Davids Quietly Challenging Goliaths

If you work in a wirehouse or regional brokerage, you may have attended a lot more going-away parties in 2006. Across the industry, there was a migration of financial advisors to the independent RIA channel

If you work in a wirehouse or regional brokerage, you may have attended a lot more going-away parties in 2006. Across the industry, there was a migration of financial advisors to the independent RIA channel, according to the annual Cerulli Quantitative Update: Intermediary Markets, a census of the financial-advisory business. Cerulli says that the number of advisors in the RIA channel increased 13 percent between 2005 and 2006. By comparison, the number of advisors in the independent broker/dealer and national full-service channels grew just 3 percent apiece during the same period.

This doesn't mean that the giant wirehouse firms of Wall Street are hurting, exactly. Indeed, most national wirehouse firms are fresh off a year that the Securities Industry and Financial Markets Association (SIFMA) says was the securities industry's most profitable since 2000 — and that was at the height of the market boom. The RIA channel was able to grow so aggressively in 2006, in part because it's starting from a much smaller base: Total RIA advisors stood at 43,008 at the end of 2006, versus 72,691 advisors at the wirehouses and 110,027 advisors at the independent b/ds, according to Cerulli Associates.

Still, those making the move to RIAs are no longer the ones who just can't cut it with the big boys: They are top producers with wealthy clients and lots of assets. Just take a look at the new recruits at Schwab Institutional, which is custodian to nearly half of all RIAs in the U.S. — around 5,000. In 2005, the average wirehouse advisor who was converting to an RIA on the Schwab platform brought with him about $65 million in assets. A year later, that figure has jumped to $100 million.

“The growth of assets and number of advisors in the [RIA] industry is extraordinary, and the drivers of the growth are wirehouse brokers,” says Barnaby Grist, managing director of strategic business development at Schwab Institutional. He also adds that the average rep joining the Schwab platform has about 15 years of experience under his belt.

Total assets in the RIA channel hit $2.2 trillion in 2006, up 41 percent from $1.6 trillion in 2002, according to Celent, a research and consulting firm. Major wirehouse firms' assets grew 42 percent, from $3.5 trillion to $5.0 trillion during that time, according to consumer reports.

Solo Benefits

John Krambeer, 38, is just the kind of rep that wirehouses are fighting over with handsome recruiting packages these days. While at Merrill Lynch, he focused strictly on high-net-worth clients, and he produces $2.5 million in revenues on $200 million in client assets. But in 2004, after 16 years with a wirehouse, he left to form his own RIA with Schwab.

Now, Krambeer says he has $230 million under management and 90 percent of that money came from former clients of Merrill and other wirehouses. His short-term goal is to triple the size of his firm and hit about $600 million in assets under management in the next three to five years. And where will that come from? He thinks it too will come from the wirehouses.

Advisors who've made the switch say the benefits of joining an RIA are hard to pass up. Take the payout, for example. According to the 2006 Moss Adams Financial Performance Study of Advisory Firms, RIA owners' pretax take-home income averaged about $260,000. The study does not survey wirehouse advisors, but André Cappon, president and founder of New York-based consulting firm The CBM Group, estimates average wirehouse pretax pay to be around $200,000.

There's also the comfort of having equity in your own business. “Reps know they're not going to get rich through stock in their own firm. They want to build equity on their own,” Grist says. With the median age for wirehouse reps approaching 50, thousands of reps are getting serious about retirement — and converting to an RIA practice offers the prospect of creating a business that they can sell or pass on to family members. It could be that this is the real reason behind the migration.

Wirehouses offer a kind of buyout program — where over a period of time, typically about five years, the retiring advisor splits his commissions with a junior advisor who is taking over his book while he continues to work at the firm. One former wirehouse rep says the opportunity for a liquid event upon retiring from his RIA was a “major factor” when making the switch. His RIA is only about two years old but he's already been offered $6 million for it.

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