After last year’s banner surge, independent broker-dealers have seen a sharp falloff in new advisors. The question that begs asking: Has the RIA marketplace stolen their thunder?
The three major RIA players — Charles Schwab, Fidelity and TD Ameritrade — all say they expect to match or exceed their historic recruitment of breakaway brokers in 2009. On top of that, the wirehouse teams they are attracting are bringing in more bang in the way of new assets. Consider: a team joining Charles Schwab today averages $131 million in assets under management. Best yet, they report, there are “fast followers” in the pipeline.
As Bill Whitney, principal of Mississippi Investment Management Co., puts it: “We get calls from advisors every day and they fall into two categories: ‘Can I come, too?’ and ‘How’d you do that?’”
Whitney, a former UBS broker, came out of retirement in January to help form the Jackson, Miss.-based RIA along with two UBS breakaway brokers and a mutual fund manager. They currently manage $100 million in assets. Why did they pull the trigger?
Whitney, 74, puts it bluntly: “The gag reflex was reached.”
An advisor since the mid-1960s when he joined Merrill Lynch, Whitney says the team has re-created what the wirehouse once was: a client-first firm focused on the individual investor. The new group, affiliated with Pershing Advisor Solutions, deals largely with high-net-worth clients.
No industry pundit suggests the move to independence is in a rush mode at the moment. As Philip Palaveev, who heads Fusion Advisor Network, observes: “It’s a steady trickle over time. It’s how the Grand Canyon was made. Over time, a lot of advisors will continue to go independent and they will tend to be successful, of significant size and entrepreneurial-minded. That will continue to shift market share gradually, but steadily, toward the independent model.”
RIA insiders love to trot out a 2009 report from Cerulli Associates that projects the wirehouse market share of assets under management will fall to 40.7 percent by the end of 2012 from 47.7 percent at year-end 2008. Meanwhile, the independent broker-dealer, RIA and dually registered channel is projected to account for 39.3 percent by the end of 2012. It would mark the first time ever that market share was pretty much even. [Editor's note: The report will be updated in July.]
“Every year, it’s getting easier, safer and more accepted to move from the wirehouse space to the RIA space. Anyone who says to the contrary is not being intellectually honest. It’s going to take a while for the size of the RIA marketplace to be comparable to the size of the wirehouse/brokerage marketplace, but….it will happen a lot faster than people expect,” according to Elliot Weissbluth, CEO of HighTower Advisors. A private equity player that owns both an RIA and broker-dealer, HighTower at press time in April had just transitioned its twelfth team, representing $15 billion in assets. Eleven of the 12 teams came from a wirehouse. The firm, in business since 2008, expects to have amassed $50 billion to $60 billion in assets within a couple of more years.
Just as intriguing as the Cerulli forecast is a new study from Aite Group that reports that while the wirehouse segment is gaining stability after the recent scandals and market meltdown, advisors there remain on edge. As Doug Dannemiller, senior analyst for the research firm, notes: “The wirehouse advisor force is much less anchored to their broker-dealer than the other segments on a going-forward basis. This is no terra firma kind of thing. We’re not in a totally stable environment. It’s still fragile.”
The survey, New Realities in Wealth Management: Has the Dust Settled?, found that only 15 percent of wirehouse advisors currently lack a plan to break away. Its conclusion: “This base of loyal advisors is small, and the remainder could initiate another wave of departures if the wirehouse segment takes another reputational hit or if the management of the [wirehouses'] mergers does not meet expectations.”
The 42-page report, released in April, also observes that wirehouse advisors and registered investment advisors have similar profiles in terms of their client base, staffing models and assets managed — “reinforcing the expectation,” as the survey frames it, that the RIA model is likely to be a good fit for advisors breaking out of a wirehouse.
Today’s Breakaway Broker
What’s the profile of today’s breakaway broker? Interestingly, it seems to be changing a bit. In addition to managing a bigger book of business, many advisors today are choosing to join an existing RIA rather than starting one from scratch.
Bernie Clark, senior vice president of Charles Schwab Advisor Services, has a name for them: “joins.” Last year, 42 percent of a record-breaking 172 advisory teams joined existing Schwab affiliates, up from 15 percent in 2008 — a trend that continues today. During the first quarter of 2010, 31 teams, representing $3.9 billion in net new assets, transitioned to Schwab. Of those, 42 percent were “joins,” up from 35 percent during the same quarter in 2009. The advisors are also coming out as teams, rather than individuals. And, Clark says, there are teams in line behind those teams.
“Our existing [advisors] have begun recruiting directly into the wirehouse space with us. They’re interested in growing their practices, finding capability,” adds Clark. “They’ve been a huge referral engine for us.”