Breakaway brokers still a trickle, not a tide

Even though independence is losing its stigma as a sign of failure among wirehouse brokers, they continue to move at only a moderate pace to independent broker-dealers and registered investment advisory firms, a panel of experts said last week.

“It is a nascent trend,” Mark Tibergien, chief executive of Pershing Advisor Solutions LLC, said of the move of brokers from wirehouses such as Merrill Lynch & Co Inc. and Morgan Stanley Smith Barney to independent firms. “It’s happening in the hundreds, not the thousands, in terms of people. It’s happening in the hundreds of millions, not the trillions, in terms of assets.”

Mr. Tibergien made his remarks in New York at a panel discussion, “Wealth Management Goes Independent,” sponsored by Aite Group LLC, a Boston-based financial services consultant.

Pershing Advisor Solutions is the RIA custody arm of Bank of New York Mellon Corp.’s Pershing LLC in Jersey City, N.J.

LOW CONVERSION RATE

Fidelity Investments has received thousands of calls from brokers exploring a new sales model in the past year, but they’ve translated into only about 150 conversions to independent firms, said Mark Healy, executive vice president of client management at the Boston-based firm’s correspondent clearing unit, National Financial Services LLC. “It’s just starting,” he said of the trend.

Just last fall, executives at RIA custodians and clearing firms for independent brokers were predicting a much faster conversion pace. The fallen reputations and fortunes of the wirehouses were expected to prompt top brokers to jump quickly to models where they could be more entrepreneurial, keep more of the revenue they produced and be more client-centric as they left the bias of pushing proprietary products behind.

However, the long market decline that continued to devastate client portfolios into 2009 — combined with some “unprecedented” lock-in retention contract offers from wirehouses to keep top producers, along with recruiting packages designed to steal talent from other wirehouses — stymied the rush to independence and made leaving “a questionable economic proposition,” Mr. Healy said.

What’s more, few brokers have wanted to test their value to clients by asking them to follow them to unfamiliar independent brokers or to RIA practices, the executives said.

Mr. Tibergien noted that an unusually high number of customers in recent months have been transferring assets to discount brokerage firms such as The Charles Schwab Corp., Fidelity and TD Ameritrade Holding Corp. They are apparently reasoning that they don’t need an adviser to help them lose 30% of the value of their portfolios, he said.

On the other hand, the panelists said the movement from wirehouse “captivity” to independence should pick up strongly over the next 18 months and continue for another decade.

The biggest beneficiaries are likely to be large independent firms such as LPL Financial because its technology and support is closer to what wirehouse brokers are used to and because being an RIA requires much more of an entrepreneurial drive, Mr. Healy and Mr. Tibergien said.

Indeed, 70% of brokers who have been leaving wirehouses have moved to independent broker-dealers, not to RIAs, the latter said.

“The move to independent firms has picked up a lot of steam,” Rick Peterson, president of an eponymous Houston-based broker recruiting firm, said in a telephone interview. “The only thing that’s slowed recruiting into the independent channels has been the market debacle, which continues to make a lot of brokers nervous.”

However, another panel member said the move to RIAs could be stimulated if Congress accepts the Obama administration’s proposal to impose a higher fiduciary standard of customer care on brokers who provide advice.

Registered investment advisers already are subject to the higher fiduciary standard.

If fiduciary responsibilities were imposed across all securities industry sales channels, it could level the playing field and make it that much easier to recruit brokers to become RIAs, said Michael Paley, a senior vice president at Focus Financial Partners.

Since its founding in 2006, the New York-based firm has created a network of 17 affiliated RIA practices that oversee about $25 billion in client assets.

Acknowledging the difficulty of setting up a business from scratch, he said he expects to see more brokerage teams joining larger RIA firms.

CLIENT RETENTION

The biggest issue for brokers considering independence remains how many clients they think they will be able to retain — which often is a condition of the depth of their relationships, the extent to which they address a range of financial planning needs and their ability to wean clients from proprietary products at their former employers. Mr. Tibergien and Mr. Healy claimed that brokers they’ve helped to leave wirehouses retained 80% to 90% of their clients — and left behind most of those they considered most troublesome.

That number is well above the 62% average client retention rate that Aite Group found in a survey of 201 financial advisers in August. That same survey found that the prime candidates for the move to independent channels — whether to become RIAs or contractors at independent broker-dealers — were mid-level brokers who produce between $250,000 and $500,000 in revenue and who haven’t received significant retention packages from their current employers.

Such brokers who join small firms, those with fewer than 10 employees, tend to retain more client assets than compatriots who join larger independent firms, the study found.

E-mail Jed Horowitz at [email protected].