Wirehouse

A wirehouse is a large, full-service brokerage firm: a broker-dealer that offers individual clients trading, investment products, research and financial advice through its financial advisors. The word is industry vocabulary rather than a regulatory term. No statute or rule defines it, but regulators use it: NASD, FINRA's predecessor, contrasted other business models with "many large, wirehouse, full-service firms" in a 2005 rule filing, and the SEC staff's 2011 study of brokers and advisers treated wirehouses as one channel of the brokerage industry, distinguished from regional, bank, insurance and independent broker-dealers.

What the label does and does not tell you. Calling a firm a wirehouse describes its size and business model, not the legal standard any particular professional there works under. The firm is registered as a broker-dealer and is often registered as an investment adviser as well, so the same person can recommend a transaction in a brokerage account as a broker and manage an advisory account for a fee. Those are different legal relationships. A broker's recommendation to a retail customer must meet Regulation Best Interest at the time it is made; an investment adviser owes a fiduciary duty across the advisory relationship. The dual-registration page explains how the two roles sit in one person.

How the advice is paid for. Clients at a full-service firm can pay through transaction charges, such as commissions and product sales charges, through an asset-based advisory fee, or both, depending on the account type. The SEC staff's 2011 study, citing 2010 industry data, reported that wirehouses and dually registered broker-dealers were more likely than bank, independent, insurance and regional broker-dealers to receive fee-based rather than transaction-based compensation. A firm's Form CRS states the fees, the conflicts that its ways of being paid create, and the standard of conduct it applies in each kind of account, and it is the quickest way to compare one firm with another.

When an advisor moves. Advisors sometimes leave one brokerage firm for another and invite their clients to transfer. FINRA Rule 2273 requires the new firm to give a former customer FINRA's educational communication when the firm or the advisor individually contacts that customer about transferring assets, or when the customer transfers to an account assigned to that advisor, for three months after the advisor joins. The communication, attached to FINRA's Regulatory Notice 16-18, asks the customer to consider whether joining incentives could create a conflict for the advisor, whether every holding can move ("Some products, such as certain mutual funds and annuities, may not be transferable"), and what the move will cost in the short term and ongoing.

A client opens accounts at the firm through one of its financial advisors. The advisor can recommend securities and products the firm makes available, open a commission-based brokerage account, or place the client in a fee-based advisory account, and the firm provides custody, statements, research and trading. The firm supervises its registered representatives under FINRA rules and, for advisory accounts, its obligations as a registered investment adviser.

An example of why the account type matters: Marcus has $400,000 with an advisor at a full-service firm, split between two accounts. In the $150,000 brokerage account he pays charges per transaction, and in a year with four trades and one new mutual fund purchase his costs depend on those transactions. In the $250,000 advisory account he pays an asset-based fee; at 1% a year that is $250,000 × 0.01 = $2,500 regardless of how many trades are made. The two accounts are governed by different standards of conduct, the Form CRS the firm gave him describes both, and BrokerCheck and the SEC's Investment Adviser Public Disclosure site show the advisor's registrations and any disciplinary history in each capacity.

Pros

• One firm can provide custody, trading, research, lending and advice, which some clients prefer to coordinating several providers.
• Broker-dealers are subject to FINRA and SEC oversight, and their registered representatives' records are searchable on BrokerCheck.
• Form CRS gives a standard, comparable summary of what the firm charges and how it is paid.

Cons

• A professional who can act as broker or adviser in different accounts makes it harder for a client to know which standard applies to a recommendation.
• Pay that varies with the products and accounts a client chooses creates conflicts the firm must disclose in its Form CRS.
• Following an advisor to another firm can mean selling or leaving behind holdings that will not transfer, with fees or taxes either way.