January 19, 2012

Wirehouses Seen Making Big Push Into Independent BD Space

Tiburon Strategic Advisors expects the big firms to create a space for breakaway brokers; recruiter Elzweig disagrees

Report sees Bank of America and others changing course on breakaway brokers. (Photo: AP) Report sees Bank of America and others changing course on breakaway brokers. (Photo: AP)

An industry analyst predicts that several of the wirehouse brokerage firms will soon be entering the independent broker-dealer market—a bold forecast given the wirehouses’ longtime messaging that brokers lose valuable support and branding by breaking away from their firms.

The report by broker-dealer market research firm Tiburon Strategic Advisors says that establishing a semi-independent model is one way—indeed a likely way—that wirehouses, like Bank of America and Morgan Stanley, can respond to the flight of brokers to independent broker-dealers. A just-released report from Cerulli Associates projects that wirehouse assets under management will fall to 35% in 2013 from 43% in 2010, though Cerulli research director Bing Waldert told AdvisorOne that the wirehouse firms themselves planned much of the attrition as a means of focusing their businesses on profitability.

The Tiburon report, called “The Independent Reps & Independent Broker/Dealers Market: The 21st Century Model?” argues that wirehouses will deploy various means, including higher retention bonuses and more aggressive recruiting, to stem the tide of departing brokers. It adds that 12% of wirehouse and regional BDs leave their firms for other firms or to start their own firms each year, but that most of them (two-thirds) are really just going in circles, switching from one wirehouse firm to another in order to capture the recruiting firm’s signing bonuses.

Nevertheless, the independent broker-dealer market—once looked down on as the resting place of failed wirehouse brokers—is gaining ground, with well regarded firms such as Raymond James garnering most of their recruits from wirehouses.

The Tiburon report says the breakaway broker market is a lucrative one, citing data that these brokers have both higher assets under management and generate more revenue than the average financial advisor. The report cites independent estimates that $145 billion in assets under administration was moved by break-away brokers to the independent financial advisor markets

A semi-independent space within wirehouses would mean that advisors would receive a higher payout but would pay their own rent, and for their own staffing and technology.

Mark Elzweig (left), one of the top recruiters in the industry, reacted skeptically to the idea. “I don’t see that happening any time soon,” says the New York City-based principal of the Mark Elzweig Co.

“It’s easier said than done. The independent side is far less profitable than the employee side. The wirehouses have been very successful in retaining their largest producers. There are isolated cases of large teams leaving to form RIAs. For the most part the people going independent are the smaller producers.”

Elzweig thinks bonuses are a more likely route for wirehouse retention. “I think the wirehouses are infinitely creative and they’re going to find ways in terms of retention bonuses so the bulk of their advisors won’t want to go independent," he says. "It’s a

turnkey model that works well for the majority of advisors. If your sales assistant leaves, the onus is on your branch manager to get you a new one. Most of the hysteria about breakaway brokers is largely exaggerated. I think the wirehouse model works.

“Bigger doesn’t necessarily mean safer, but in terms of today’s economic volatility and uncertainty, clients with large pools of assets feel comfortable housing their assets in larger firms,” Elzweig adds.

Saxon Sorrentino, director of business strategy and development for investment services firm Fiserv agreed with Elzweig on the effectiveness of traditional retention packages, telling AdvisorOne in an earlier report that wirehouses will fight back for advisor headcount through cash.

“We think we will continue to see a steady move of advisors into the 'indie' channels, including independent BDs, RIAs and dual-registered, of a couple percent for the next several years, but [the trend] will be inversely impacted by the number and attractiveness of advisor retention packages that may be issued by the four wires,” Sorrentino said.

But the Fiserv executive also sees room for more accommodating wirehouse platforms, noting that Wells Fargo and Merrill Lynch already offer contractor-advisor business models where the FA pays for services themselves in exchange for a higher payout.  "I think more will adopt a Raymond James model that allows for four different models of practice ownership: the more of a contractor model the more the FA has to pay for his own services,” Sorrentino said.

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