Wall Street Squeezes Small Brokers, Many Go Independent

In this brutal market, advisors generating less than $300,000 in annual revenue are taking payout cuts and being let go, as wirehouse firms seek to cut costs and improve efficiencies. But many of these advisors are finding homes at independent and regional b/ds and RIA firms.

In this brutal market, advisors generating less than $300,000 in annual revenue are taking payout cuts and being let go, as wirehouse firms seek to cut costs and improve efficiencies. But many of these advisors are finding homes at independent and regional b/ds and RIA firms.

Last month, UBS announced plans to cut some 2,000 employees in its wealth management division—many of them financial advisors with under $250,000 in trailing 12-month production. Meanwhile, in its 2009 compensation plan, Merrill Lynch cut payout rates by around half to between 20 and 25 percent for those advisors who have been in the business for six years and produce $300,000 or less in annual revenue.

Smith Barney took similar steps, according to advisors at the firm, dropping payouts to around 20 percent for advisors with under $300,000 in production and over 10 years in the business. A Smith Barney spokesman declined to comment on the rumored changes to its compensation grid.

“Some firms changed their overall plan for producers between $300,000 to $400,000 and some firms just have a penalty box for those generating less than $300,000,” says Andy Tasnady, founder of Tasnady & Associates, a compensation consulting firm to the brokerage industry. In the current market, some lower end advisors are generating as much as a third less revenue but the costs of supporting them have not declined. “The net is capturing a larger group than firms probably intended to at first,” Tasnady says.

Fortunately, many regional and independent firms are happy to scoop up these smaller producers. Kevin Conard, president of The Retirement Planning Group, an Overland Park, Kansas-based RIA, says his firm launched a website to target breakaway brokers (advisors who defect from wirheouses) last fall. Conard says the firm recently took on a veteran UBS advisor and his junior partner with a combined $70 million in assets who responded to a recruiting email they had sent out from their website. That brings total assets under management at The Retirement Planning Group up to $175 million and advisor headcount up to six. While Conard’s firm does not offer upfront money, he was able to hike their payouts by 20 percent, and offer them ownership in the company.

“I think every advisor at these firms is starting to question why 70 cents on the dollar they make is going to their firms,” especially considering that the Wall Street brands are, in some cases, working against them, says Conard. What’s more, he says, too much of that goes to pay for layers upon layers of management.

Smaller wirehouse producers are also joining existing RIAs as opposed to starting their own independent firms. Barnaby Grist,managing director of strategic business development at Schwab Institutional, says between 2006 and the fall of 2008, average production of advisor recruits to Schwab RIAs increased by 30 to 40 percent. But at the end of last year, this started to change: The wirehouse firms began to push out lower-end producers, and many of these advisors decided to try independence. In the first quarter of this year, Schwab recorded a 65 percent increase in the number of wirehouse advisors joining Schwab RIAs, but these advisors generate, on average, 20 to 40 percent less revenue.

“My belief is that the wirehouses really don’t make any money on anybody producing less than about $500,000 or $600,000,” says Grist.

TAGS: Research
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