Big wealth teams dump wirehouses to go independent

Two of the brokerage industry’s most prominent wealth managers have dumped their wirehouse broker-dealers, instead opting to become independent registered investment advisers, with more well-known advisers perhaps soon to take the same path.

One group, with $7 billion in assets, left Merrill Lynch & Co. Inc. of New York last month. Merrill regularly touted the heads of that group, David Hou and Mark Sear of Los Angeles, as among the firm’s most elite producers.

The other team, led by fixed-income specialist Bill Gurtin, in May completed the transition of $5.2 billion from Morgan Stanley of New York to the newly formed Gurtin Fixed Income Management of San Diego.

He has parked about 80% of his clients’ assets with Schwab Institutional, which is seeing unprecedented interest from the largest brokers in the country, according to one executive.

“In an average year, we get one group with $1 billion or more in assets,” said Barnaby Grist, managing director of business consulting with Schwab Institutional of San Francisco. “There are three or four more we hope move this year.”

Mr. Grist said that Schwab Institutional expects to add $18 billion in assets this year from breakaway brokers.

The impetus for such prominent advisers to leave wirehouses has “been building up over time,” said Tim Welsh, president of Nexus Strategy LLC, an independent consulting firm in Larkspur, Calif. “The tipping point was the credit crunch and subprime crisis, particularly if teams were holding large amounts of company stock.”

Wirehouse brokers and advisers are typically tied to their firms through deferred compensation packages in the form of company stock that a broker loses if he or she leaves the firm.

Over the past year, the stock prices of Merrill and Morgan have plummeted. On Thursday morning, Morgan Stanley’s stock was trading near $39, while a year ago it was valued at about $72 per share. Likewise, Merrill on Thursday morning was trading around $37. Exactly a year ago, it closed at $85.26 per share.

The availability of technology and products to independent firms has also leveled the playing field, Mr. Welsh said. No longer do wealth managers have to rely on wirehouses for cutting-edge technology.

“There’s nothing really there to keep these guys tethered to the wirehouses, not anymore,” Mr. Welsh said. And the value of an independent adviser’s business is increasing at the same time the big wirehouses’ stock prices are depreciating, he added.

“We needed autonomy to build a fixed-income money management business,” said Mr. Gurtin, who praised Morgan Stanley, saying he probably would have left the firm years ago if it were not so accommodating.

Two significant considerations were the control he now has to hire his own staff and the ability to have technology specific to the firm’s fixed-income management strategy, he said.

And the assets that advisers such as Mr. Gurtin, Mr. Sear and Mr. Hou have in their hands are nothing to sneeze at.

At the end of their respective first quarters — Feb. 29 for Morgan Stanley— Merrill Lynch had total client assets of $1.637 trillion and Morgan Stanley Global Wealth Management Group had client assets of $722 billion.

Mr. Gurtin and his team therefore managed about 0.72 percent of the Morgan Stanley total, while Mr. Sear’s and Mr. Hou’s $7 billion was about 0.43 percent of the Merrill Lynch client asset total.

Meanwhile, it was unclear which asset custodian Mr. Sear and Mr. Hou have chosen. High-level industry sources gave conflicting reports, with one saying Merrill Lynch opened up its clearing firm, Broadcort of Jersey City, N.J., to the team, while another source said the two chose to use multiple custodians.

Mr. Hou declined to comment on his and Mr. Sear’s decision about a custodian.

But Merrill Lynch may once again be trying to find a position in the crowded field to serve investment advisers, industry observers said.

Last Monday, in a move to strengthen its clearing platform, Merrill said it hired one of the heads of the defunct New York-based Bear Stearns Cos. Inc.’s former clearing and custody business, John Tyers.

Mr. Tyers will join Broadcort as president. He was senior managing director and co-head of Bear Stearns’ broker-dealer and investment adviser services.

Joe Triarsi, who shared Mr. Tyers’ title and responsibilities at Bear Stearns, is now sole head of the clearing business there.

E-mail Bruce Kelly at [email protected].