From the March 2016 issue of Research Magazine • Subscribe!

The Breakaway Push Is Sputtering Out

The independent channel is losing allure as a new wave of brokers looks for big deals

© Laughing Stock/Corbis © Laughing Stock/Corbis

Back in 2010, both advisors and their clients were still licking their wounds from the financial crisis. Investors were angry and upset. Joining an independent broker dealer was an attractive alternative to many advisors. The ranks of independents swelled with despondent wirehouse brokers.

That trend is slowing dramatically, according to recent data from Cerulli Research. In 2015 Cerulli estimates that 24% of wirehouse brokers moved to independents in 2015, a sharp drop from almost 30% in 2010. Last year 59% of wirehouse advisors who moved opted to join another wirehouse, up from 45% in 2010.

I don't expect a boost in the number of wirehouse advisors heading to independent firms in the next few years. The lions share of advisors who jump ship will continue to join rival wirehouses. That includes 2019 when the last of the wirehouse retention deals finally expire. That would be an optimal point for those advisors who are serious about independence to join independent firms that offer only modest deals.

The golden handcuffs have already come off at Merrill Lynch and the retention awards at the three remaining wirehouses — Morgan Stanley, UBS, and Wells Fargo — will all be completely amortized by the beginning of 2019.

Sentiment has changed in the interim. Independent broker-dealers are no longer the fresh, new thing. And now that a number of advisors have tasted the forbidden fruit it's clear that like everything else in life, going independent has its own pluses and minuses.

Attractive Model

What's clear is that the wirehouse model has features that will always be attractive to the advisor community, including both turnkey offerings and enticing pay packages. Face it: the best advisors take the long view for their clients when it comes to their finances. When it comes to their own businesses they prefer hard, cold cash now rather than later.

The immediate reward of hefty upfront recruiting packages continues to attract more advisors than the pot of gold at the end of the rainbow offered by most independent firms.

Advisors who go independent typically receive modest upfront deals — some offer nothing — to join or start independent firms. Down the road, they can command impressive multiples for the sale of their businesses. The sales of independent practices are taxed at the more favorable capital gains rate.

By contrast, recruiting packages at the much maligned wirehouses can be north of 300%, much of it in upfront money. That tax rate is higher but it's money in their pocket.

Plus, it's easier and more comfortable for most advisors to keep the business model that they’ve always had. Many advisors who have kicked the tires at independent firms have concluded that they are not prepared to do all the additional work required to go independent.

There will always be wirehouse advisors with the entrepreneurial DNA to choose independence. But the vast majority of wirehouse advisors will remain within the fold. They will continue to prefer the convenience of the turnkey wirehouse model. They will remain convinced that the credibility of a household name is a powerful tool to help them attract big accounts.

The independent option will continue to grow but not as dramatically as many suggest. Industry trade magazines regularly feature interviews and stories about advisors who’ve gone independent. These stories might be headlined, “Here's why Joe broker turned down a cool million dollars to go independent!” These tales are relative outliers, and that's why they fascinate.

Independent firms and their allied recruiters frequently claim that an increasing number of wirehouse advisors are demanding customization and squirm under the stifling wirehouse bureaucracy. Plenty complain, for sure. That doesn't translate nearly as often as you would think into those advisors going independent. As the saying goes: “Believe the behavior.”

Money talks even when wirehouse advisors select independent venues. Some of the most successful recruiters of high-end wirehouse teams are “Super Independent” firms like Hightower, Focus Financial Partners and Steward Partners. They speak the language of high-end wirehouse advisors. They offer serious money to join as well as broad-based platforms and support services.

Bottom line: in the next three years, wirehouse advisors will continue to kick the tires at independent brokers. But let's not overhype the trend. It's good for advisors to have a variety of potential business models. But it's important to remember that the wirehouse model works well for the majority of current wirehouse advisors and probably always will.

The View Ahead

Here's what to expect as many existing retention awards expire by 2019:

  1. Deferred compensation programs will not help stem wirehouse defections. These programs don't engender loyalty. Back in 2015, some of the wirehouses souped up their deferred compensation programs. They pale in comparison to potential 150% upfront recruiting packages.

  2. The focus at wirehouses will be on incentives that actually work. Wirehouses will step up their efforts to partner older advisors nearing retirement with younger advisors. This is by far the most effective retention tool out there. Firms will also boost their promotion of stickier, harder to transfer products like unified managed accounts and banking services. While these products may benefit clients, it's not lost on wirehouses that they make it more onerous for advisors to move client assets elsewhere. Home office-run portfolios will be promoted as well.

  3. The broker recruiting protocol will hold. Wirehouses will stay the course with the protocol because it's in their own self interest. They will want to bolster their own recruiting efforts and avoid publically embarrassing tugs-of-war over investor assets.

As I pointed out recently in an article at ThinkAdvisor (“Why the Broker Recruiting Protocol Is Here to Stay”), a catalyst for the protocol's formulation was press coverage of the ugly disputes that arose when advisors changed firms. Departing brokers were routinely slapped with temporary restraining orders (TROs) by their old firms, amid fights over whether clients were free to follow their advisor.

This was not the image that senior management at the wirehouses wanted to project to well-heeled investors. It still isn't. Major brokerage firms would be loath to blacken their names by returning to a TRO-centered strategy.

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