Plenty of advisors today are looking to make a career move like Colin Higgins. In 2003, he left his job as a rep for a regional brokerage firm, Hoefer & Arnette in San Francisco, and started his own RIA firm. But he didn’t go it alone. Four other brokers at the firm, who were working as a team with Higgins, jumped ship with him–taking $180 million in assets under management.
Needless to say, the brokerage firm wasn’t happy about losing the five-member team–or the assets under management–but Higgins and his colleagues believed that leaving the brokerage firm environment was not only the best move for them, but also for their clients. “We were looking for the ability to continue to grow our business in a manner that we wanted to, and we wanted to give our clients a shift from a B/D relationship to a pure fee-based one,” Higgins says. “We weren’t getting the support that we wanted from the B/D,” he adds, and “we realized that these are our [client] relationships, and that we could better take care of them if we went out on our own.”
After jointly sending a letter with the B/D to their clients about their decision to leave, Higgins and his colleagues took 95% of their clients with them. Two years after launching their RIA firm, The Golub Group in San Mateo, California, Higgins and his team have doubled their assets under management to $360 million. They’ve also doubled their staff–a decision they weren’t free to make at the brokerage firm–and client base.
Regional brokerage firms aren’t the only ones losing advisors in droves. The wirehouses are also seeing their share of brokers breaking away (dubbed “breakaway brokers”) to hang out their own shingle. Scott Dell’Orfano, executive VP of Fidelity Registered Investment Advisor Group, says more and more teams of advisors with “higher-net-worth clients and much larger books of business” are abandoning wirehouses and setting up their own shops.
It may be far too early to suggest that the wirehouse model is pass?(C)–those titans of Wall Street can still boast tens of thousands of brokers and billions of dollars in transactions and assets under management. Under Stan O’Neal, for instance, a leaner Merrill Lynch has increased both revenue and profitability. In the third quarter, Merrill’s net income was $1.4 billion (up 49%) on revenues of $6.7 billion. The company’s Global Private Client group, which its 14,696 “financial advisors” call home, posted record pretax profit margins of 19.8% in the quarter on net revenues that were up 9% to $7.9 billion. Yet, many brokers are leaving the wirehouse scene.
Why is that?
The Conflict of Interest Issue
Besides the fact that these brokers want to control their own destiny and that of their clients’, industry officials interviewed for this article believe a big part of the reason for the increase in breakaway brokers is because of regulatory scrutiny concerning conflicts of interest, and the dispute over the Merrill Lynch rule. “A lot of the wirehouses are starting to feel defensive about their firms,” says Scott MacKillop, president of U.S. Fiduciary in Houston. The wirehouses’ reputations and marketing prowess, too, are suffering, and many brokers are being put in the awkward position of having to defend their wirehouses’ reputations.
But Steve Gresham, executive VP at Phoenix Investment Partners in Hartford, Connecticut, says the wirehouse model will always be around in some form because not every advisor wants to be an entrepreneur. The silent generation, too, who were born before the baby boomers, have “an extraordinary interest in the safety and security of an established company,” he says. Although the wirehouses have not made significant strides in attracting boomers.
To be successful at setting up their own businesses, however, Higgins says advisors must hatch a plan ahead of time. “We had a pretty smooth transition because we did a lot of planning in advance,” he says, like scoping out office space, computer IT vendors, payroll providers, and banking relationships. Another crucial step is finding a custodian that’s “willing to support you and help you grow your business,” Higgins says. Higgins and his team are using Charles Schwab as their custodian, and are also getting technology and compliance support, among other things, from Schwab. “They’ve done a phenomenal job,” Higgins says.
Advisors must also know that just because they may be good at managing a portfolio and client relationships, that doesn’t mean they’ll be good at running a business, Higgins warns. “You have to have an entrepreneurial instinct, and pay attention to detail,” he says. Dell’Orfano agrees, but says he’s noticed that advisors are learning from the mistakes of their peers who’ve already made the transition, and are “taking a lot more time to analyze what it takes to run an independent practice.”
Being a Good Manager
That’s good news, because the breakaway brokers who end up creating the most profitable firms are good business managers, says Philip Palaveev, a senior manager at Moss Adams who’s in charge of advisor market research. Beside wanting to control their own destiny, believing that they can serve their clients better solo, and creating equity in a firm that they can sell when they retire, one of the main attractions to going independent is pulling in more money, he says, so advisors must realistically assess the challenges associated with running a business. Despite the fact that most advisors working at wirehouses are entrepreneurial by nature, when they break away from the wirehouses they “underestimate how much time they will spend managing the business,” Palaveev says. At wirehouses, brokers can devote nearly all of their time to clients and relatively little time on practice management, he says. Once they go independent, they’ll find they’re spending from 30% to 50% of their time running the business, he says, so to free up more time with clients they should consider outsourcing some functions, or joining an existing RIA firm instead of going it alone.
Another popular option is for breakaway brokers to link up with an independent broker/dealer firm. MacKillop says many breakaway brokers are getting a significant chunk–in some cases as much as 70%–of their revenues from commissions, so they need to park their Series 7 license at a broker/dealer in order to keep collecting the commissions. That’s what a former Smith Barney rep did when she decided to join U.S. Fiduciary. Like other breakaway brokers, she left Smith Barney because “she wanted to be more objective, have control over her destiny, and [control] what she was doing with her clients,” MacKillop says. She’s now an employee of U.S. Fiduciary’s broker/dealer and its RIA practice. MacKillop points out that neither Schwab nor TD Waterhouse’s transition service for breakaway brokers allows them to move their Series 7 license. “This is where the TD Waterhouse and Schwab strategy [to recruit breakaway brokers] has a hole in it,” he says. “It puts the advisor in a position of either having to give up that stream of revenue or find another alternative.”