Fidelity markets new tools guiding brokers to ‘independence’

Fidelity Investments today unveiled an expanded Transition Solutions program that it says will help brokers at large firms make sense of the options open to them as they weigh independence.

Fidelity Investments today unveiled an expanded Transition Solutions program that it says will help brokers at large firms make sense of the options open to them as they weigh independence.
A key part of the new program is an online calculator that allows brokers who input data such as projected annual production, payouts, deferred compensation and taxes to receive a “detailed and customized” report. That report compares brokers’ estimated income over 10 years with what they would generate by joining or starting a registered investment adviser firm, or by affiliating with an independent broker-dealer.
“Regardless of the independent model a broker is evaluating, Fidelity’s resources can demonstrate the potential economic benefits of independence,” the company said in a news release.
RIA custodians and independent broker-dealers have been spending increasingly large marketing and advertising dollars to lure brokers to so-called independence, hoping to capitalize on their dissatisfaction with the mergers, losses and other disruptions at powerhouses such as Merrill Lynch & Co. Inc., Morgan Stanley Smith Barney and UBS Wealth Management. They’ve also pounced on scores of lower-tier brokers who were fired by wirehouses or who left after their payouts were heavily cut by large firms.
Fidelity claims its calculator offers a more detailed level of analysis than similar offerings on rivals’ websites.
The tool appears aimed at combating the allure of big upfront bonuses that the wirehouses continue to dangle before top brokers. It highlights, for example, the hidden tax costs of taking forgivable loans as compared with the equity value that can be built up in an independent firm, according to Felipe Luna, president of Concert Wealth Management Inc.
Mr. Luna said Fidelity has licensed and enhanced the calculator that he has developed and presented at webinars sponsored by Fidelity and The Charles Schwab Corp.
Michael Durbin, president of Fidelity’s institutional wealth services division for RIAs, confirmed through a spokesman that Mr. Luna helped the company with the new tool, but noted the enhancements the firm has made: Brokers can specify, for example, more than 50 expense items across categories such as legal fees, insurance, registration and salary.
Mr. Durbin said that much of his 50-person sales team has been trained to help brokers analyze their “independence” options, as well as connect them with the lawyers and insurance and real estate firms necessary to smooth a transition. “The early part of this cycle does not lend itself to pitching our custodial services,” he said.
In the first three quarters of 2009, Fidelity attracted 110 wirehouse brokers with $6.5 billion of assets to its custodial platform, plus another 60 that joined independent broker-dealers that are clients of Fidelity’s National Financial Services LLC clearing subsidiary. Schwab, which does not have a clearing affiliate, said in mid-September that it had attracted 115 teams of brokers to its RIA custody platform this year, up from 75 for all of 2008.
Pershing Advisor Solutions, the RIA custody affiliate of clearing giant Pershing LLC, said it attracted 22 new RIA teams in 2009 as of the end of October. Pershing has custody of about $73 billion of RIA client assets, compared with more than $500 billion at Schwab and $370 billion at Fidelity, according to the companies.
Consultants estimate that perhaps 500 brokers in the past 18 months have left wirehouses for independent channels, a trickle when compared with the scores of thousands who remain at the big firms.
“It has been, and will remain, a slow trickle but the fundamentals are still in place,” said Bing Waldert, a consultant at Cerulli Associates. “It’s easier than ever before to go independent because the technology is better and the blueprint on how to do it has been built.” He calculated that breakaway brokers will account for a shift of client assets amounting to one-half to 1 percentage point annually from broker-dealers to independent firms.
The wirehouses also continue to wave big inducements to keep their top brokers in-house or recruit them from rivals. Merrill and Morgan Stanley Smith Barney have recently been offering signing bonuses as high as 330% of brokers 12 months’ annual production, paid over several years to lock them into the new firm, according to recruiters.
Fidelity today also issued a report, titled “Options for Independence,” that provides best-practice suggestions for operating as an independent adviser or broker. While it focuses on such virtues of the independent life as increased client trust and the autonomy and control of running one’s own business, the white paper also issues some cautions.

Brokers must be realistic about how many of their clients will follow them to independence, it warns, and must evaluate the portability of proprietary products in their clients’ portfolios and the tax consequences of having to liquidate them. They also should be prepared for some “short-term cash flow issues” until recurring revenue from quarterly billing cycles comes in consistently.
And, reflecting Fidelity’s experience as a custodian, it reminds brokers to provide the firm with a “very organized transfer spreadsheet” to help get assets on board as quickly as possible.