For successful, entrepreneurially minded wirehouse advisors, the allure of going independent is a powerful, magnetic force.
But as more and more top producers opt to launch their own shops free from the dictates of big-bank employers, wirehouses are trying harder to retain them—and their client assets part-and-parcel.
The large firms have good reason to zealously persist: In 2013—the most recent year for which figures are available—wirehouse asset market share dropped to 42% from 47% at its 2007 peak, studies by Cerulli Associates indicate.
Indeed, by 2018, the independent channel is pegged to overtake the wirehouse channel. Last year, independent BDs’ share grew by 13.9% as opposed to 12.2% for wirehouses.
It therefore comes as no surprise that, “absolutely, the wirehouse’s chief goal is to keep client assets in-house,” says Matt Brinker, senior vice president-acquisitions and partner development, United Capital, an RIA based in Newport Beach, California.
The financial crisis, with its mergers and acquisitions, new management regimes and widespread angst, fueled an exodus of wirehouse FAs. In response, Merrill Lynch, Morgan Stanley and UBS issued special retention bonuses to thousands of advisors, according to Andrew Tasnady, managing partner of Tasnady Associates, in Port Washington, New York, who designs wirehouse compensation plans.
Now those bonuses are expiring, and some expect independent-leaning advisors at those three wirehouses, and their counterparts at Wells Fargo Advisors, to make the jump to independence.
That’s one reason the four big firms recently boosted FA deferred compensation, experts say.
“Wirehouses are betting that their bolstered deferred comp dollars will convince more advisors to stay with the home team,” blogged executive recruiter Mark Elzweig, whose eponymous firm is located in New York City.
In their effort to keep their most successful advisors, bank BDs have instituted both additional and enhanced incentive programs.
“Wirehouses are trying harder to keep the advisors they want to retain from going independent and are all too happy to let smaller advisors find other places to do business,” says Robert Bartenstein, managing director-CEO of Washington Wealth Management, in San Diego, CA.
However, “while wirehouses are trying harder and harder to retain [big producers],” he notes, “we’re seeing bigger and bigger advisors leaving to go independent.”
“Though no one is writing wirehouses’ epitaph,” Bartenstein concludes, “you might argue that they’re losing the war.”
The firms’ most potent ammunition to keep FAs in their W-2 seats is the up-front signing bonus. The terms of these forgivable loans have even been extended, some up to nine years.
“To receive the full amount, the financial advisor must stay at the firm longer,” Tasnady says. If advisors leave early, they must repay the balance.
Brinker remarks: “Anyone who thinks these deals are constructed for the benefit of the advisor is deluded.”
The financial rewards realized from selling proprietary products is the second-biggest incentive for FAs to stick around.
“Wirehouse employee-mind-trained advisors are prone to be restrained by these golden handcuffs,” Bartenstein remarks.
With this year’s deferred comp increases, the firms made FA-earned monies more difficult to receive since payments are tied to specific goals; for example, more asset gathering, according to Tasnady.
“Wirehouses are reshaping compensation to be based less on sales level and a little more on doing certain things,” he adds.
In an interview, Elzweig speculates that the increases “won’t be terribly meaningful because if an advisor wants to leave, the amount of money they can [receive] to go to another wirehouse or a regional is so much more.”
Independent broker-dealers, however, see the deferred-comp picture from a different angle.
“The dawn of deferred comp has got to be a red flag for sophisticated advisors that accelerates their thought process about going independent—the longer you stick around with a deferred-comp set-up, the harder it is to make the leap,” Bartenstein says. “Wirehouses are giving deferred compensation as a de facto retention tool to keep advisors longer. This, effectively, is economic hostage-taking.”
Deferred comp had become a major irritation for advisor Tyson Ray, founding partner of FORM Wealth Management Group, in Lake Geneva, Wisconsin, who left Wells Fargo Advisors in January 2014 to go independent. He’d been with the firm for 16 years and felt trapped.
“The way Wells Fargo tries to keep you is with hurdles that you have to come over. They’re tied to a lot of compensation—what I would refer to as golden handcuffs money—which you had to stay at the firm for years in order to get,” says Ray, whose BD is Raymond James. “It seemed that the longer I stayed, the more I was going to lose to ever leave. The terms just continued to ladder themselves out into the future.”
Typically, advisors opting for independence seek freedom to build portfolios with products that, as Brinker puts is, “don’t come with financial kickers, which motive them to sell one product over another.” That’s one big motivation for leaving the fold.
Further, Ray notes that tighter regulations imposed on wirehouses have “negatively affected” FAs. “They’re being subjected to more policies and procedures, and aren’t liking them. It feels oppressive.”
Ray looked into going solo with Wells Fargo’s independent channel, FiNet. The firm is the only wirehouse to offer such a structure and, in addition to outside advisors, makes it available to FAs who transfer from its traditional Private Client Group model.
“We’ve had record asset growth,” says Alex David, managing director and head of FiNet branch development. In 2014, average client assets per FA recruited totaled a record $72 million. FiNet, in fact, is the fastest growing WFA channel in same store sales and revenue, says David, based in St. Louis.
FiNet advisors own their client relationships contractually, and FAs moving from PCG are permitted to take their existing clients with them.
But Ray gave FiNet a pass when he found that joining would mean a payout reduction for his first two years “to compensate the Private Client Group for losing my revenue,” he says. “I decided to take the risk that I’d have enough clients move over to make up the difference of what I would have lost had I changed channels. And that’s the way it’s worked out.”
Though FiNet’s payout to FAs shifting from PCG is the same as those joining from outside Wells Fargo, the PCG-transferring advisors pay 15% of their production to WFA the first year and 10% the second, David says. After that, they receive full payout.