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Break Back Brokers

The hottest trend over the past 18 months has been the breakaway broker, a wirehouse advisor who leaves his firm to either become an RIA or to affiliate with an independent broker dealer.

The hottest trend over the past 18 months has been the breakaway broker, a wirehouse advisor who leaves his firm to either become an RIA or to affiliate with an independent broker dealer. The turmoil on Wall Street, the giant mergers of brokerage firms, the lure of entrepreneurship have combined to draw thousands of FAs out of the wirehouses over the past year and a half. Recently some of that momentum has subsided, but the wirehouses are still losing net advisors, according to research from the Aite Group.

And yet, over the last six months, I have noticed an interesting reverse shift: the RIA or independent b/d advisor who wants to return to (or go to for the first time) a wirehouse firm. The longstanding assumption in the industry has been that such men and women do not exist. Once you go over to RIA or indy land, you just don’t come back. But I have helped some of them do it. While it’s impossible to know whether this will be a sustainable trend, here are four reasons I think it might continue:

The deals that are being offered by the wirehouses are at a record high. For the right type of advisor (1st quintile, clean compliance record, good business mix, etc.), it could be as high as 330 percent of trailing twelve month’s production (structured as 120-140 percent in cash upfront plus 5 back end bonuses). For some, this incentive is too rich to ignore.

Business ownership:
For many independent advisors, the lure of becoming a business owner and one’s own boss was a primary reason to “break away” from a traditional firm in the first place. But for some, the reality of business ownership does not match the fantasy, especially in the current economic climate. Some of them may feel that having to deal with the minutia of day-to-day management distracts them from focusing on their clients and significantly growing their businesses. Of course, this has long been true. We wrote about it back in 2002—some people just find they are not entrepreneurs.

Brand: When everything is said and done, the strong, time honored brands of firms like Morgan Stanley Smith Barney and Wells Fargo have a certain cache that an advisor hanging out his own shingle does not. For some clients, the name on the building means more than the name on the door.

Hiring sprees: Many of the big wirehouse firms have lately announced plans to hire thousands of new financial advisors. Early this month, Wells Fargo announced plans to hire 10,000 advisors over time, while Bank of America has said it wants to hire 2,000 advisors this year, mostly trainees.

The Tales of Two Teams:
Consider a $3 million team that I recently worked with. “Ryan” and “Andrew” left Merrill Lynch approximately five years ago and affiliated with a large independent broker dealer because their wirehouse firm did not give them the flexibility to serve their clients the way they wanted. When they left Merrill they had almost $400 million under management and were convinced by their new independent broker/dealer that they would be given significant resources and technology to build their business. Fast forward almost 5 years and their production is right where it was when they left, at $3.4 million.

“We were sold a bill of goods regarding the b/d’s level of sophistication and technological capabilities,” says Ryan. “We have spent the last number of years and many thousands of dollars creating systems that work for us.” His partner, Andrew, echoes his sentiments and frustration. “We have been just exhausted since the move. We’ve spent so much time working on the business; we have had not nearly enough time to work in the business and grow it beyond our initial asset base.” The team believes that if they had been given the ability to off load the “heavy lifting” (i.e., compliance, H.R., technology, building maintenance, etc.), they would have grown exponentially.

In speaking with the team, it became readily apparent that they belonged at a full service firm. After spending 6 months on due diligence and taking meetings with two of the wirehouse players and three regional firms in their city, they were pleasantly surprised to find that the wirehouses had actually become more flexible than they were 5 years prior. They were suddenly more open to letting the team function as their own independent within the firm.

What’s more, the many layers of management that they had to deal with years ago have been replaced by a complex manager who essentially functions as the key leader in the market, and now the wirehouse firms truly allow access to open architecture. At the start of this year Ryan and Andrew moved to a wirehouse firm, taking over 95 percent of their business with them in less than 3 months. They feel that they are now at a firm that is “the complete antithesis” of what they left a few short years ago and they are free to focus on one thing—serving their clients and expanding their business. And, oh, by the way, the 330 percent deal that they received didn’t hurt either.

For some RIA advisors, going to a wirehouse is an almost foreign concept. Such was the case of “Derek” and “Ian”, a team of two independent west coast portfolio managers, with approximately $200 million under management and $2 million in production. The two partners had spent their entire professional life (10 years) at an imploding RIA. When we started speaking at the beginning of 2009, they indicated a strong desire to find a new, successful and growing RIA. They initially bristled at the thought of even looking at a wirehouse. However, after some persistence on my part, I convinced them that while they were exploring their options anyway, and because their biggest frustration related to a lack of access to a robust product set, it wouldn’t hurt to look at one or two of the wirehouses as well.

They were skeptical at first, and believed that life at the wirehouses was akin to hell, they came to realize that by having access to products that they did not have before (including lending, insurance and alternative investments to name a few), they would be in a position to capture greater wallet share from their clients. At the end of the day, they joined a local wirehouse office because the complex manager assured them that they would essentially function as “their own independent firm” within the office but have access to all of the necessary support and help to grow their business. They, too, got a pretty nice recruiting package.

Will the “break back broker” phenomenon turn into a trend or is it just a blip on the radar? Only time will tell.

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