Former Brokers Make Great RIAs

You may have heard it’s not just small time advisors making the leap to full independence these days. Some big b/d brokers are moving too. The interesting thing is, those defecting brokers (also know as breakaway brokers) are running

You may have heard it’s not just small-time advisors making the leap to full independence these days. Some big b/d brokers are moving too. The interesting thing is, those defecting brokers (also know as breakaway brokers) are running some of the industry’s fastest growing registered investment advisory firms. RIA custodians like Schwab and Fidelity say they expect more of the same in the future.

Let’s face it. The registered investment advisory business is booming. RIA client assets grew by nearly 50 percent between 2005 and 2007, according to Cerulli Associates. And apparently, former wirehouse reps are contributing more than their share to this growth: According to a recent study by Fidelity Investments titled, “Fidelity RIA Metrics: Profiles of the Fastest Growing Firms,” the majority of firms showing client asset growth over 100 percent during the past three years are run by a so-called breakaway broker.

These same RIAs (those with over 100 percent asset growth in three years) share other traits too: an average tenure with the firm of nine years, and average assets under management of about $215 million. Gail Graham, executive vice president at Fidelity Institutional Wealth Services, says, “We’re seeing a trend where relatively young firms that broke away from their broker/dealer five to nine years ago and focused on aggressive growth of their asset base appear to have reached a level of critical mass where their assets are virtually doubling every three years.”

The question is, why are former wirehouse reps outpacing their peers when it comes to RIA asset growth? Chip Roame, managing principal at research and consulting firm Tiburon Strategic Advisors in Tiburon, Calif., says so long as the investment advisors being compared in the study have the same amount of experience, the breakaway RIAs are likely doing better due to their early sales training with big Wall Street firms. “These former brokers have been beaten to go after high-net-worth clients for years. Their branch manager was always saying ‘No. We don’t want $2,000 accounts. We want the million dollar accounts.’ So they are more focused on wealthy clients,” Roame says.

Dennis Gallant, founder of Gallant Distribution Consulting (GDC), a boutique research and consulting firm, says he’s not surprised. Typical breakaway brokers cross over to the RIA world as well-established teams with a strong infrastructure looking to take their business to the next level, he says. Most of the time, wirehouse reps become RIAs because they are anticipating, or at least have, great potential for growth, he says. “These guys didn’t become RIAs to retire and ride out into the sunset,” he adds.

William Spiropoulos is a good example. After 20 years on the wirehouse side of the business, he decided to leave the wirehouses behind and launched his own RIA. A year after he launched Newtown, Pa.-based Core States Capital Advisors, Spiropoulos has about $310 million in client assets. By the end of 2008, he expects to manage $200 million more. The long-term goal is to lay claim to over $1 billion in assets. Not only that, he’s been hiring new talent to help keep on top of the growing assets.

With such potential coming from the wirehouse circuit, it’s no surprise that two of the biggest RIA custodians, Schwab Institutional and Fidelity, are adding services to appeal to bigger and better b/d reps. A recent example: Just this quarter, Schwab will close the deal on its acquisition of RIA back-office outsourcing provider, Etelligent Consulting Inc.

Since the back-office tasks are all taken care of by the wirehouse, says Barnaby Grist, managing director of strategic business development at Schwab Institutional, running back-office tasks on your own is among the biggest issues for reps when choosing to become an RIA. “RIAs said they want to spend more time with the client, and less time worrying about the back office. We said ‘We’ll buy something where we deliver the back office to the [former] wirehouse rep. Whatever goes wrong with the back office, they can call Schwab,” he says.

Numerous other rollouts at both firms have preceded the Etelligent deal. And there will be more to come. In the meantime, those breakaway brokers will continue to grow.

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