Broker shift to RIA status slow but steady
Disenchanted brokers are migrating slowly to independent channels, adding to the coffers of major custodians like Charles Schwab & Co. and Fidelity Investments.
Disenchanted brokers are migrating slowly to independent channels, adding to the coffers of major custodians like Charles Schwab & Co. and Fidelity Investments.
Schwab, through its Charles Schwab Institutional custodial business, accumulated $13 billion from former full-service brokerage firm advisers in 2008, up 41% from the previous year, said Bernie Clark, senior vice president and head of sales for the San Francisco-based firm’s adviser services business.
The breakaway-broker gain represents about 22% of the $60 billion of new assets that all independent advisers brought to Schwab last year, coming from 123 teams of brokers who set up as independent registered investment advisers or who joined existing RIA businesses. That’s up from 2007, when Schwab attracted $9.2 billion from 114 teams of breakaway brokers.
A good chunk of the new business came from one client — Gurtin Fixed Income Management LLC of San Diego and Chicago, which set up shop last February with about $5 billion of client assets, most of which it keeps under custody with Schwab. About one-third of the breakaway assets Schwab has been accumulating in recent years came from brokers at Morgan Stanley and Smith Barney, both of New York, Mr. Clark said.
Fidelity, the second-largest custodian of assets from registered investment advisers after Schwab, had lured 59 teams of former brokers as of the end of the third quarter of 2008, up from 55 in all of 2007. It hasn’t yet released full-year conversion statistics for 2008.
Breakaway brokers brought about $9 billion of assets to the Boston-based company in the first nine months of 2008, more than double the $3.5 billion it attracted from them in all of 2007, a spokesman said.
‘FLOODGATES HAVEN’T OPENED’
The increases aren’t large considering the market wreckage that has shaken the confidence of financial services firms’ customers, industry observers said.
“The floodgates haven’t opened,” said J. Thomas Bradley Jr., president of the RIA business at Omaha, Neb.-based TD Ameritrade Holding Corp., which has been consciously trying to manage down expectations of a flood of new assets. “There is a long sales cycle in wooing the breakaway broker. A lot of them are wary because they’ve been so rattled by the markets, and they’re getting offers from other wirehouses with pots of cash.”
The major deterrent for successful brokers — even ones whose clients are questioning the safety of the assets they placed at companies such as Merrill Lynch & Co. Inc., UBS Financial Services Inc. and Wachovia Securities LLC — is loyalty and comfort, said Mark Tibergien, chief executive of The Bank of New York Mellon Corp.’s Pershing Advisor Solutions LLC, a unit of the bank’s Jersey City, N.J.-based Pershing clearing division.
“It isn’t a purely economic decision,” he said. “It raises emotions about loyalty, about fear of starting your own business, about uncertainty as to whether your clients will follow you if you change.”
Pershing captured more than$4 billion of assets in 2008 from 16 breakaway broker teams that came from Merrill, Smith Barney and Morgan Stanley, among other large brokerage firms, Mr. Tibergien said.
“The low-hanging fruit has been gathered by most of the custodians,” said David Ceponis, formerly a broker for Securities America Inc. of Omaha, who is based in Wilton, Conn. He now runs a hybrid practice and keeps his fee-based client assets of about $60 million at Jersey City-based TD Ameritrade Institutional.
TD Ameritrade does not break out its independent-adviser numbers but said about 30% of new client assets at the discount-brokerage firm last year came from the breakaway camp. About 33% of total client assets at the broker, or $80 billion, come from RIAs.
Mr. Ceponis, a member of TD Ameritrade’s adviser-in-transition mentor council, said he has consulted with two independent-brokerage teams but doesn’t expect to hear back from them until they are much further along in the decision process.
Yet even as Mr. Tibergien and other executives at RIA custodial firms agree that their strongest competition for top brokers remains other big brokerage firms, they also said that more and more brokers who are in serious conversations about converting to independence are in their pipelines.
Schwab’s Mr. Clark said the firm’s recent web casts aimed at the breakaway market have attracted 500 to 700 participants. More tellingly, he said, wirehouse brokers are no longer shy about revealing their interests in possibly breaking away.
At a recent New York conference of the Greenwood Village, Colo.-based Investment Management Consultants Association, Schwab was surprised to find about 50 brokers from full-service firms accepting an invitation to dinner and openly asking questions.
“People aren’t afraid of being seen exploring their options anymore,” Mr. Clark said.
Alexander Samuelson, a Smith Barney spokesman, said custodians have been exaggerating the phenomenon of the breakaway broker and the quality of the brokers who choose to set up their own businesses.
“Many advisers, upon doing their due diligence, realize how much work it takes to run a business with all the legal and regulatory issues involved,” he said. “Especially today, they are finding that it takes too much time away from their core business of working with clients.”
E-mail Jed Horowitz at [email protected].
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