If you work for one of the major wirehouses, you're in pain. If you're a commission-based rep, business is slow. And if you are a fee-based rep, your fees are dropping along with the value of client accounts.
And if you are in a deferred-compensation plan and receive company stock, ouch. Shares of the major broker/dealers are getting hammered — so hammered that Citigroup (down 35 percent in 2008 alone) recently replaced advisors' options that had expired worthless with new, lower-priced ones. (FAs received half the number of options they had lost.)
But there's an upside to losing thousands in your personal net worth: It weakens the glue that holds you to your firm. For those of you who have always wanted to move on, but couldn't because it made you physically sick to leave tens of thousands (and more) of dollars in unvested options on the table, this is your moment. According to recruiters, despite declining company-wide profits, wirehouses are offering record upfront bonuses — in some cases more than double your trailing 12-months' production (for certain producers, anyway). Even the independent broker/dealer and RIA channels may look tempting now that your deferred-comp account has depreciated. In short, near-term prospects for individual advisors are far better than for the financial-services industry, which continues to reel from credit problems.
Wirehouse firms could be in for a mini-recession of their own, meaning company stock prices could languish for a while longer. “I think these firms will continue to contract,” says Punk Ziegel analyst Dick Bove, referring to the brokerage sector, especially the larger firms. “The real profit drivers for them have been credit derivatives, mortgages, private equity, prime brokerage, the IPO markets. It doesn't look to me like any one of these segments will be returning to 2007 levels anytime soon,” he says. The good news? The advice business isn't going away, not by a long shot: “People are going to continue to gather wealth, and as long as they do they will need advisors,” Bove says.
What burns most is that the retail brokerage — wealth-management units, sorry — of the wirehouses are coming off terrific years. All to be blown up by the capital-markets divisions of the firms, which, in aggregate, have lost nearly $200 billion in sub-prime write-offs. That doesn't endear a rep to his firm. For recruiters, it's the best of times: “This is the best business we've seen in a year,” says Nick Ferber, a recruiter with Sanford Barrows. Because of the large losses in deferred compensation, Ferber and other recruiters say more advisors reckon this might be the time to make the move. For some reps — those with clean CRDs and fee-based books that are in the growth phase — upfront bonuses can be as high as 250 percent of trailing 12-months' production. (For more on this, see Mindy Diamond's Career Moves column, “Take It Or Leave It,” on page 107).
Branching out on one's own may be the most attractive alternative. If you really listen, you can hear custodial firms — such as Schwab, Fidelity, TD Ameritrade and Pershing — licking their lips over the current turmoil at wirehouses. Traditionally, these firms have depended on independent broker/dealers for their recruits, and have had more limited success bringing the much larger wirehouse producers — often called “breakaway brokers” — to their side. For the moment, that may have changed. According to Barnaby Grist, managing director of Strategic Business Development at Schwab Institutional, the turmoil at the large broker/dealers is filling the pipeline like never before. “With three weeks still to go, this quarter is setting records in terms of the number of advisors turning independent with Schwab Institutional, and the assets they are bringing with them. In fact, new assets are double what they were in this same time period a year ago,” says Grist.
He says teams of advisors with $1 billion in assets that they'd been talking to over the course of 2007 have moved to Schwab early in 2008, at least partly because of the mess their firms are in through no fault of their own. Says Grist: “Many times we hear that [the current turmoil] is a stark reminder that despite their capabilities, their financial success and their ability to serve clients are not always in their own hands.”
Certainly, reps at the biggest Wall Street firms have taken the biggest hit (see chart). “The question really is, ‘What's the stock down since they hired you?’” says Ferber. That's the calculation one Smith Barney advisor is making. The advisor, who requested that his name not be printed, says options given to him as part of his upfront bonus converted at $43 per share, and were awarded in August 2005, a time, he says, the stock was “also in a bit of a dip.” Still, the value of his holdings is now roughly half of that. “Every single week two or four large producers leave the firm,” he says. He understands, since many of them have lost many hundreds of thousands of dollars. “It's that much easier to walk away,” he says. Obviously, its happening at all the firms, not just Smith Barney.
The Smith Barney advisor knows he might attract a nice bid — he's in his mid 40s, with $300 million in assets under management, most of it in fee-based accounts. But he's not leaving. In fact, he's jealous of the guys that came on at the firm 12 months ago whose shares are converting near $20. “I like the CAP program,” he says of Smith Barney's voluntary deferred-compensation plan that lets advisors buy Citi shares at a 25-percent discount. “As long as it doesn't go to zero in the next five years, I'll be okay.”
|Stock Price (3/21/08)
|17.99 - 55.55
|Merrill Lynch (MER)
|42.58 - 95.00
|25.98 - 57.45
|28.10 - 66.10
|Morgan Stanley (MS)
|38.18 - 90.95