From the November 2008 issue of Research Magazine • Subscribe!

November 1, 2008

Q&A: Wirehouses Are Down, But Not Out

Research spoke with Chip Roame, head of Tiburon Strategic Advisors in Northern California, about the latest news affecting the wirehouse firms and the industry.

Research: What is affecting advisors most today? Roame: The captive firms have been in the negative news so much, going back to the auction rate securities and such, even before they were sold. Because of this, the advisors have had to explain a lot of things to clients, when they would call up and ask, "Do we own these products?" That's strike one.

Strike two seems to be that the stocks of these firms have been very, very depressed. If you hold this stock in a golden-handcuffs program, a 401(k), a stock-option plan, etc., that stock may be worth very little today. If it's been a reason that you've stayed in the past, when it's paid out handsomely, that's no longer the case.

And strike three is that some firms have folded or are being folded into another firm. That's quite a combination of distinct factors.

Given the broader market turmoil, does it make sense for advisors to switch firms now, from the clients' perspective?Removing ourselves from the current situation, let's recall that anytime you move, you open up yourself to re-evaluation on the part of clients. You can ask them to fill out the paperwork since you're going to ABC firm, but that does give them pause to think about whether or not they want to go with you. And they can ask themselves, "What does this move mean for me?"

At a time like now, are these concerns exacerbated? Do more clients say, "I'm too scared, and I can't go with you?" I think that's valid to be thinking about and may be a reason that more advisors at major firms don't move.

So how much movement do you expect?There's a perception that a big flood of advisors are moving. I tend to think that won't happen, and that it's exaggerated. Advisors ask themselves, "Now, do I really want to make that call [about switching firms] to all my clients?" That's a tough conversation.

On the other hand, if you're at Merrill Lynch and the firm's being bought by BofA, it is an opportunity to tell your clients why you and they would be better off at ABC firm. But it's all about personal preference.

That door, though, is wide open now.

How about a guess as to how many wirehouse advisors will really move out of this model?The answer to this is that the number will certainly be less than everyone says, and that's point number one. Everyone will predict that crazy numbers will move, but at the end of the day, not as many will have moved. We always seem to exaggerate this trend.

Point number two, if we ask whether or not advisors are more apt to go independent this time around rather than going to another wirehouse, I would argue that they actually may be. This is because the wirehouses have issues that I referred to earlier.

No RIA firm has been taking a big gamble on ARS or selling out or going belly up or being bailed out. These issues go away when you go independent, in most cases.

And there will always be a group of advisors who'll be at their last straw, and for some, this is the time they're now going to switch out of this model.

Now, I'm not sure we're talking about thousands or tens of thousands, but there is a group of advisors that have been frustrated in recent years with the research-analyst scandal of a few years ago or the mutual fund scandals. This crisis today is just more troublesome, and for some, it will be what makes them finally go.

And what firms will these advisors move to?Look at George Dunn, formerly of Citigroup-Smith Barney, and his group. They didn't go out on their own. They went to an existing RIA, Convergent Wealth Advisors. Thus, they got the back-office support like they had at a wirehouse but at an independent shop. They're not bucking it all and going out to do it on their own. They are leveraging what someone else at another firm already has in place.

Financial advisors move everyday because they think another office in their city is better than their current spot, but we can't make too global a conclusion based on this. It really depends on the perception in the marketplace of a particular office or branch being "the" place to go.

When advisors move between firms in a city, it's not based on any corporate strategic direction. It's based on the local branch management.

Look at what's happened at UBS. They've got a whole list of ex-Lehman advisors who've joined. Maybe UBS isn't the top choice in every market, but in some markets and for some advisors, they will be fine with this choice.

Overall, what is the impact of the issues affecting the wirehouses on their FAs? It's having a huge ancillary effect. The wirehouse advisors are spending a lot of time explaining all of these issues to their clients. Thus, it becomes less a matter of what a particular advisor did and more a matter of what the firm was involved in. For the advisor, he or she has reputational risk by being with a specific firm, and he or she will have less of this risk, generally speaking, at a smaller firm.

What does this imply for the captive brokerage model?It isn't over. Plenty of advisors want to be in this type of shop and aren't going to run from this business model. There are roughly 90,000 advisors at these firms, and they aren't going away. It could go to 80,000, but that's only one possibility.

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Janet Levaux, MBA/MA, is the managing editor of Research; reach her at jlevaux@researchmag.com.

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