Back in 2010, both advisors and their clients were still licking their wounds from the financial crisis. Investors were angry and upset. Joining an independent broker dealer was an attractive alternative to many advisors. The ranks of independents swelled with despondent wirehouse brokers.
That trend is slowing dramatically, according to recent data from Cerulli Research. In 2015 Cerulli estimates that 24% of wirehouse brokers moved to independents in 2015, a sharp drop from almost 30% in 2010. Last year 59% of wirehouse advisors who moved opted to join another wirehouse, up from 45% in 2010.
I don’t expect a boost in the number of wirehouse advisors heading to independent firms in the next few years. The lions share of advisors who jump ship will continue to join rival wirehouses. That includes 2019 when the last of the wirehouse retention deals finally expire. That would be an optimal point for those advisors who are serious about independence to join independent firms that offer only modest deals.
The golden handcuffs have already come off at Merrill Lynch and the retention awards at the three remaining wirehouses — Morgan Stanley, UBS, and Wells Fargo — will all be completely amortized by the beginning of 2019.
Sentiment has changed in the interim. Independent broker-dealers are no longer the fresh, new thing. And now that a number of advisors have tasted the forbidden fruit it’s clear that like everything else in life, going independent has its own pluses and minuses.
What’s clear is that the wirehouse model has features that will always be attractive to the advisor community, including both turnkey offerings and enticing pay packages. Face it: the best advisors take the long view for their clients when it comes to their finances. When it comes to their own businesses they prefer hard, cold cash now rather than later.
The immediate reward of hefty upfront recruiting packages continues to attract more advisors than the pot of gold at the end of the rainbow offered by most independent firms.
Advisors who go independent typically receive modest upfront deals — some offer nothing — to join or start independent firms. Down the road, they can command impressive multiples for the sale of their businesses. The sales of independent practices are taxed at the more favorable capital gains rate.
By contrast, recruiting packages at the much maligned wirehouses can be north of 300%, much of it in upfront money. That tax rate is higher but it’s money in their pocket.