When advisors leave wirehouses for the RIA channel, the moves often generate plenty of notice. These are usually experienced players with enormous books of business. But how significant are the changes?
There are no shortages of stories. In February, John Beirne, a former member of REP.’s Top 100 Wirehouse Advisors list, announced he was leaving Merrill Lynch to start his own registered investment advisory. (It was a big loss to Merrill: Beirne and his team manage about $2 billion in assets.) A month later the RIA aggregator HighTower said it had recruited a Merrill Lynch Private Banking and Investment Group team--Richard Steinberg, Kenneth Hoffman, and Jordan Waxman with $1.4 billion in AUM. There are plenty of other deals, usually representing AUM in the hundreds of millions of dollars each.
But traffic out of the wirehouse channel and into the RIA world is far from an exodus. Quite the opposite. A survey led by SIFMA and Cerulli Associates found that the share of advisors leaving wirehouses for RIAs was virtually insignificant in 201--just 2.1 percent of all the wirehouse advisors projected to make a move.
The independent broker/dealer channel was the most attractive to wirehouse breakaways, the survey found, making up more than 44 percent of the moves. Other wirehouses ranked second, at nearly 37 percent.
Independence is appealing to a growing number of wirehouse advisors, but the RIA route clearly has some challenges for most of them. Some industry observers say the greater responsibilities inherent in running such a business can be a powerful disincentive.
Part of it is the scale that’s required to run your own business. AUM of $100 million is the new threshold for oversight by the SEC, under new rules implemented this year as part of Dodd-Frank reforms. “Typically what we find is if your assets are under $100 million, you’ll probably choose that IBD rather than starting your own firm,” says Tyler Cloherty, senior analyst at Cerulli Associates.
And larger wirehouse advisors often have forgivable loans from their employers that would have to be repaid in the event of a move. That’s easier when a b/d is offering an incentive payment to bring over your book, but harder if you’re launching your own business.
“What we’re anticipating coming up in the future is that some of these forgivable loans that were given out in 2007, 2008, 2009 are starting to lapse,” Cloherty says. “At that point, an advisor at a wirehouse probably has some friends who left for RIA and have been successful. So it’s not as intimidating anymore. So as those contracts lapse, we’re anticipating some movement there.”
And then there’s the issue of managing the details of an operation that had been left to your employer while you were at the wirehouse.
“It’s going from being an employee to running your own business,” Cloherty says. “Nothing is incredibly difficult in itself, but it’s a lot of little decisions that need to be made. You have to get your own server and you have to get your own office space and you have to get your own admin, and you’re responsible for compliance and operations, and you’re the HR manager. It’s just a lot of operational responsibility. Some people prefer what they’re best at, which is being an advisor.”
Scott Collins, founder and CEO at FirstPoint Partners, a recruiting and consulting firm in Solana Beach, Calif., says that when wirehouse advisors talk to him about independence, the RIA option is almost always part of the discussion. But questions persist, particularly concerning commission business that may often make up a significant portion of revenues. Collins says b/ds can offer a platform for commission business for RIAs that want to function as hybrids.
When the industry looks back on its history three to five years from now, it will probably see a trend of larger advisory teams going to the pure RIA model, Collins says.
“Let's face it, the hallmark of success in this country is small business ownership. And a lot of advisors are very entrepreneurial by nature,” he says. “You’ll see it’s more widely accepted to become independent….I just don’t see that trend going in the other direction.”
Aite Group analyst Alois Pirker agrees that the lure of holding equity in a sizable RIA practice can be a powerful incentive for some wirehouse advisors.
“You don’t get that big check” as an incentive bonus, he says, but, “You certainly get to build a company that you can sell in the end. You build enterprise value that’s measurable and tradable."