Illustration by Oliver Munday

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.

Perhaps the newest retention gun that wirehouses are toting is the beefed-up succession-planning program.

“At the moment, this is the No. 1 retention tool—the new first-line strategy,” Elzweig says.

For example, UBS’s Aspiring Legacy Financial Advisor (ALFA) program, rolled out in April, is designed to smoothly transition client relationships by pairing FAs who have been with UBS at least five years with new UBS advisors. The Legacy FA must sign a contract indicating they are leaving the financial services industry, not just retiring from the firm.

“When the financial advisor is transitioning out of the business, we want the relationship to remain intact and remain at UBS,” says David Larado, head of net new money strategy, UBS Wealth Management, based in New York City.

Under ALFA, UBS pays up to 230% of the FA’s trailing 12 months’ revenue over five years; on top of that, the Legacy FA can choose to remain an active advisor for the first two years and receive further compensation.

“This program is clearly an incentive for advisors not to take a check and go elsewhere but to say with the firm,” Elzweig observes.

The way Bartenstein sees it, wirehouse succession-planning programs “are more about making sure that assets stay at the wirehouses long-term. The wirehouse own the clients; the advisors are W-2 employees—they don’t own anything and never will. Succession planning at wirehouses is very often a game of smoke and mirrors that appears to benefit the advisor but is designed to benefit the firm.”

An early succession-planning construct at Smith Barney, which Morgan Stanley took over in 2009 and 2013 acquisitions, was dubbed by the firm its “Franchise Protection Program,” Elzweig recalls. Last year Morgan Stanley, which declined to comment for this article, enhanced what is now called the “Former Advisor Program (FAP).” It provides a large up-front payment to qualifying, exiting FAs even before their books are transitioned to other Morgan Stanley advisors.

An increasingly common strategy that wirehouses are putting into play, in general, is teaming, or the ensemble approach. It is of course more difficult for groups to leave than for solo practitioners.

“Wirehouses are disintermediating advisor relationships and replacing them with teams. In terms of retention, their goal is to make it as cumbersome as possible for a team to leave,” Brinker says.

At Merrill Lynch, programs are designed “to help advisors best meet client needs,” a spokesperson said when asked about the firm’s approaches to FA retention.

Its Team Financial Advisor program (TFA), launched in August 2014, is, in part, a succession planning strategy, says Racquel Oden, managing director-head of advisor strategy and development, Merrill Lynch Wealth Management, based in New York City.

TFA immediately places trainees with a team; and Merrill pays them a salary for the next 31 months. Since the established team advisors are receiving the free services of a trainee for more than two-and-a-half years, this seems to be a notable incentive for them to stay at the firm.

Oden stresses, however: “This wasn’t a program put together to respond to advisors going independent. It’s an additional funding you’d never see at an independent. It enhances the existing advisor’s practice.”

Oden also insists that the trend to going independent is nowhere near a top-of-mind issue for Merrill. “We have the lowest attrition rate in the history of the firm,” she says.

According to Tasnady, the attrition rate is in fact low at all four wirehouses.

“I think recruiters are a little surprised that there hasn’t been a big bump of advisors jumping to other wirehouses. They’ve been waiting for this big surge of advisors who were [delaying until] their retention deals unwound completely,” Tasnady says. “There might be a slight bump, but I don’t expect it to last very long.”

How are independent BDs countering wirehouse efforts to keep FAs from leaving? One big tack, among many attractions, is to furnish credit to FAs intent on independence.

“If an advisor doesn’t have the capital to pay back the balance on their lock-up loan, many broker-dealers will provide it so that the advisor can get out,” says Bartenstein, whose firm offers such a program.

All in all, the trend of wirehouse advisors shifting to independence is forcing the independent space to recreate the many lines of businesses available at the big firms.

“This is making the space better and more sophisticated. The only ones to lose in the migration to independence are the wirehouses. Frankly, I feel they deserve it,” says Bartenstein, formerly with Merrill Lynch and Morgan Stanley.

Sidebar-The Legal Deterrent

Exiting wirehouse advisors typically retain most of their clients—many, as much as 80%–90% of them. Certainly, the big firms try mightily to prevent this. One method to deter FAs from leaving is sending the message that this could trigger outsized legal woes.

“There’s a direct threat issued by the wirehouses that they [figuratively] will machine-gun you like [“The Godfather's”] Sonny Corleone at a tollbooth, and their henchmen will pick you up and drive away with your livelihood,” says Robert Bartenstein, managing director-CEO of Washington Wealth Management, in San Diego. “When advisors open the door to this opportunity, the firms will attempt to make good on their threat.”

How to stand clear? Follow the Broker Protocol, an agreement on departure procedures signed by numerous firms. “If advisors don’t,” Bartenstein says, “they do so at their own peril. Wirehouses have forensic computer programs that allow them to see if you’ve manipulated client data prior to leaving, and they will demonstrate that to a judge or arbitration panel.”

Independent advisor Tyson Ray, founding partner of FORM Wealth Management Group, whose BD is Raymond James, adhered to Wells Fargo protocol to the letter when he resigned last year.

“Well Fargo makes it hard to leave,” Ray says. “One big deterrent is that all the client data is in a consolidated internal client management system. So I had to leave behind all my client notes, records, family information and so on.

“The legal counsel I got was extremely specific: ‘Do not take anything [but a client list]. If they catch that you took any information, they can claim damages’,” Ray recalls. “All I was allowed to take was my clients’ names, addresses, email addresses and phone numbers.”

Managing $240 million in assets when he left, Ray got back 90% of his clients and today has $215 million under management.

“The transition was a lot of work but rewarding,” he says. “I’ve enjoyed reconnecting on a deeper level with my clients.” —JWR

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