In a trend signaling further shrinkage of the wirehouse financial advisor population, FAs are leaving the big firms for greener pastures at beckoning regionals and small national firms. Higher payout isn’t the only allure: The mainly lower-level producers are seeking venues where they will be more valued and respected. But big producers are part of the migration, too.

It is a trend that has deep implications for the future of both wirehouses and advisors, as ThinkAdvisor’s interviews with recruiting and compensation experts reveal.

In the last five years or so, lower-level producers have seen their payouts decline significantly, along with the amount of support they receive from their wirehouse firms. These FAs aren’t being pushed out, but they don’t get much love either. In discouraging them, the wirehouses — Merrill Lynch, Morgan Stanley, UBS and Wells Fargo — have given the clear impression that they’d be happy if the FAs would leave to make room for more successful producers. In many cases, the feeling is mutual — and that is intensifying, as the growing trend shows.

“The smaller firms have benefited from the bigger firms concentrating on the bigger producers,” says Danny Sarch, president of Leitner Sarch Consultants, executive recruiters based in White Plains, New York. “The lower-producing advisors have had their payouts [reduced] in recent years and have fewer and fewer resources [available to them], which effectively forces them out. The firms don’t treat them well. They’re not wanted.”

Sarch continues: “It’s a question of when the advisors’ pain — frustration — is strong enough for them to say, ‘I really need to go somewhere else. Why stay here?’”

They are moving to what recruiters term smaller national firms, like Raymond James and Ameriprise Financial, and to regionals, such as Janney Montgomery Scott and Stifel Nicolaus, as well as to bank brokerage units of, for example, JPMorgan Chase and Citi, and to neighborhood banks.

Big Producers

The shift to smaller firms is not limited to lower-producing advisors. It is also occurring with big producers, expanding the trend of wirehouse advisors going independent or switching to the RIA channel.

“It’s not only advisors doing $500,000 in production — who are more tolerated than loved — that are moving to regionals. These firms, which allow wirehouse advisors to keep their business model and that pay attractive recruiting deals, have garnered many top producers,” says Mark Elzweig, founder of an eponymous executive recruiting firm in New York City.

Elzweig continues: “The regionals and small nationals have upped their game in the kinds of resources they have and the type of producers they’re attracting. They’re perceived as more user-friendly [than wirehouses], and the recruiting packages are certainly quite solid.”

But the shift isn’t always about money.

“The biggest change is that at the higher end, people aren’t moving just for financial reasons — and the wirehouses can’t get their arms around that. They just don’t get it,” Sarch argues.

The impact of the trend is yet another comedown for the big firms, who have been steadily losing advisors to the independent and RIA channels since the global financial meltdown.

But the more things change, the more they stay the same when it comes to wirehouse general M.O., now and going forward.

“The wirehouses have so much overhead that they will continue to focus on the larger producers and give the smaller ones reasons to leave. Most of them will choose to tuck themselves into smaller firms, where they are welcomed, receive higher payouts and get better support. That trend is consistent with millennials, who are less interested in taking risks and more concerned about quality of life,” says Mitch Vigeveno, founder and CEO of Turning Point, Inc., an executive search firm near Tampa, Florida. He was previously vice president of branch development for Raymond James’ independent advisor business.

‘Penalty Box’

Certainly, a chief reason for lower-level producers exiting wirehouses is dropping into the “penalty box,” where they are financially punished for less-than-desired production levels. Two firms that use this system are Morgan Stanley and UBS; Wells Fargo does not, according to Andy Tasnady, whose consultancy, Tasnady Associates, in Port Washington, New York, advises firms on FA compensation plans. Most regionals do not have wirehouse-like production-level hurdles that FAs must meet, he says.

Merrill Lynch eliminated its penalty box as of Jan. 1, a change that effectively raises compensation for lower-level producers. 

“Merrill Lynch has removed the motivation for lower-end producers to leave,” says Tasnady. This has particular impact on “advisors who are on the way up. They’re the ones that have been ripe to be cherry-picked by regionals and banks, and are the most valuable. They’re new in their careers and hungry. Now they won’t be encouraged by the penalty box to seek a job elsewhere.”

Another reason — a new one — for wirehouse FAs’ and other advisors’ attraction to regionals and smaller nationals is that two of the big firms, Morgan Stanley and UBS, have left the Protocol for Broker Recruiting, an agreement that makes it easier for advisors to depart.

Forecasts Tasnady: “The net effect will be more advisors — the volume that used to go to UBS and Morgan Stanley — ending up at large regionals that stay in the protocol.”

Edward Jones Surges

But Edward Jones, a national firm that isn’t a member of the protocol and who in the last five years has aggressively recruited experienced advisors, says it now has the most advisors of any firm: 16,000. According to the BD’s 10-Q quarterly report filed with the Securities and Exchange Commission at the end of November 2017, Jones’ advisor ranks grew to 15,952, thereby edging out, by headcount, the former largest BD, Morgan Stanley.

Last year Jones recruited 212 established FAs, according to Katherine Mauzy, the principal responsible for the firm’s experienced advisor recruiting strategy.

One likely big attraction to Jones is its boosted compensation package, which focuses on a higher base salary with an income guarantee based on a percentage of experienced advisors’ trailing 12 months’ gross production. Plus, the privately owned firm has revised its incentive-bonus program, and it provides the opportunity to become a partner.

“Jones offers a great profit sharing-type bonus. Their comp plan is unique,” notes Tasnady.

But some are dismissive of Jones’ drawing power for established FAs.

“I don’t see any sign that Edward Jones is in the competition for the experienced advisors who are considering something different. I question their ability to attract them,” says Sarch.

Moreover, there is Jones’ record of manifestly rough treatment of advisors who leave the firm.

“I can see attractive features that Jones has, but I wonder why people would go to a non-protocol firm when they know that if they decide to leave, it’s going to get ugly very fast? I don’t think that’s a prudent thing to do,” Elzweig says.

Vigeveno adds: “Jones has been outwardly aggressive in protecting client assets over the years. Who owns the client? is a big question for an advisor contemplating Jones. They need to really understand the deal and know what would happen if they decide to leave.”

The trend of exiting wirehouses for smaller firms and regionals shows no signs of abating.

“In fact, regionals have done so well that many have upped their own requirements for new recruits,” Elzweig says.

Better payouts and transition money with shorter strings attached versus wirehouse signing bonuses, lack of pressure to reach ever-higher production levels and heightened support are chiefly responsible for regionals’ and small nationals’ appeal to FAs.

Clearly, that trend, along with wirehouse FAs’ leaving to go independent or RIA, means that these firms’ sales forces will continue to decline in coming years.

Moreover, “the fact that three of the four major wirehouses — Merrill Lynch, Morgan Stanley and UBS — are actively recruiting only $1 million-plus producers shows they’re only interested in selectively upgrading their advisor ranks,” Elzweig says. “Unless an advisor is doing $1 million-plus, or is on the way there, these firms aren’t really interested.”

Of course, a critical, all-consuming goal for the wirehouses remains the retention of client assets.

Indeed, Sarch considers succession planning for existing practices the “overwhelming challenge” to wirehouses, and he poses another important question: “Will the firms succeed in hiring a new generation that can run these practices and that can retain the trust of the clients and their children?”

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