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October 05, 2011 at 12:24 PM
One surprising consequence of the markets’ wild gyrations since August has been that fewer wirehouse advisors are expressing an interest in going independent. The tried-and-true path of moving from wirehouse A to wirehouse B or to a well-capitalized high-end boutique firm, suddenly seems a whole lot more attractive.
What’s happened is that in the face of markets that resemble Coney Island’s famed Cyclone rollercoaster, many advisors are becoming as conservative and risk averse as their clients.
We know that during periods of intense market volatility, retail investors take a “flight to quality,” cutting back on riskier equities and opting for the safety of blue chip stocks, government securities and money markets. More advisors are now favoring big, well-capitalized household-name brokerage firms. These include high-end boutiques like Barclays, JP Morgan and DB Alex Brown, as well as Merrill Lynch, Morgan Stanley, Wells Fargo and UBS.
The Wall Street Journal reports that in one six week period, the Dow rose and fell more than 100 points in 24 out of 38 trading days. The third quarter of 2011 had three of the largest intraday point swings in history. Investors worldwide yanked $92 billion from stock funds in the three-month period ending in August.
Suddenly the prospect of monetizing your book at another well-known, household-name firm seems like the safe, prudent way to go. After all, fragile world economies and the prospect of a prolonged low-growth environment accompanied by fickle, erratic markets are convincing many that the time to cash in on the practice that they’ve built is fast approaching.
Far away abstractions like “owning my own franchise” and ‘fully open architecture” seem to pale in comparison to the wisdom of lining up your own personal cash cushion to ride out the storm. As in 2008, advisors have taken big hits on the stock portion of their compensation. They welcome a strategy to help them recoup these losses.
Independent firms offer very modest deals compared to the high-octane wirehouse recruiting packages. After all, the big monetary payoff in hanging out your own independent shingle doesn’t come until way down the road: three to five years before retirement, when an advisor can set his or her own sale price and then realize the proceeds as a capital gain. With the daily raging seas of a tumultuous market, the virtues of independence are becoming secondary concerns for many advisors.
There’s also another factor at work. Many advisors view the major wirehouses and big-name boutiques as relatively safe harbors that inspire confidence with well-heeled clients. Sure, most of the wirehouses have their issues of late, and their stocks have taken some pretty big hits.
