Wirehouse brokers with hybrid books of business—those with both retail and midmarket institutional accounts—could soon be on the endangered species list, if the recent actions of Merrill and UBS are any guide.
The two wirehouses have been plucking midmarket institutional accounts from large retail producers formerly allowed to work such accounts and redirecting them to their institutional platform. Unsurprisingly, the move has upset the brokers, but it also is rankling clients, who do not want to start the process of getting with an advisor all over again.
In most cases, these changes represent a substantial loss in income to the hybrid-book broker. Institutional payouts are between 20 percent to 25 percent compared to a retail payout of 30 percent to 50 percent.
The hybrid brokers typically have built their businesses serving retail clients and then expanded into the midlevel institutional accounts, such as midsized banks, municipalities, small hedge funds and regional insurance companies. To this point, such arrangements were discouraged by wirehouse management, but tolerated.
But wirehouses are growing concerned about the intracompany competition and conflict that the hybrid arrangements can create, the firms are increasingly requiring hybrid brokers to conform to choose between retail or institutional platform. To make their point on this matter, firms are making the hybrid business more difficult by lowering payouts and increasing ticket charges.
As an olive branch to those who like the hybrid model, the wirehouses and some national banks are considering creating middle-market divisions that would give brokers a business model between the institutional and retail worlds.
For hybrid brokers seeking to make a change in response to these difficulties, there are two choices: go independent or connect with a regional firm that welcomes hybrid-book brokers.
At an independent practice, of course, there is zero possibility of intracompany conflict over institutional accounts. Such a move requires an entrepreneurial mindset, but it delivers the ability to quickly generate profit after expenses.
In terms of regionals, Oppenheimer, Ryan Beck and Advest are distinguishing themselves as the best choices for the hybrid-book broker looking for a new home. Because these firms are smaller, the likelihood of intracompany conflicts over clients is reduced and the list of prospective clients who are in play is increased (relative to a wirehouse). In addition, regional firms provide higher payouts than wirehouses—often their brokers receive a retail payout on midmarket institutional business. Further, hybrid brokers there gain greater accessibility to traders and top management and are far better able to execute business than their wirehouse counterparts.
“If there is an institutional client conflict, we will find a way to meet the needs of the client and both brokers,” says Richard Grobman, managing director and regional manager for Oppenheimer & Co. in Philadelphia. “We have an open architecture platform, leaving investment choice to the brokers.” He also noted that Oppenheimer employs 24 in-house analysts, “who are not driven by investment banking or corporate finance issues.”
Hybrid brokers at wirehouses might soon be a thing of the past, but that doesn’t mean those with this business model have no options.