Why Some Big Breakaway Brokers Are Going Independent: Economics

Some years ago, I was on a trip to somewhere that involved flying through Dallas (which doesn’t narrow my destination down very much), and got to talking with the guy sitting next to me. As luck would have it, he was a stockbroker from Houston. I don’t remember which wirehouse he was with, but he wasn’t bashful about telling me that he generated $1 million in annual gross commissions. With uncharacteristic tact, I apologized for prying, but asked if he didn’t mind telling me what his payout on that was. 

“I’m one of one of their biggest producers in Texas,” he proudly told me, “so I receive our top payout of 50%.” I tried to resist, honestly I did, but I just couldn’t stop myself from following up with: “What could they possibly be providing that’s worth half a million dollars a year?” He hemmed and hawed and mumbled something about research, marketing support and a Shark machine, I think, but altogether, it all couldn’t have come close to $100,000 worth of stuff. 

I was reminded of that conversation as I was recently reading about a new study by Cogent Research for Fidelity Institutional Wealth Services that found 76% of breakaway brokers say they are better off financially than they were prior to their move to independence—and 64% were better off after only six months. And despite all the attention that “breakaway teams” get in the trade press these days, some 80% of the 173 brokers surveyed made the leap by themselves.

Of course, that’s not a very large sampling, Fidelity isn’t exactly an unbiased observer, and like most “studies” in our industry, this was an “unaudited survey,” if you get my drift. Still, those are pretty striking figures, and perhaps even more surprising is the finding that 86% of the breakaways said “all or most” of their clients moved with them. I suppose that’s a testament to both the proliferation of professional assistance to make the move toward independence, and to today’s all-time low in the reputations of brokerage firms. 

I suspect these impressive stats are also a function of a phenomenon not seen in the brokerage world before the past two or three years: “big producers” going independent. Like the superstar I chatted with on the plane, top brokers historically have been very reluctant to take the risk of going out ontheir own—regardless of the economic incentives. For most of the nearly 30 years that I’ve been covering independent advisors, going independent almost always meant scraping by for a number of years while one slowly built up their practice. Which meant advisors had to really want to be independent: for the lifestyle, the freedom or, most typically, to better serve their clients. 

Today’s breakaways seem to be in a very different camp, making a very different decision. As far as I can tell, these top producing breakaways are making a business decision, plain and simple: One based on the realization that the reputation of their brokerage firm (and any brokerage firm they could jump to) has not only stopped being an asset, it’s become a liability. 

The impact of this new influx of “instantly successful” advisors on the independent community hasn’t even started to emerge. But because these firms appear to be generating revenues in excess of $1 million a year from the get go, they’ll be among the most successful advisory firms, sought after by vendors, custodians and professional associations alike. Will they be satisfied with what’s currently available or look for organizations with a more SIFMA/wirehouse feel? Probably too early to say: But my guess is that they will have a powerful impact on the culture of the industry—and the profession—of independent advice. 

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