From the October 2008 issue of Research Magazine • Subscribe!

October 1, 2008

Advisors in Motion

Wall Street's ugly industry stumbles will likely result in a stream of broker defections next year as advisors seek to distance themselves from sullied firms and recoup stock losses attached to their no-longer golden handcuffs.

The continuing move toward higher payouts isn't expected to abate the trend, according to industry experts. In fact, recruiters report that they are in contact with more top-performing teams right now than in years. One reason: a notable shift in corporate loyalty.

"I've gone through the demise of Hutton, Drexel, Shearson, Kidder, DLG and Prudential. We've seen all these great firms go, but they were all unique singular events. We're not seeing, in this case, the demise of any one firm," according to Rick Peterson, president of the Houston recruiting firm, Rick Peterson & Associates. "What you are seeing is the deterioration of respect both brokers and clients have for the performance of the firm, notwithstanding their own contributions."

The collapse of the auction rate securities market, the subprime mortgage meltdown and any number of other missteps have left many advisors feeling angry and betrayed. Add to that the plummet in firms' stock prices and there's trouble in paradise.

As Danny Sarch, president of Leitner Sarch Consultants in White Plains, N.Y., bluntly frames it: "What these firms have done is destroy any corporate loyalty at the advisory level. Take Merrill Lynch, with its strong corporate culture. Its stock has gone from $90 to $25. And it's not just Merrill, of course. This pain is being felt everywhere."

There's already been a trickle of high-profile defections from wirehouses this year, in part because advisors are seeking to "re-monetize" their stock, according to Mark Elzweig, president of Mark Elzweig & Associates in New York City. As one recruiter put it, a broker's 401(k) now resembles something closer to a 101(k).

"A lot of people are open to deals to make themselves whole again. Deeper than that, shall we say the client experience and the advisor experience have been less than optimal? People are looking for solutions elsewhere," Elzweig notes. "A lot of advisors and clients want to make a fresh start somewhere else."

Which firms are shaping up as the beneficiaries of this to and fro? First, don't count the wirehouses out. Insiders report that Morgan Stanley in particular is seeing a good bit of action. LPL Financial, with its dominant independent brand, and the captive channel Raymond James & Associates are also proving they are players. The latter, in fact, in August recruited a group from Citigroup/Smith Barney that manages a combined total of $700 million in assets. In a statement earlier this year, RJ&A president Dennis Zank acknowledged: "There's no question we are benefiting from a certain level of advisor discomfort on the Street right now."

Wachovia Financial Network is also mentioned as a contender as is Pershing Advisor Solutions, whose profile has heightened under the leadership of new CEO Mark Tibergien. At press time in mid-August, he was in talks with 84 breakaway wirehouse brokers, roughly triple the number a year earlier. And they are brokers with a sweet spot: teams primarily, with staff, and managing between $400 million and $1 billion in assets.

Tibergien is talking to brokers about four different platforms: forming an RIA; being served by one of Pershing's independent broker-dealer customers; becoming a "hybrid advisor," served by both; or joining an existing advisor.

"The organizations they are leaving are historically terrific institutions with very strong brands and a very strong product offering," says Tibergien. "But as advisors become more sophisticated and more independent, they tend to chafe under the structure of those organizations."

As for what's accelerating the trend, Tibergien adds: "Many of these large firms have tarnished their reputations by some of their management decisions. Unfortunately, advisors themselves are becoming a little bit exasperated having to explain to their clients what their company is doing. All they want to do is service clients, get more clients and give them advice -- not spend their time apologizing."

Compensation ForecastThe bad news? By year's end, broker compensation is likely to be down by 15 percent compared to 2007, according to one key forecast. The good news is that the retail brokerage business is holding up far better than its peers across the financial services industry.

Alan Johnson, who heads Johnson Associates in New York City and produces a popular quarterly compensation forecast, predicts that overall compensation will be down 30 percent this year. As he puts it: "2008 will be an old-fashioned terrible compensation year."

But, he added, "The retail brokerage sector [at an estimated 15 percent] has done better. It's down, but not as dramatically. Their business is more fee-based so it has held up way better than risk-based or transaction-based models."

Still, one thing is indisputable. Unless fee-based advisors are adding new assets, their share of the pie has diminished as portfolio values have shrunk. "If your business is up in 2008, you're probably doing a very good job bringing in new money," observes Sarch. "If not, you're not going to be making as much in terms of absolute compensation."

In another survey, The Smart Cube, a global research firm, found that the economic downturn triggered by the subprime lending crisis could reduce Wall Street compensation packages for new hires by as much as 20 percent. The survey included brokers, but crossed a wide range of job categories.

Omer Abdullah, managing director in charge of the survey, said that top producers are not at risk. "The folks in the top quartile, generally speaking, are fairly safe. At the end of the day, it's about revenue and profits and they are the ones bringing it in," he notes. However, that doesn't necessarily apply across the board. "When times are good, the second and third quartiles would have felt safe as well. In an economic situation such as this, we're moving the bar up, if you will," according to Abdullah.

Johnson, too, suggested that marginal producers could face layoffs in the coming year. Over 80,000 jobs worldwide have been cut by financial companies in the last year, according to data from Bloomberg. "If you are a good broker you are as secure as anybody can be in life. Firms need you and they want you," he said. "If you are a marginal broker, all bets are off."

Not surprisingly, the other compensation issue that advisors are fixating on is the demise of golden handcuffs. "These firms' stock prices are in the toilet, and almost all golden handcuff programs are stock-based. Your handcuffs have rusted," notes Chip Roame, managing principal of Tiburon Strategic Advisors. While some firms are scrambling to re-issue options and employ other creative measures to keep their brokers motivated, Roame says: "Advisors are tired of having to explain all these problems away to their clients. And because of that rusted out handcuff, you could see an increased number of people in motion. You go to these top producer conferences and this is all they talk about."

As headlines continue to document the story of an unraveling Wall Street, industry observers expect broker movement to continue -- if not accelerate. That's not all bad news, according to Elzweig, who says wirehouses are generally offering packages, front and back, in excess of 200 percent of the trailing 12. On top of that, he says the caliber of advisor has never been higher, calling it the "best and brightest category."

Johnson, meanwhile, predicts a growing stream of defections early next year. "That's when the rubber will hit the road. My experience is that when you have these calamities, people can put up with it for six months to a year and then they bolt. There's going to be regulatory fallout. There's been client fallout already," he said. "That's going to wear on brokers. They're going to say, 'I need to do something different.' Different place, different office, different firm."

The Client FactorOne positive thing about the testy environment is that it makes really good advisors even more valuable.

As Johnson puts it: "Now is the time where if you are a really good broker, you earn your income. You let your clients know markets go up, they go down. This is a downer, but there's a plan in place and there's nothing to panic about. You're more valuable than ever in tough times. You earn your money when there's a lot of ugliness."

It's also a time of enormous opportunity.

Elzweig, for example, knows a number of advisors whose businesses are growing in terms of both new quality relationships and assets.

"It's a mistake to generalize and say we're in difficult times and everyone is making less," he cautions. "What's happening now is a lot of advisors are meeting with clients and helping them make sense of the tumultuous markets. They're rebalancing portfolios, when necessary, and getting referrals. In these kinds of markets, there are always more clients and potential clients up for grabs. The advisors I'm talking to aren't worried; they know they have a solid franchise."

Roame, meanwhile, says it's a good time to take the long view.

"You have to always step back and remember the more permanent trends that underlie this business. You've got 70 million baby boomers who are going to retire over the next 20 years. If you're in the business of managing retirement money, this is a good place to be," Roame says. "Will the next three months be a good time to be an advisor? No. Will the next 10 years be a good to be an advisor? Absolutely."

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Grumbling on the Street

"There's no question people are moving and you're seeing a rise in advisors looking for alternative solutions. I had one guy tell me that looking at the major firms for a solution today is like looking for the tallest midget in the circus. That's a change."-- Danny Sarch, president, Leitner Sarch Consultants

"There's some anger [among advisors] that a lot of these problems had nothing to do with them and their performance, yet they are paying the penalty. It's been a very traumatic event in the eyes of many brokers....They are desperately looking for safe havens and for reassurances from their own firms that these problems will be resolved."-- Rick Peterson, president, Rick Peterson & Associates

"The biggest difference between 2008 and other down cycles is the question about the viability of the U.S. financial system. Look at Bear Stearns. Is it going to be one out of one, or one out of 10, before this is all over? How many firms will go broke? The truth is nobody knows. And that's new. Since the Great Depression, this has not been a meaningful issue in the U.S."-- Alan Johnson, managing director, Johnson Associates

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Freelance writer Ellen Uzelac is based in Chestertown, Md.; the former West Coast bureau chief and national correspondent for The Baltimore Sun, can be reached at ellenuzelac@msn.com.

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