The four biggest brokerage companies dominate the U.S. wealth management space, but independent and regional firms are catching up as they gained clients and assets after the 2008 downturn.

Consulting firm Aite Group said in a report Monday that the top four brokerages -- Merrill Lynch, Morgan Stanley Smith Barney, UBS and Wells Fargo Advisors -- employ 12 percent of the industry's 451,000 financial advisers and manage 38 percent of $12.4 trillion in client assets.

Yet the wirehouses lost ground in the aftermath of the financial crisis. Combined assets from these four fell by $900 billion, or 16 percent, to $4.7 trillion during the past two years, Aite said.

The instability in the markets and within the big firms absolutely benefited the regionals and smaller independent firms, Alois Pirker, research director at Boston-based Aite, told Reuters. They've managed to attract advisers and surpass their (pre-crisis) assets.

The trend will continue, Aite said, though at a more modest pace. As the market settles and the big firms integrate a round of mergers, it will be harder for regionals and independents to attract wirehouse advisers and clients, Pirker said.

There are still opportunities to attract wirehouse advisers, especially if the integrations at the big firms falter, but it will be more difficult, he said.

Customers and advisers fled the largest firms in record numbers after Bear Stearns and Lehman Brothers collapsed while Morgan Stanley, Citigroup Inc and Bank of America teetered. Being the biggest lost its allure, while a wave of consolidation among the biggest firms triggered a job-hopping frenzy.

Emerging as the winners were independent registered investment advisers (RIAs) and brokerage firms such as closely held LPL Financial, Ameriprise Financial and Baird Wealth Management, which saw assets increase over this period.

RIAs, many employing just three financial advisers, saw their combined client assets grow by $200 billion, or 12 percent, to $1.5 trillion last year. Small brokerage firm assets grew by $100 billion, or 6 percent, to $1.8 trillion.

The small firms grew because they recruited wirehouse brokers, who on average oversee $83 million in client assets, significantly higher than among small wealth firms, said Aite.

Aite's report comes amid a debate on whether independent and regional firms will pose a serious threat to the big four. Executives at Morgan Stanley and Merrill Lynch contend the flood of broker moves has already peaked.

Wirehouses have recovered some of the assets they lost during 2008, but there's still a $900 billion gap. A lot of those assets are now at other firms, said Pirker.

Morgan Stanley Smith Barney, a joint venture former by Morgan Stanley and Citigroup last June, is the biggest wirehouse with 33 percent of wirehouse client assets. The two firms separately managed 36 percent in 2007.

Merrill Lynch, now part of Bank of America , follows with 30 percent of Big Four client assets, up from 28 percent.

Wells Fargo Advisors, part of Wells Fargo & Co , was most successful among the wirehouses, increasing its share of big-firm assets during the downturn to 23 percent. Wachovia Securities, purchased by Wells Fargo in December 2008, had 20 percent of overall wirehouse client assets in 2007.

Aite said UBS, the fourth-largest brokerage, now looks more like a regional firm than a wirehouse as its market share slipped to 13.6 percent from 14.2 percent in 2007.

Everyone is waiting to see what (UBS wealth management chief) Bob McCann's plan will be for UBS. They could stay at this size, but it doesn't match their position in other markets, said Pirker.

(Reporting by Helen Kearney, editing by Matthew Lewis)

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