I started in wealth management toiling in wirehouses for 12 years before committing the grave sin of giving up my book for the management side of the business. I had headed two offices for a major wirehouse in New York City and recall it like it was yesterday when an advisor resigned to join an RIA to go independent.
Back then, I failed to comprehend why an advisor would leave a major firm for a small RIA — but ironically, I later became part of the founding team at Hightower Advisors, helping to ignite the breakaway advisor movement.
When I left Hightower in 2011, a senior executive at a wirehouse asked about this growing trend, claiming that he wasn’t seeing the tsunami of advisors bailing for independence. He said that the headcount at his firm was steady.
I advised this exec that every tsunami starts with a few ripples on the shore and that the firms who choose to ignore those ripples do so at their own peril. This particular wirehouse ignored the ripples, and 13 years later, that firm and others like it, no longer report headcount figures because the immense waves of that tsunami rocked their worlds.
In fact, according to Cerulli data, wirehouse market share is plummeting. Cerulli estimates that by 2027 wirehouse assets will drop to 27.7% of the wealth management industry, a decline of more than 6 percentage points from 2022. The beneficiary, of course, is the independent segment.
Last year, wirehouses cumulatively saw a net decrease of 612 advisors while RIAs saw a net gain of 856. When you ask former wirehouse advisors if they have any regrets about going independent, you tend to be met with a common refrain: They only wish they had pivoted sooner.
What have been the main drivers behind the migration to independence and where is the trend headed over the next decade?
The financial crisis of 2008 was a huge catalyst in accelerating advisor movement. With the exception of the Great Depression, this marked the first time that every major wirehouse was on the verge of extinction.
Advisors realized that their clients stayed with them not because of the brand name but because they had earned their clients’ trust. While I believe the aforementioned crisis was a motivating factor in the shift to independence, it was certainly not the only factor.
Here are five major factors that have contributed to, and will continue to accelerate, the shift to independence. With wirehouse headcounts shrinking year after year, the lingering question is: Will the last one out, please turn off the lights?
Autonomy
Many advisors at wirehouses have lived under a system designed to manage to the lowest common denominator, often stifling top performers. Additionally, from a compliance perspective, wirehouses operate pursuant to FINRA guidelines of suitability, while RIAs follow SEC fiduciary rules.
While the best advisors at wirehouses run their business like a fiduciary, as an independent RIA they can officially claim that standard.
Compensation
The grid system in the wirehouses is broken and limiting. An advisor generating $2 million in revenue at one of the wirehouses can anticipate a payout (sans deferred compensation) to be in the 45% to 47% range and taxed as ordinary income.
If that advisor doubles revenue within five years, the advisor has reached the top of the grid, so the wirehouse captures all of the margin expansion. Great for the wirehouse, not so much for the advisor.
In the independent space, earnings before owner’s compensation can be in the 60% to 70% range, depending on how efficiently the business is run. In many cases, this income is either in the form of a 1099 or K1, representing significant tax and savings upside.
Creating Value
For advisors to build significant net worth, they need to own their business.
Historically, advisors wanting to realize the value of their business had to leave their firm, join a rival and accept an upfront check in the form of a promissory note — taxed as ordinary income and usually with a nine-year lockup period.
Going independent allows advisors to build equity in their business, creating a long-term asset that often far exceeds the value of a wirehouse check.
Technology
Wirehouses tend to move slowly when adopting new technologies, inevitably leaving their advisors at a competitive disadvantage relative to peers at RIAs.
RIAs can select their own tech stack to best meet their client’s needs. If technologies improve, and there is a better solution in three months, the RIA can shift to more modern solutions. That is simply not the case at wirehouses.
Product
Decades ago, the most sophisticated investment products resided exclusively in the wirehouse world. This is certainly not the case anymore because asset management firms have recognized that the RIA industry is the fastest-growing advisor and client segment.
In recent years, they have begun dedicating significant resources to support RIAs and their clients. Today, RIAs can access traditional and alternative investment products not available to wirehouses — in many cases at lower cost to the client.
No End in Sight
I’m often asked whether I see this ongoing tsunami slowing in the future. My answer is simple: no.
Wirehouses present a wonderful farm system for developing advisors and readying them for an eventual move to independence.
With wirehouse headcounts shrinking year after year, the lingering question is: Will the last one out, please turn off the lights?
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Ed Friedman is director of business development and growth at Summit Financial, an investment advisory firm helping values-driven independent and breakaway advisors.
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