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Broker Exits Spur Recruiting Shift

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The movement of financial advisors out of the wirehouses has continued in early 2012, experts say, and should put Merrill Lynch and Morgan Stanley on notice. At the same time, though, the majority of advisors who decide to make a move remain with the wirehouses or other large national firms, they add.

A former Morgan Stanley Smith Barney team, for instance, just moved to LPL Financial in a hybrid-RIA model. The three San Diego-based advisors, Neil McNeil, Robert Meyer and Ryan Clive-Smith, have about $2 million in yearly fees and commissions and some $300 million in assets.

The group is now operating as Ibis Capital and is partnering with Stratos Wealth Partners, an RIA. Stratos has over $2 billion custodied with LPL Financial, representing the vast majority of the RIA’s assets. Ibis Capital also has chosen Fidelity Institutional as its custodian.

“An LPL-Fidelity combination is very unique. LPL has traditionally not allowed such arrangements,” said Chip Roame, managing director of Tiburon Strategic Advisors, in an interview.

A spokesman for LPL, however, says that the Ibis arrangement is not very unusual: “LPL Financial, like all custodians, does business in a multi-custody marketplace. Furthermore, because of the integration benefits our RIA platform offers, our RIA customers typically custody all of their assets with us, but it is not unusual for larger RIA firms such as Stratos to retain some residual assets with other custody firms while utilizing LPL as its primary custodian.”

Earlier this month, a Merrill Lynch private-banking team with about $1.4 billion in assets joined the independent advisor-owned HighTower in New York. This is the fourth “breakaway” team to move from Merrill to HighTower, a registered investment advisory firm.

The issue, says Roame, is more about the importance of “trailblazers” and the broader breakaway-broker trend and less about the specifics. If some have already embraced independence, the question becomes “will many more follow?” asked the consultant. “I tend to think that if Merrill does not respond with better offers, this trend will accelerate.”

Merrill is taking some steps to make up for departing reps. In February, it introduced more substantial recruiting packages to advisors with rival firms; some may now receive as much as two times their previous year’s fees and commissions in cash after 12 months.

The team of Jose Fernandez and Juan Aleman recently joined Merrill’s San Diego office from Citibank with about $2 million in yearly sales and $260 million in assets. And the duo of Ryan Baker and Stuart Hamm came to Merrill from Morgan Stanley in Florence, Ala., with plans to move over nearly $1.4 million in yearly production and more than $130 billion in assets.

For its part, Morgan Stanley maintains that advisor attrition, particularly in the top two quintiles, “remains near historical lows.” In mid-April, just ahead of issuing its first-quarter earnings, Morgan Stanley said it recruited four UBS advisors and two Deutsche Bank FAs. The combined assets of the three teams are about $1.4 billion, while the total yearly fees and commissions are close to $8.7 million.

Meanwhile, the wirehouse firm, led by James Gorman, recently lost four reps to Bank of America-Merrill Lynch, Raymond James (RJF) and RBC Wealth Management (RY) with a total of about $3 million in production and some $500 million in assets.

Morgan Stanley, Bank of America and Citigroup are all facing possible downgrades to their credit ratings by Moody’s Corp., which announced the news in late February. Analysts say that this could complicate reported plans at Morgan Stanley to purchase more of Citi’s interest in the Morgan Stanley Smith Barney joint venture; Morgan now owns 51% of the business.

Could a downgrade also hurt Morgan Stanley’s pull as a recruiter? “The rating agencies blew out their street cred quite a while back with their investment-grade ratings of Enron in 2001 up until four days before the firm collapsed,” said executive-search consultant Mark Elzweig in an interview. “Unless the new rating of one firm is dramatically lower than another, most advisors will yawn and shrug it off.”

Advisors tend to focus on a firm’s stock price and the pricing of credit-default swaps, added Elzweig. “Unless the rating downgrades influence these numbers, I don’t think that it will matter much,” he said.

Other experts concur. “Downgrades have numerous impacts on financial institutions, including on their cost of capital and on their [corporate] images,” explained Roame. “I would think that broker recruiting would not be substantially impacted, after a possible paused for a week or two as the news is digested.”

Still, since downgrades cause borrowing costs to increase, Morgan Stanley, Citi or BofA might have to pay more interest and thus have less to pay for other expenses or earn lower margins, the consultant points out. “One outcome could be that they allocate lesser amounts to recruiting staffs and/or to broker recruiting bonuses … ,” Roame explained.  “But believing that some brokers would not join Merrill Lynch or Morgan Stanley because their parent’s debt rating is lowered, though still super high, seems unlikely to me.”

According to the J.D. Power and Associates’ 2012 U.S. Financial Advisor Satisfaction Study, some of the wirehouses have room for improvement in terms of giving their advisors the right mix of technology, client support and other tools.

The J.D. Power Study (based on responses of nearly 2,800 employee FAs) found that Morgan Stanley stood below the industry average of 698 with a score of 649. Edward Jones had a top rating of 900, followed by Raymond James at 864, RBC at 802 and UBS at 730. Merrill’s rating was 688, while Wells Fargo’s was 633.


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