From the August 2008 issue of Investment Advisor • Subscribe!

Springtime for Brokers

Custodians and independent B/Ds roll out the carpet

Although the markets and the economy don't much appeal to practically anyone these days, it may be the perfect brew for breakaway brokers. Many are seizing the day, taking advantage of a wider array of opportunities available to them as variations of the RIA model are embraced by the industry at a time when the stresses on the big wirehouses have brought some of them to their knees.

The major RIA custodians have created a host of new services and platforms to ease the transition, from market leader Schwab Institutional's new "Schwab Business Start-up Solutions," to Fidelity's HybridOne service meant to accommodate B/D reps, hybrid advisors, and full-blown RIAs, while LPL Financial has joined the pack--it will custody assets for independent RIAs as well as for its own brokers, along with some unaffiliated reps, later this year.

First, the numbers. Roughly 13,000 brokers and/or advisors had left their current firm in the preceding 12 months, according to the third annual National Financial Broker and Advisor Sentiment Index, released in early 2008. At the same time, the number of brokers and advisors saying they were likely to consider leaving their current employer and switching to another firm in the following 12 months rose to 9% from 5% last year. That equates to roughly 21,000 brokers and/or advisors who will possibly leave their current firms in a year's time, parent company Fidelity Investments pointed out. That's a lot of movement, and with the 1,500 to 2,000 of wirehouse brokers going independent every year, as estimated by Philip Palaveev, president of Fusion Advisor Network in Seattle, custodians are hungrily eyeing the talent and their attendant books of business.

Executives at custodians and some advisors and recruiters themselves say the numbers are rising because of these individuals' entrepreneurial drive, and most say the trend toward independent RIAs really has taken off in the past three years. But entrepreneurs don't ever operate in a vacuum. The popularity of the model and the move to a fee-based system seems to be fueling the drive to a large degree, with success breeding success. As one executive noted, custodians are seeing some wind at their backs not only because of the RIA model's appeal but because of the growing fissures appearing in the big banks whose stock prices have been battered by their subprime exposure, which has led to ever-bigger losses.

The custodians are circling, looking for brokers to jump ship.

"We are talking to their brokers who are managing assets for high-net-worth people," says David Hutchinson, who is head of business development for Schwab Institutional and has a team of 25 people in the field. These brokers are "nervous about the risk profiles of the big banks," he notes, and Schwab is attracting them with the strength of its balance sheet and name, he says. These are "advisors that are entrepreneurial who are seeing cracks in the makeup of these big firms. UBS has tons of clients with auction rate preferred securities and its clients are asking the brokers, 'Why are these in my portfolio?'"

At a wirehouse, brokers are limited to the alternative investments the bank prefers, explains Hutchinson, a 13-year veteran of working with advisors who has seen "in the past few years an acceleration of folk moving to us from wirehouses."

Twilight Time?

Mitch Vigeveno, owner of Turning Point, Inc., in Safety Harbor, Florida, who recruits for various independent broker/dealers, mentions the twilight of the giants, too.

"As far as the wirehouse brokers are concerned, a lot of them are disillusioned about the wirehouses they are associated with, he says, with clients wondering, "If Bear Stearns and Citigroup can't manage their own affairs--why should I give them my own money to manage?" These brokers, says Vigeveno, "are disgusted with their existing firms and want to develop their own brand, and want to build equity in their own business."

Palaveev of Fusion Financial points to another trend: "more and more consumers are realizing they need to find a good advisor and not a good firm, and this [going RIA or affiliating with an independent B/D] allows an advisor to become more independent," Palaveev says. At the same time, more and more advisors are asking why they need a broker--they can trade if they meet the SEC's fiduciary standard.

Then there is the not-so-little matter of compensation. "These brokers are disenchanted also because they are under water on some of the stock options," Vigeveno notes. And a simple walk across the Street these days won't help.

"It used to be that if you were at Morgan Stanley, you could switch to Citigroup or Bear Stearns. You can't really do that anymore--the banks are not doing well," says James Zimbardi, senior partner with Allgen Financial Services in Orlando, an advisory firm that also helps brokers go independent. "Some get out of the business altogether. We say, 'Let us show you there is a middle ground.' Putting your own shop together is a grueling task. We make it a smoother transition," allowing broker to "plug and play into an established infrastructure." Moreover, Allgen is leveraging the fact that these brokers already have an established book of business.

"Advisors breaking away from their corporate careers is our largest target," Zimbardi states. "They usually feel claustrophobic with all the red tape suffocating their ability to continue growing, be innovative, and reach their full potential."

These independent advisors' payouts will be in five or 10 years when they sell the firm and get three to five times the revenues that their assets are generating at that point, according to Vigeveno.

"The reasons we hear," for breaking away, says Scott Dell'Orfano, executive VP with Fidelity Institutional Wealth Services, is that brokers "want to create their own brand, want to create their own equity, and want to use whatever products they want. They don't want to be constrained by product usage." At large wirehouses, "they feel constrained and they can't access the products they need," he says. Fidelity is benefiting from this bundle of sentiments. In 2007, it helped 65 independent RIAs with a total $5 billion in assets launch; in the first five months of 2008, it has helped 60 independent RIA businesses start up, with $7.6 billion in total assets.

A trend both Schwab and Fidelity have seen are not just individuals shedding the wirehouse shell, but whole teams, some in groups of three to five people, some come in a pack of 10, like a group Schwab shepherded recently in Southern California. These are close-knit groups of people that have banded together and had success and now don't want to break up a good thing, as they realize that their team approach has enabled their success, executives explain.

Wirehouses seem to think that teams would be jumping less often, Hutchinson says. "A lot of [the brokers] kind of scratch their heads and say, 'What are [the wirehouses] adding to their bottom line?'"

"The larger producers in a wirehouse are structured in a team environment," Dell'Orfano notes. The more these individuals get educated about the RIA community, the more they see multiple partners run the bigger firms, he says. That sends yet another appealing message to brokers feeling antsy at the wirehouses.


Elizabeth D. Festa is a freelance business writer based in Washington, D.C. She can be reached by e-mail at elizabeth.d.festa@comcast.net.

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