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The Ties That Unbind

For the first time, the credit and capital crisis on Wall Street is having a real impact on the wealth management business.

For the first time, the credit and capital crisis on Wall Street is having a real impact on the wealth management business. Many of the financial advisors working for big wirehouse firms—and some of their wealthiest clients—are looking for an out, and they’re turning to smaller firms and boutiques like RIA firms, trust companies and even independent b/ds.

What began last summer as a couple of hedge fund failures has turned into a genuine rout, with gigantic write-downs (worldwide the sum has swelled to about $400 billion), a Bear Stearns meltdown and bailout, additional hedge fund bust ups and failure of the auction-rate securities (ARS) market. Not surprisingly, the wirehouse firms’ reputations have taken a giant hit, as we noted in our cover story for June. Registered reps working for these firms are increasingly frustrated, as their unhappy clients call on them to answer for all of it.

RIA custodians say they are benefiting from the turbulence (see Registered Rep.’s upcoming July cover story for more on this; to be posted on 5 July), as wirehouse advisors have begun deciding now is the time to make the leap to full independence (after all, the glue that held reps there—ever higher company stock values in comp plans—has weakened substantially by the downdraft). Last year, San Francisco-based Charles Schwab Institutional gained 114 former wirehouse advisors or teams (with $9.2 billion in client assets), up from 60 RIAs in 2006. So far this year, the firm has doubled the pace of deals. Meanwhile, Fidelity Institutional Wealth Services says that in 2007, 60 registered reps dropped their Series 7 licenses to register as RIAs with the firm, up from 40 in 2005.

Mark Casady, Chairman and CEO of LPL Financial, says his firm is also reeling in wirehouse advisors at a much greater rate. “Our recruiting in May was two times what it was last year, and most of those recruits came from wirehouses," he says. He also estimates that this year about 35 percent to 40 percent of the firm’s recruits will come from wirehouses, up from 15 percent to 20 percent last year, and just 5 percent four years ago. He says the firm’s announcement earlier this year that it plans to launch a platform for independent RIAs and will begin supporting hybrids has definitely generated interest among potential recruits, including wirehouse advisors.

Granted, this is just a drop in the bucket. There are about 60,000 advisors working at the New York wirehouses, so the defections probably represent less than 1 percent. Plus, these giant RIA service firms, and independents like LPL, have an interest in advertising their recruiting success—it might encourage a kind of lemming effect, bringing them more business. Still, a number of high-profile defections in recent months from firms like Merrill Lynch and Morgan Stanley underscore the phenomenon. Another sign of the times: Fidelity Investments has become the largest financial services firm, as measured by client assets, with something like $1.6 trillion, according to an April 2008 Tiburon “Strategic Advisors” study. At the time of the survey, Merrill Lynch had about $1.5 trillion in client assets, Tiburon says, but Charles Schwab was right behind it with about $1.4. “Schwab has probably passed Merrill at this point,” said Chip Roame, managing principal of Tiburon, at an April conference.

Here are some notable moves: Earlier this year, one of Morgan Stanley’s top teams left to start its own RIA with Schwab. Lead by Bill Gurtin, Gurtin Fixed Income had been with Morgan for nine years and manages $5.2 billion in client assets, making it the largest RIA to join Schwab ever. More recently, David Hou and Mark Sear of The Capital Strategies Group, which manages $5 billion in assets and generates about $20 million in annual production, left Merrill Lynch to do the same. Meanwhile, in May, several advisors left Merrill Lynch's Washington D.C. offices to found Monument Wealth Management (LPL), including David Armstrong, Timothy Lee, Dean Catino and Timothy MicKey.

UBS is apparently suffering as well. A London-based analyst at JPMorgan Chase estimates that UBS clients withdrew some $39 billion over the last three months in response to the firm’s mammoth write-downs and credit-market losses, according to a recent Bloomberg story. Some of that money is going to trust companies like Wilmington Trust Corp., the story says.

Cerulli analyst Bing Waldert thinks that there may be more defections to the RIA and independent side of the industry when the markets calm down. He notes that some frustrated reps are afraid to make big career moves when the capital markets are so tough. But these days the RIA industry has developed a number of arrangements that offer newly independent wirehouse reps a safety net—there are more opportunities for them to act as dually registered hybrids (LPL, Cambridge, etc.) and there are more RIA consolidators who can offer back-office and practice management help (see Mindy Diamond’s Career Moves column coming in our July issue for more on this.)

The credit crisis may have come at just the right time for the independent side of the industry. After all, wirehouses and brokers were already moving towards the RIA model: fee-based accounts and fiduciary relationships. It will be interesting to see how the wirehouses respond to the dissatisfaction in their advisor ranks and among their clients as the year progresses.

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