June 7, 2011

No End in Sight to Breakaway Broker Trend: Aite Group Report

Survey of 151 advisors suggests structure of retention packages will lead to a second wave of departures

Financial advisors’ appetite for breaking away from wirehouse brokerages shows no sign of abating, and all signs point to a second wave of departures due 

to the structure of employee retention packages, says a new report from Aite Group released Tuesday.

The breakaway trend that peaked during the financial crisis and has continued to plague the wealth management industry is likely to pick up momentum as the value of wirehouses’ retention packages wanes, according to the Aite survey of 151 employee advisors conducted in March.

“Locked-in wirehouse advisors may be willing to leave their employer two to three years before their retention contract expires,” said Alois Pirker, research director with Boston-based Aite Group and author of the report, in a statement. “At that point, it will become clear whether the brokerage firm has done a good job catering to its advisors, or whether the lock-in contract was the sole binding element. The substantial sign-on bonuses currently offered by leading firms could be the catalyst that kicks off the next wave of breakaway activity.”

Although leading wealth management firms—especially Merrill Lynch and Morgan Stanley—retained many of their top-producing advisors by offering retention packages, those packages now appear to be leading toward a second peak in breakaway activity. The first wave of breakaways in 2008 and 2009 consisted mostly of not-locked-in advisors.

“Given that retenti on packages are structured as forgivable loans with an annual reduction in payback amounts, these contracts are losing their effectiveness not when they expire, but rather when it becomes affordable for the advisor to pay back the residual amount. The data from Aite Group’s advisor survey suggests that this is the case two to three years before the contract expires,” the report concludes.

One in three of potential breakaways aims to depart from his or her employer in 2012, according to the survey. Wirehouse firms have the rest of 2011 to convince these top-producing brokers that they will not find a better work environment at other firms.

But the report also notes that the future is not all bleak for wirehouses. Large firms are at risk of losing top performers, but may find opportunities to pick up advisors from competitors. And one-third of potential breakaways are considering wirehouse firms as their top choice as a new employer.

The proposition offered by RIA rollup firms resonates well with potential wirehouse breakaways that are considering independence, but not so much with non-wirehouse advisors, “who seem to be more set on large, independent networks,” Pirker writes. “The valuation of an advisor’s book of business is clearly the make-or-break criterion for successful onboarding of breakaways for RIA rollup firm.”

Forty-three percent of potential wirehouse breakaways would make it their main condition, while another 29% focus on cultural fit.

Read ‘Fidelity's Durbin Asks: Need Another Reason to Leave Wirehouses? Taxes?’ at AdvisorOne.com.

Reprints Discuss this story
This is where the comments go.