From the June 2010 issue of Research Magazine • Subscribe!

Model Non-Employees

In a surprising trend away from big brokerages, the RIA space is attracting a surge of refugees from the wirehouses.

After last year's banner surge, independent broker-dealers have seen a sharp falloff in new advisors. The question that begs asking: Has the RIA marketplace stolen their thunder?

The three major RIA players -- Charles Schwab, Fidelity and TD Ameritrade -- all say they expect to match or exceed their historic recruitment of breakaway brokers in 2009. On top of that, the wirehouse teams they are attracting are bringing in more bang in the way of new assets. Consider: a team joining Charles Schwab today averages $131 million in assets under management. Best yet, they report, there are "fast followers" in the pipeline.

As Bill Whitney, principal of Mississippi Investment Management Co., puts it: "We get calls from advisors every day and they fall into two categories: 'Can I come, too?' and 'How'd you do that?'"

Whitney, a former UBS broker, came out of retirement in January to help form the Jackson, Miss.-based RIA along with two UBS breakaway brokers and a mutual fund manager. They currently manage $100 million in assets. Why did they pull the trigger?

Whitney, 74, puts it bluntly: "The gag reflex was reached."

An advisor since the mid-1960s when he joined Merrill Lynch, Whitney says the team has re-created what the wirehouse once was: a client-first firm focused on the individual investor. The new group, affiliated with Pershing Advisor Solutions, deals largely with high-net-worth clients.

No industry pundit suggests the move to independence is in a rush mode at the moment. As Philip Palaveev, who heads Fusion Advisor Network, observes: "It's a steady trickle over time. It's how the Grand Canyon was made. Over time, a lot of advisors will continue to go independent and they will tend to be successful, of significant size and entrepreneurial-minded. That will continue to shift market share gradually, but steadily, toward the independent model."

RIA insiders love to trot out a 2009 report from Cerulli Associates that projects the wirehouse market share of assets under management will fall to 40.7 percent by the end of 2012 from 47.7 percent at year-end 2008. Meanwhile, the independent broker-dealer, RIA and dually registered channel is projected to account for 39.3 percent by the end of 2012. It would mark the first time ever that market share was pretty much even. [Editor's note: The report will be updated in July.]

"Every year, it's getting easier, safer and more accepted to move from the wirehouse space to the RIA space. Anyone who says to the contrary is not being intellectually honest. It's going to take a while for the size of the RIA marketplace to be comparable to the size of the wirehouse/brokerage marketplace, but....it will happen a lot faster than people expect," according to Elliot Weissbluth, CEO of HighTower Advisors. A private equity player that owns both an RIA and broker-dealer, HighTower at press time in April had just transitioned its twelfth team, representing $15 billion in assets. Eleven of the 12 teams came from a wirehouse. The firm, in business since 2008, expects to have amassed $50 billion to $60 billion in assets within a couple of more years.

Just as intriguing as the Cerulli forecast is a new study from Aite Group that reports that while the wirehouse segment is gaining stability after the recent scandals and market meltdown, advisors there remain on edge. As Doug Dannemiller, senior analyst for the research firm, notes: "The wirehouse advisor force is much less anchored to their broker-dealer than the other segments on a going-forward basis. This is no terra firma kind of thing. We're not in a totally stable environment. It's still fragile."

The survey, New Realities in Wealth Management: Has the Dust Settled?, found that only 15 percent of wirehouse advisors currently lack a plan to break away. Its conclusion: "This base of loyal advisors is small, and the remainder could initiate another wave of departures if the wirehouse segment takes another reputational hit or if the management of the [wirehouses'] mergers does not meet expectations."

The 42-page report, released in April, also observes that wirehouse advisors and registered investment advisors have similar profiles in terms of their client base, staffing models and assets managed -- "reinforcing the expectation," as the survey frames it, that the RIA model is likely to be a good fit for advisors breaking out of a wirehouse.

Today's Breakaway Broker

What's the profile of today's breakaway broker? Interestingly, it seems to be changing a bit. In addition to managing a bigger book of business, many advisors today are choosing to join an existing RIA rather than starting one from scratch.

Bernie Clark, senior vice president of Charles Schwab Advisor Services, has a name for them: "joins." Last year, 42 percent of a record-breaking 172 advisory teams joined existing Schwab affiliates, up from 15 percent in 2008 -- a trend that continues today. During the first quarter of 2010, 31 teams, representing $3.9 billion in net new assets, transitioned to Schwab. Of those, 42 percent were "joins," up from 35 percent during the same quarter in 2009. The advisors are also coming out as teams, rather than individuals. And, Clark says, there are teams in line behind those teams.

"Our existing [advisors] have begun recruiting directly into the wirehouse space with us. They're interested in growing their practices, finding capability," adds Clark. "They've been a huge referral engine for us."

It's much the same story at TD Ameritrade Institutional, where 50 percent of breakaways are joining an existing practice. During the 2009 fiscal year, the firm took on 200 new advisors. During the first six months of the current fiscal year, TD Ameritrade added 124 advisors -- putting it on track to beat last year's numbers.

"I've never seen a sales pipeline like we have now," said Tom Bradley, president of TD Ameritrade Institutional. "We've built up a pipeline of over $240 billion in assets from potential breakaways: individuals we have uncovered that are showing some level of interest. It's an indicator. Before the financial calamity, we didn't have a pipeline. We've gone from near zero to $240 billion overnight."

Like others, Michael R. Durbin, president of Fidelity Institutional Wealth Services, says there is less urgency in the tenor and pace of breakaway activity now that the financial crisis has subsided. And to the good, he adds, the firm is looking at larger teams and asset pools -- bigger pickings than many of the smaller breakaway brokers that were pushed out or opted out a year ago. Fidelity helped 50 broker teams transition to independence in the first quarter of 2010, an increase of 20 percent compared to the first quarter a year earlier. The majority joined Fidelity's RIA platform.

"The overall trend is still faster than it was going into the crisis," Durbin points out. "What's clear from the advisor's perspective is there isn't any kind of value these days in being part of a branded, big financial services firm. In a lot of ways that brand is still a liability. I see advisors putting distance between themselves and those firms."

In a notable twist, Kevin Richardson, an advisor since 2001, left Merrill Lynch for LPL Financial in February because the brand wasn't opening doors -- in fact just the opposite. "People already dealt with Bank of America in one way or the other," said Richardson, 44, who two months into the transition had $30 million in assets under management at his new Monterey, Calif., office. Slowly, he said, he is working back up to $85 million in assets, the amount he managed when he left the wirehouse. "I want people to know it's Kevin Richardson, not one of thousands of advisors who work for a wirehouse"

Durbin, meanwhile, believes that many advisors still in a wirehouse setting have adopted what he calls a "relative independent-mindedness." "Even post-crisis, they're having to answer questions about their affiliation," he said. "A lot of folks in our pipeline are the ones who have now gotten through the crisis, they are getting to know their new ticker symbol and they are already thinking independently even though they are sitting in Brand X."

Eric Thurber, founder and managing director of Three Bridge Wealth Advisors in Menlo Park, Calif., moved his six-member team from Morgan Stanley Smith Barney to Schwab almost a year ago after losing faith in the wirehouse model.

"We did a month or two of due diligence on other wirehouse firms, naturally an easier move for us. To turn down the checks from our existing firm and offers from others that were substantial made us pause," said Thurber, 40, whose group has $250 million in assets under management. "But we felt strongly if we went to another wirehouse firm that we couldn't go back to clients and say it was going to be any better. Were our clients going to be in better shape? No."

Another factor affecting play today: firms like HighTower, Rehmann Group and United Capital Financial Partners -- outfits that have created a clever model around incubating or basically becoming the employer of former wirehouse reps. "The emergence of these firms that function as the back office for the breakaway is pretty comforting for individuals who don't want to start their own business," according to Mark Tibergien, CEO of Pershing Advisor Solutions. SeaCrest Wealth Management is another in the new lineup of independent firms offering an equity stake to advisors as well as a more entrepreneurial environment

It's worth noting, too, that many independent broker-dealers also now offer an RIA solution. LPL Financial, the nation's largest, at year end had 92 RIA firms on its platform with $7.3 billion in assets under custody. The RIA launched in late 2008.

"We do see interest in our hybrid or RIA platform, particularly for those coming out of the wirehouse," says Bill Morrissey, LPL's executive vice president of business development. For the 12-month period ended March 31, LPL added a net of 450 new reps and advisors, down from a net of 750 for the 12-month period ended Dec. 31. Historically, one-third of LPL's recruits come out of a wirehouse. With the market in recovery, Morrissey says he doesn't rule out a pickup as the year advances.

Tiburon Strategic Advisors estimates that $200 billion will flow out of the wirehouses this year in the hands of breakaway brokers -- not much when you consider that wirehouses hold $6 trillion in assets under administration and under management, according to Tiburon's managing principal Chip Roame. But, he adds, it's "a big stinking deal" when looked at through the prism of the overall independent channel, which Tiburon puts at $2.5 trillion.

"The real question is: Could $200 billion become $1 trillion? Could there really be a flood one day? To me, it's all about how the wirehouses respond to brokers," says Roame.

Roame is betting that the wirehouses won't experience a change in mindset and that they will continue to "buy their brokers" with huge monetary incentives. But what happens if Congress forces brokers to adhere to a fiduciary standard, putting them on the same side of the table as RIAs? Presumably, it would help level the playing field. Sallie Krawcheck, president of Bank of America's Global Wealth and Investment Management Division, which includes 15,000 Merrill Lynch brokers, went on record in April supporting a fiduciary standard.

Another subtle development is the fact that many RIAs are beginning to look like small broker-dealers.

"The most successful RIAs are now getting to a size where they are starting to resemble organizationally a wirehouse. It's like the kid who's starting to look like Mom and Dad," notes Palaveev. "They have a lot of decisions they have to make that look like those of a wirehouse. How do you keep the advisor involved emotionally and professionally and stay profitable without compromising? That's the next growth phase for the RIA industry: finding a business model that allows them to operate on a large scale as opposed to a mom and pop."

Reprints Discuss this story
This is where the comments go.