Wall Street’s ugly industry stumbles will likely result in a stream of broker defections next year as advisors seek to distance themselves from sullied firms and recoup stock losses attached to their no-longer golden handcuffs.
The continuing move toward higher payouts isn’t expected to abate the trend, according to industry experts. In fact, recruiters report that they are in contact with more top-performing teams right now than in years. One reason: a notable shift in corporate loyalty.
“I’ve gone through the demise of Hutton, Drexel, Shearson, Kidder, DLG and Prudential. We’ve seen all these great firms go, but they were all unique singular events. We’re not seeing, in this case, the demise of any one firm,” according to Rick Peterson, president of the Houston recruiting firm, Rick Peterson & Associates. “What you are seeing is the deterioration of respect both brokers and clients have for the performance of the firm, notwithstanding their own contributions.”
The collapse of the auction rate securities market, the subprime mortgage meltdown and any number of other missteps have left many advisors feeling angry and betrayed. Add to that the plummet in firms’ stock prices and there’s trouble in paradise.
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As Danny Sarch, president of Leitner Sarch Consultants in White Plains, N.Y., bluntly frames it: “What these firms have done is destroy any corporate loyalty at the advisory level. Take Merrill Lynch, with its strong corporate culture. Its stock has gone from $90 to $25. And it’s not just Merrill, of course. This pain is being felt everywhere.”
There’s already been a trickle of high-profile defections from wirehouses this year, in part because advisors are seeking to “re-monetize” their stock, according to Mark Elzweig, president of Mark Elzweig & Associates in New York City. As one recruiter put it, a broker’s 401(k) now resembles something closer to a 101(k).
“A lot of people are open to deals to make themselves whole again. Deeper than that, shall we say the client experience and the advisor experience have been less than optimal? People are looking for solutions elsewhere,” Elzweig notes. “A lot of advisors and clients want to make a fresh start somewhere else.”
Which firms are shaping up as the beneficiaries of this to and fro? First, don’t count the wirehouses out. Insiders report that Morgan Stanley in particular is seeing a good bit of action. LPL Financial, with its dominant independent brand, and the captive channel Raymond James & Associates are also proving they are players. The latter, in fact, in August recruited a group from Citigroup/Smith Barney that manages a combined total of $700 million in assets. In a statement earlier this year, RJ&A president Dennis Zank acknowledged: “There’s no question we are benefiting from a certain level of advisor discomfort on the Street right now.”
Wachovia Financial Network is also mentioned as a contender as is Pershing Advisor Solutions, whose profile has heightened under the leadership of new CEO Mark Tibergien. At press time in mid-August, he was in talks with 84 breakaway wirehouse brokers, roughly triple the number a year earlier. And they are brokers with a sweet spot: teams primarily, with staff, and managing between $400 million and $1 billion in assets.
Tibergien is talking to brokers about four different platforms: forming an RIA; being served by one of Pershing’s independent broker-dealer customers; becoming a “hybrid advisor,” served by both; or joining an existing advisor.
“The organizations they are leaving are historically terrific institutions with very strong brands and a very strong product offering,” says Tibergien. “But as advisors become more sophisticated and more independent, they tend to chafe under the structure of those organizations.”
As for what’s accelerating the trend, Tibergien adds: “Many of these large firms have tarnished their reputations by some of their management decisions. Unfortunately, advisors themselves are becoming a little bit exasperated having to explain to their clients what their company is doing. All they want to do is service clients, get more clients and give them advice — not spend their time apologizing.”
Compensation ForecastThe bad news? By year’s end, broker compensation is likely to be down by 15 percent compared to 2007, according to one key forecast. The good news is that the retail brokerage business is holding up far better than its peers across the financial services industry.
Alan Johnson, who heads Johnson Associates in New York City and produces a popular quarterly compensation forecast, predicts that overall compensation will be down 30 percent this year. As he puts it: “2008 will be an old-fashioned terrible compensation year.”
But, he added, “The retail brokerage sector [at an estimated 15 percent] has done better. It’s down, but not as dramatically. Their business is more fee-based so it has held up way better than risk-based or transaction-based models.”
Still, one thing is indisputable. Unless fee-based advisors are adding new assets, their share of the pie has diminished as portfolio values have shrunk. “If your business is up in 2008, you’re probably doing a very good job bringing in new money,” observes Sarch. “If not, you’re not going to be making as much in terms of absolute compensation.”
In another survey, The Smart Cube, a global research firm, found that the economic downturn triggered by the subprime lending crisis could reduce Wall Street compensation packages for new hires by as much as 20 percent. The survey included brokers, but crossed a wide range of job categories.
Omer Abdullah, managing director in charge of the survey, said that top producers are not at risk. “The folks in the top quartile, generally speaking, are fairly safe. At the end of the day, it’s about revenue and profits and they are the ones bringing it in,” he notes. However, that doesn’t necessarily apply across the board. “When times are good, the second and third quartiles would have felt safe as well. In an economic situation such as this, we’re moving the bar up, if you will,” according to Abdullah.