Brokerage House Blues

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Oct 20, 2008 9:33 pm

<SPAN =mainarttitle>Brokerage House Blues
<SPAN =mainartauthor>Joshua Lipton <SPAN =mainartdate>10.20.08, 6:30 PM ET

On Sept. 15, the day Bank of America announced that it would snap up Wall Street brokerage house Merrill Lynch at less than half the price it was worth only a few months prior, CEO Ken Lewis made a point of telling reporters the object of his firm's desire was Merrill's 16,850 retail brokerage sales force.

Unlike the ivy-league-educated, lavishly compensated investment bankers at the firm, Merrill Lynch's financial consultants work the front lines with clients and have continued to provide liquidity for the firm's bankers, even as institutional credit flows have come to a halt. Indeed, Merrill's army, known as its GWM or Global Wealth Management division, now controls nearly $1.5 trillion in client assets. Lewis called the division the "heart" of Merrill.

But Bank of America's $50 billion price for once-mighty Merrill may not turn out to be the bargain Lewis hoped for. Reports from the rank-and-file brokers indicate that the "heart" of Merrill could soon be in need of a defibrillating shock.

Says one recent Merrill Lynch broker who left to go independent, "When you're young, the name is everything. But now, the name is tainted, and I can't see myself calling up people asking them to entrust their assets to Merrill."

Indeed, as the financial services industry reels from its "do-or-die" restructuring, and too-big-to fail institutions like Bank of America, Citigroup and Wells Fargo gobble up smaller, weaker competitors, the large brokerage sales forces at these banks are facing a crisis of confidence of their own.

"What used to be a positive, a real privilege--having Merrill Lynch or UBS on your business card--is as tainted as tainted can be," says Mindy Diamond, president of Diamond Consultants, an executive search firm specializing in the placement of financial advisers. "Brokers now spend all day defending against actions they have nothing to do with. Wirehouses have become a detriment, a real negative."

In brokerage jargon, a wirehouse refers to large retail brokerage operations like Merrill Lynch, UBS (formerly PaineWebber), Smith Barney (now part of Citigroup) and Morgan Stanley. As nearly 80 million baby boomers approach retirement, these large brokerage sales forces and the lucrative asset management businesses they feed are the most promising parts of most major financial institutions.

And for many years, national brand names plus the lure of deferred compensation in company stock or options has kept most wirehouse brokers happy. But given the collapse of financial stocks and the new reality of lower leverage ratios and the lower returns associated with them, being associated with a big publicly traded firms isn't as desirable as it once was.

Moreover, thanks to cheap technology, easy access to top-shelf financial products and back office technology systems, being a part of a national firm is no longer a necessity for running a successful financial advisory business. Take, for example, David Armstrong, 41, a former Merrill Lynch broker who defected less than a year ago with four other Merrill brokers to start his own firm, Monument Wealth Management based in Alexandria, Va.

"I just had my four-month anniversary as an independent, " he says. "And it's been great. I would never go back. I get such a sense of pride of ownership, which I never had at Merrill."

Armstrong isn't alone. In April 2007, Citigroup's Paul Tramontano and Sam Katzman left Smith Barney to start Constellation Wealth Advisors, an independent advisory firm, in New York City. They now manage more than $3 billion for 100 clients, most of whom came over from Smith Barney. More recently, a team of top brokers defected from Merrill to start Los Angeles-based Luminous Capital, taking more than $1.8 billion in assets with them.

Indeed, there has been a steady bleed of advisers out of the wirehouses, like Citigroup's Smith Barney, UBS and Morgan Stanley. According to Cerulli Associates, the number of advisers at wirehouses has been dropping at a rate of 1.1% per year since 2004. Experts think the number of defectors will accelerate. Meanwhile, over the same period, the ranks of registered investment advisers are increasing at a rate of 2.4% per year.

Unlike brokers working at firms like Smith Barney and Merrill Lynch, so-called RIAs, or registered investment advisers, have a fiduciary duty to act in the best interest of their clients. They typically earn their fees based on client assets under management, rather than on product commissions.

Even more troubling than statistics showing the growth of RIAs has been the increase of dually registered advisers--advisers who maintain the licenses required for brokerages as well as those required for investment advisories. This group has swelled at a rate of 22.1% per year. Being dually registered often means that the financial representative is transitioning out of a commission-based business and into a fee-based investment advisory business. For big brokerage houses, it usually means that brokers are planning to go independent.

Why would a broker with Merrill, UBS or Wachovia leave these bigger firms to go independent?

Because independents often keep more of the fees or commissions they generate. According to analysis by Pershing LLC, a subsidiary of the Bank of New York Mellon and custodian for independent investment advisers, a wirehouse rep generating in $1 million of production or commissions, will earn a median payout of 45%.

By contrast, a broker working for a lesser-known independent broker/dealer like Cambridge Investment Research or the Investment Center nets, on average, about 51%. If the adviser goes a step further and becomes a licensed RIA or fiduciary, earning fee-based income on assets under management, he would net 61% after overhead expenses.

Given big brokers' fall from grace, it's no wonder then that the RIA model is attracting more fans. Last year, there were 13,841 registered investment advisory firms managing $1.7 trillion compared with 12,450 managing $1.3 trillion in 2005, says Cerulli. Expect the number of RIA firms to grow.

Ultimately, the big winners of the current financial firm meltdown could be the firms like Charles Schwab, Pershing, Fidelity and TD Waterhouse. These firms act as custodians for independent RIAs. They help independent advisers build and run their businesses and give them access to the kind of technology and products available to reps from big national firms.

"The custodians are getting the assets when the brokers break away," says Julie Cooling, founder and president of RIA Database. "They take care of everything when advisers go independent."

Indeed, Pershing Advisor Solutions claims that it is now engaged in conversations with 94 wirehouse teams representing $24 billion of assets under management. That's triple what it was at this time last year, says CEO Mark Tibergien.

Schwab Institutional, another custodian for registered investment advisers, is also signing up new advisers at a record pace. In 2007, the firm brought in more than $9.2 billion of net new assets from 114 brokers turning independent. In the first half alone, Schwab Institutional brought in $9.4 billion in new net assets.

So, before Bank of America's Ken Lewis and Wells Fargo's Dick Kovacevich break out the champagne to celebrate their fire-sale acquisitions, they should be mindful of the flight risk they face among their vast brokerage troops and the assets they control.

Merrill Lynch declined to comment for this article, and Smith Barney spokesman Alex Samuelson dismisses the idea that there will be a flight of advisers out of the wirehouses. However, according to recruiters, some wirehouses are already offering top producing brokers "retention" packages amounting to one year's compensation, payable over nine years. But for some firms it may not be enough.

Says one fed up Smith Barney broker with more than $1 billion in client assets, "Our business has been very nice, actually. But we are tucked under this behemoth Citi that consistently screws up. They stumble and kill whatever contributions we make."

Adds another broker who became an employee of Wachovia after it bought AG Edwards in May 2007, "People hate Wachovia. As far as I'm concerned, the name's a curse word now."

Oct 20, 2008 10:08 pm

All good points here.  These places are tainted forever, rightly or wrongly they will go down in history as people who could not manage their own money, so how can they be expected to help clients manage theirs. 

  Watching a mentee broker calling for established guy at MS he is completely shell shocked,  calling and using the firms name is he getting absolutely blasted, people ripping him a new one like this whole mess is his fault.  Sad.
Oct 21, 2008 10:53 am
  My guess is that the trends mentioned in the article, toward independent advisors, will continue if not accellerate.
Oct 21, 2008 11:28 am
Interesting article. I was talking to a 10-year AGE guy the other day.  He said they are just going to replace their marquis on the front of the building with an electronic sign-board so they can easily make changes  .  He said he spends 30-40% of his calls explaining who he works for, why it's NOW OK to be with a bank again (after just explaining that being independant again after the Citi "merger" was OK), after years of explaining the virtues of AGE being "independant", then explaning that it was OK to merge with Wachovia. He said it has almost become too much to bear for him.  he no longer conducts business - it's just fighting fires.  It was one thing to fight market fires, but another thing to endlessly defend your firm.
Oct 21, 2008 2:58 pm

What a mess you guy’s are in. First the auction rate crap, then the mergers and  then more mergers to stop from going belly up and now the market down turn!

  I do feel sorry for you, hang in there.  
Oct 21, 2008 3:50 pm

I will just say for all the wire guys out there if that article doesn't get you seriously looking at going to an established Independent, opening your own Independent shop, or going RIA nothing will!

Oct 21, 2008 4:05 pm

There are some areas where I can see entire branch offices going independant together.  Imagine and entire office, BOM, support staff and all, leaving on the same day…funny thought.

Oct 21, 2008 8:35 pm

Any AGE FA that thought that WS would remain “independent” once C bought the rest of WB can’t think for themselves.  All you have to do is listen to Danny speak of the universal bank model to know it was only a matter of time before WS would align with a national bank…and WFC was one of the likely candidates.

Oct 21, 2008 9:26 pm

[quote=Ferris Bueller]

I know, these are the things that have me up at night. Oh wait, I’m having my highest grossing month ever.[/quote]

Taking home $4,800 in a single month will sure make for a Merry Christmas.

That’s great.

Oct 21, 2008 10:03 pm
Ferris Bueller:

Hey put, I’ll bet it gets your blood boiling to learn that I’m not even a college grad. Did some sales after high school. Been in the industry about 9 years and I stand to do just under 800K in gross production this year. I’m a mutual fund, bond, and annuity peddling machine and don’t do ANY options!

So suck on that big boy!

  Ferris, after I graduate high school I want to be just like you.  You think I'm kidding, but I'm not.
Oct 21, 2008 10:07 pm

[quote=Ferris Bueller]

Hey put, I’ll bet it gets your blood boiling to learn that I’m not even a college grad.


No college graduate suspected that you were one of us.  What was it that Forrest Gump’s mother told him?

Oct 21, 2008 10:31 pm

[quote=Ferris Bueller]

Was that before or after Forest made MILLIONS on the shrimp boat.

It must really anger you to know that I am a self made millionaire
with no college degree. Isn’t our industry great! I’ll think of you
tomorrow when I drive out of my huge house in my 90K M5. See ya, you


There are a lot of self made people without degrees–I don’t believe
you’re one of them, but that’s what’s nice about the Internet. 
You can be whatever you want to be.

Having a BMW is so pedestrian.  Several months ago my wife was
shopping for a car for me to buy her as a birthday present.  She
started by looking at a BMW, then went down the street to look at a
Jag.  The Jag guy told her, “You don’t want a BMW, Negroes are
driving them now and they no longer make a statement.”  When she
told me what he had said I thought it was certainly politically
incorrect and made a mental note to not reapeat the story too many

She decided to get an SLK—something about only turning sixty once in a lifetime and wanting to celebrate a life well lived.

Oct 21, 2008 10:45 pm

In the 1980s there was a firm called Blinder Robinson.  Their
people made tons of money screwing people out of their savings.

Once we got an application and resume from a New York regional manager
looking for a job with a real brokerage firm.  We decided to
interview him in an attempt to learn what we could about Blinder.

The guy looked like a character out of The Sopranos.

At some point he told an associate, "When I first realized the way
Blinder does business I felt guilty.  But when you’re a college
drop out who lives in a million dollar house and drive a hundred
thousand dollar car you can make peace with yourself."

Ferris Bueller is just like him.  Rookies and potential rookies
would do well to pay ZERO attention to anything Ferris says.

Oct 21, 2008 10:55 pm

Not a surprise. AGE had a very loose account distribution policy with an older naive clientele. Couple that with high annuity payouts and A shares and 800K was very attainable for the 5% of advisors who were actually proactive.

Oct 21, 2008 11:09 pm

[quote=Ferris Bueller] [quote=SeriousMoney] Not a surprise. AGE had a
very loose account distribution policy with an older
naive clientele. Couple that with high annuity payouts and A
shares and 800K was very attainable for the 5% of advisors who were
actually proactive.[/quote]

L share annuities, Wrap accounts, and C share funds. Most of my business is fee based.[/quote]

As I’ve said, the Internet  allows a poser to be anything he wants to pretend to be.

I’ve known hundreds of posers–none of them worth the powder it would take to blow them to hell.

Oct 21, 2008 11:19 pm

You BBQ your clients!!!  Doesn’t that negatively impact your AUM??

Oct 21, 2008 11:22 pm

I’ll believe Ferris before a word that comes out of you, putsie.  I may not do a similar type of business as him but it’s clear he knows what he’s talking about.  You, on the other hand, sound like nothing more than a bitter old man who can only feel better by trying to drag others down to your pathetic level.

Go back into your cave.  We don’t need you here.

Oct 21, 2008 11:35 pm

[quote=Ferris Bueller]BBQed clients taste good.

Hey I think I found a picture of Putsy from the 80’s:[/quote]

  I prefer to deep fry my clients.  I like the crispy crunch.   Ferris, that picture is hilarious.
Oct 22, 2008 2:08 am

[quote=Provocative Put]

As I’ve said, the Internet  allows a poser to be anything he wants to pretend to be.

I’ve known hundreds of posers–none of them worth the powder it would take to blow them to hell.


Hello Pot…have you met my friend Kettle?

Oct 22, 2008 12:33 pm
RIAs Winning Asset Game, Says Citi Report

Oct 15, 2008 11:12 AM, By John Churchill

Are the Wall Street wirehouses ready to concede defeat at the hands of the RIA industry? A survey conducted by Citigroup and released on October 7 could be interpreted as such.

In his introduction to the report, analyst Prashant Bhatia writes, “We have found that collectively, RIAs are the most powerful asset-gathering force in the industry.” The report, benignly titled, “Registered Investment Advisor Survey,” is an analysis of the results of a survey of 100-plus RIA firms that collectively manage more than $60 billion in client assets. Average assets managed by the surveyed firms totaled $200 million to $250 million, with 15 firms managing more than $1 billion. Additionally, firms averaged 10 to 12 years in the business, and 100 to 200 clients. (Click here to view the entire survey.)

“The purpose of our report is to better understand this industry, the clients it services, the products it uses, and the custodians that they utilize,” Bhatia continues, in the introduction to his report. “We also shed light on how this rapidly growing industry is competitively positioned to compete with large advisory forces … ”

No doubt. Both Schwab and Fidelity, the number one and two RIA custodian platforms, recently released their results for the first six months of the year, including the results of their efforts at attracting advisors and assets from the wirehouse firms. Schwab Institutional, the firm’s RIA custodian, reported $34 billion in net new client assets for the first two quarters of 2008, $9.4 billion of which came from wirehouse advisors. (In all of 2007, only $9.2 billion in net new client assets came from wirehouse FAs.) Fidelity’s Institutional Wealth Services division, Fidelity’s RIA custodian business, brought in $31.3 billion in net new client assets through the first two quarters of 2008. Of that, $7 billion came from wirehouse FAs.

With the exception of Morgan Stanley, which brought in $24.7 billion in net new client assets in the first six months of 2008, the other wirehouse firms have had a markedly different experience this year: Merrill Lynch lost a net $1 billion in client assets in the first half of 2008; Citigroup’s Smith Barney lost a net $12 billion in client assets during that period; and UBS’ U.S. Wealth Management unit lost a net CHF 3.9 billion in the period.

These numbers along with the surveys’ findings—suggest RIAs aren’t just “competing” with their wirehouse brethren, they’re winning.

Among the survey’s findings:

• RIA net new client assets are overwhelmingly coming from full-service brokers. Two-thirds of respondents said full-service brokers were their primary source of new assets, eight times more than the next largest source: “new client income.”

• Most RIAs expect annual growth in client assets of 15 percent or more over the next three to five years. Eighty percent of respondents expect at least 10 percent annualized growth of assets in that time period; none expect their asset base to shrink; and only one expected growth of less than 5 percent.

• A surprisingly high number of RIAs are looking to acquire another RIA firm. Over one-third of respondents are looking to buy another RIA and less than 2 percent want to sell, resulting in an 18:1 disparity of buyers to sellers, in Bhatia’s estimation.

• Schwab is #1. Schwab’s RIA custodian platform was voted best by a landslide. Schwab ranked #1 across all six criteria RIAs use when considering which custodian to use, including service, technology, cost, mutual fund offering, brand and custodian referral program. Schwab earned more #1 votes in each category than all other competitors combined.

• When choosing a custodian, Bhatia estimates 50 percent of an RIA’s decision is based on service and technology followed by costs (17 percent), mutual fund offerings (12 percent), brand (11 percent) and whether the custodian provides referrals (8 percent).

• Respondents said they are 15 times more likely to direct new client assets to their primary custodian than a secondary or new custodian.

• Almost 20 percent of surveyed RIAs had previously worked at a major full-service broker. Nearly 40 percent of those—or 8 percent of the total respondents—used to work for Merrill Lynch. (No other firm is mentioned as a previous employer.)