January 20, 2012

Wirehouse Push Into Indie-BD Space Could Follow Wells’ Model

But making a semi-independent or fully independent channel work within the wirehouse world is no easy feat, experts say

(Photo: AP) (Photo: AP)

Experts say that an anticipated move by some wirehouse brokerage firms into the independent broker-dealer market could resemble the channels introduced by Wells Fargo (WFC) and the firms it acquired as part of its ’08 merger with Wachovia.

The wirehouse push was outlined in a recent report, “The Independent Reps & Independent Broker/Dealers Market: The 21st Century Model?” published by the consultancy Tiburon Strategic Advisors. The report says the wirehouses are looking at a semi-independent model as one way to capture and retain more brokers.

Chip Roame“At least one of them and maybe two will in 2012 create halfway houses, where the allow reps to utilize their brands but take over some of their own economics, earn a higher payout, pay their own staff, pay their own technology, pay their own rent, etc.,” said Chip Roame (right), head of Tiburon Strategic Advisors, in an interview with AdvisorOne.

Other experts, while not convinced on the short-term introduction of any new wirehouse channel, agree that the competitive environment means they must, at least, seriously consider such a development.

“For years, they dismissed [independence] as a source of lost advisors or part of their planned attrition,” said Mindy Diamond of Diamond Consultants, a recruiting firm, in an interview. “But the breakaway-broker movement is having an impact: They aren’t losing that much in terms of quantity, but they are in terms of quality. There is no question about that.”

Wells Fargo’s independent model, FiNet, is a success, Diamond says. “Advisors feel protected but also able to keep more of their fees and commissions, and [Wells Fargo] pays nice transition money.  It’s a tremendous success,” she explained.

FiNet has about 1,050 reps, while another Wells’ channel called Profit Formula reportedly has several hundred advisors.

The Profit Formula platform, experts say, lets advisors retain their status as employees while requiring them to pay for some office and other expenses in return for higher payouts. It has given the advisors the freedom to set and distribute their own bonuses to staff, for instance. But, financially, it doesn’t appear to be such a great deal for Wells Fargo.

“They’re not expanding it and not letting reps transfer into it,” said Danny Sarch of Leitner Sarch, an executive-search firm, in an interview. “Advisors love it, and no [Profit Formula] reps are leaving.”

Wells and the other firms still have to figure out the best way to profit from semi-independent and fully independent platforms, he adds.

And from the advisors perspective, Sarch says, the appeal is limited. “The disadvantage of being on a caputured-independent platform with Wells Fargo, LPL Financial (LPLA) or Raymond James (RJF), for instance, is that you deal with one broker dealer vs. being in an RIA model with many custodians and more choice about how your business is custodied.

What the wirehouses must do, he notes “is to do something to differentiate themselves from each other and come up with a value proposition as to why they are a good choice.” Until they do that, Sarch adds, they are must continue to boost their upfront recruiting, or signing, bonuses.

“They have to make some compromises,” Sarch said, noting that, “if they trust these [advisors] as producers, they should let them run their own practices. It makes sense as a business model.”

While it may seem to make sense in some ways, the wirehouses face many other pressures at the moment, such as integration issues related to the Morgan Stanley Smith Barney (MS) joint venture and the Bank of America-Merrill Lynch (BAC) merger, for instance. Such challenges and the apparent difficulty of profiting from independent and semi-independent channels within the wirehouses could take some time to straighten out, experts say.   

“It’s been on their minds,” added Diamond. “I’m not privy to boardroom talk, but I do not know that they will ever do it.”

Roame, though, insists it is the shape of things to come.

 “Wells’ FiNet is landing some big reps but not huge numbers,” he said. “Part of the reason is, I believe, the breakaway broker trend is smaller in numbers than most others say. It’s a good offer. Wells (Wachovia really) had another offer called Profit Formula and yet another call Cap Trust. All of these had glimmers of the right idea. These ideas will all come back in 2012.”

For his part, Sarch believes we’ll just have to wait and see. “Who knows what they have on the drawing board,” he stressed. “The pressures on the wirehouse model means [many options are] being examined.”

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