Broker recruiting gets ‘rational’

Big brokerage firms appear to have taken a break from their costly musical-chairs game of broker recruitment, according to executives and headhunters.

“I truly believe the industry is moving toward a more rational recruiting model,” James Gorman, the new chief executive of Morgan Stanley, said last week after the company reported a 2009 loss of $960 million that was slightly mitigated by positive results at its expanded retail-brokerage unit. “We went through a frenetic period as an industry over the last couple of years in terms of deals and dislocations.”

James Wiggins, a spokesman for Morgan Stanley, said Mr. Gorman’s comment on “rationality” refers to the absolute size of offers dangled before top brokers as well as the structure of recruiting deals.

Mr. Gorman, who once ran Merrill Lynch’s army of retail brokers, last year engineered Morgan Stanley’s joint venture with Smith Barney, which created the world’s biggest retail-adviser force, with more than 18,000 brokers. It’s followed in size by Bank of America Corp.’s Merrill Lynch & Co. Inc. unit, which ended 2009 with 15,006 advisers, and Wells Fargo & Co., which has about 13,800 advisers in its brokerage offices and branches following its takeover of Wachovia Corp.

SHIFT IN FOCUS

Big brokerage firms for years dangled cash offers that could equal two to three times the revenue an adviser produced in the previous 12 months, often coupled with “forgivable loans” that were allowed to expire after a few years. More recently, the deals have been angled toward the back end, with recruiting bonuses paid out in full over more than five years and dependent in part on the amount of client assets brokers can bring with them.

Mr. Gorman expressed hope that with most of those arrangements now in place, firms and their advisers can focus on asset gathering and product sales rather than on negotiating counteroffers. Indeed, he said, the “significant outflows” of advisers Morgan Stanley Smith Barney LLC experienced in 2008 and last year — largely among Smith Barney brokers — declined dramatically last quarter.

The transition period in which clients follow their advisers to a new firm also largely has passed, Mr. Gorman said, signaling stability in asset levels and a more settled period than at any time in the decade he has been involved with retail brokerage.

“The lower turnover is for real,” he said in a conference call with analysts. “For the next couple of years, it should stay low and relatively stable.”

Sallie Krawcheck, president of Bank of America Global Wealth and Investment Management, has been similarly upbeat. She told reporters this month that attrition among former Merrill brokers reached a record low in the fourth quarter of 2009. In the previous three quarters, about 3,000 brokers left Bank of America.

Almost 8,700 brokers left Morgan Stanley Smith Barney, Merrill Lynch, Wells Fargo and UBS Wealth Management Americas last year, with 4,121 moving among wirehouses and 1,156 going to independent channels, according to Discovery Database. The bulk of the others went to regional or institutional brokerages.

Bank of America, which bought Merrill Lynch a year ago, reported a fourth-quarter loss of $73 million on bad consumer credits and Merrill-originated derivatives but boasted that 94% of Merrill’s “high-producing” financial advisers remain in place. The bank also touted progress in its cross-marketing goals, saying 41% of Merrill’s advisers sold a banking product last year.

Wells Fargo, in reporting its consumer-credit-scarred fourth-quarter earnings last Wednesday, boasted of “solid financial adviser recruiting” during the fourth quarter. Brokers who joined its Wells Fargo Advisors LLC unit “are over two times more productive than those who have left the firm,” it said in a news release. Teresa Dougherty, a spokeswoman at Wells Fargo, declined to comment on trends in broker attrition and recruitment.

Many big brokerage firms, to be sure, have encouraged low-tier producers to leave by slashing payouts, which has proved fertile recruiting ground for some independent-brokerage and wealth management firms. Executive recruiters said the big firms also are set to benefit from the fact that there are just fewer deals to be done.

“A lot of advisers who were all about money have already moved, and those that remain in their seats have become more thoughtful, weighing what is best for their clients and whether paying back a retention package makes sense,” said Mindy Diamond, president of Diamond Consultants LLC.

Ms. Diamond, whose clients include Morgan Stanley, said big brokerages also have become more selective in recruiting, seeking only “first- and second-quintile” producers.

“The retention money to stay is very powerful,” echoed Michael King, another veteran recruiter. But he said top brokers can still get one and a half times their previous 12-month production in upfront payments to move to rival wirehouses, and qualify for the same amount on the back end if they meet their targets.

DISCOUNTERS SEE SUCCESS

Discount brokers and clearing firms that have been encouraging brokers to consider independence, meanwhile, said their efforts are becoming more successful. “The closing rate is starting to improve,” TD Ameritrade Holding Corp. chief executive Fred Tomczyk said in a conference call last week on the company’s efforts to recruit breakaway brokers and their clients’ assets to its custodial platform. Over the past 18 months, he expressed skepticism that brokers would make market-battered clients even more anxious by asking them to transfer their business to a new broker.

He declined to break out the number of brokers recruited or their assets under management. Kristin Petrick, a TD Ameritrade spokeswoman, said in its last fiscal year, ended Sept. 30, the firm’s roster of breakaway brokers grew by 30% from an unspecified number in fiscal 2008.

Fidelity Investments in 2009 helped 190 teams of brokers start registered investment adviser firms, join existing RIAs or move their assets to small broker-dealers that cleared through Fidelity’s National Financial Services LLC affiliate.

Some independent brokers said they too are benefiting from the freeze at wirehouses and the big firms’ rejection of low-tier producers.

“We expect a significant amount of adviser movement in 2010,” said Manish Dave, senior director of business Development at Ameriprise Financial Inc., who noted that the firm, which has 2,400 employee advisers and 7,900 independent contractors, hired almost 400 advisers last year as direct employees and began this year with a strong influx of recruits from big firms.

“The wirehouses are going very much upstream in what they are doing,” he said, noting that Ameriprise advisers have an average 12-month production of just under $300,000. “We have the support, leadership and resources to help them rebuild and grow.”

— Jessica Toonkel Marquez contributed to this story.

E-mail Jed Horowitz at [email protected] and Hilary Johnson at [email protected].