Advisor Defections Expected To Pick Up

(Dow Jones) Defections by financial advisors from the major brokerage firms are expected to gradually pick up this year as the economy improves and some incentives to stay put start to expire.

That movement is likely to benefit independent advisory firms, which will attract many of the defectors, some recruiters say.

"Despite the size of the transition packages being offered by competing wirehouse firms, if an advisor is thinking about leaving, more often than not it's to go to some independent advisory firm," says Mindy Diamond, president of Chester, N.J.-based search firm Diamond Consultants.

LPL Financial, part of LPL Investment Holdings Inc., and the biggest independent broker dealer, is one likely beneficiary, she says.

Mark Casady, chairman and chief executive of LPL Financial, told Dow Jones Newswires last week that his company recruited fewer advisors from wirehouses in 2010, as some of the major firms put retention bonuses in place. But LPL expects recruiting from those firms to return to normal levels this year as some of those incentives expire, he said.

Bing Waldert, an analyst at Cerulli Associates, said defections from the major brokerage firms slowed in 2010 partly because so many advisors departed in 2009. "Our expectation is that it would start to slowly pick up again in 2011 and return to more normalized levels," he said.

Any financial advisor who took a retention bonus to remain at a wirehouse firm has likely been watching as his peers take "pretty big packages" to move from one firm to another, said Waldert. As retention bonuses are paid up, advisors who have been dissatisfied or are tempted by up-front incentives will be sizing up their options, he said.

Among independent broker-dealers, few are equipped to bring on a successful wirehouse advisor, but LPL is one firm that is positioned to successfully handle such recruits, Waldert said.

Improving markets and investor sentiment will also trigger defections.

Alois Pirker, an analyst at Aite Group LLC, said he believes the bulk of retention bonuses won't expire this year. But he expects movement nonetheless as advisors who may have delayed moves due to the downturn finally see the chance to make a change with markets on the upturn.

"If some retainers expire, that will add to it, but I think in general the markets are beginning to get better and investors are more positive again," Pirker said. Some advisers were sitting on the sidelines while the going was tough, he said. "You don't want to burden your clients with a move and tough markets. So as the sun rises, people get more motivated and clients might be more inclined to move with their advisor. It may be a good time to make the change before the markets fully swing back."

Advisors may also be more inclined to move while some of the big firms are still offering attractive hiring bonuses, Pirker said.

For example, one broker, who used to work for Merrill Lynch and moved to Morgan Stanley at the beginning of 2009, said his deal was 120% of production upfront with a nine-year commitment, with the chance to earn about another 100% in deferred compensation if he meets all the hurdles.

"They won't stay high forever. Some in the neighborhood of 300% have been rumored," said Pirker. "When you hire with those terms, it also means that the profitability of that relationship is not off to a good start. You're advancing three years' production before the guy's even on board. You want to use [such offers] to attract top producers, and you certainly don't want to have those offers out there forever; they'll come off the table as the migration slows down."

The fact that the Securities and Exchange Commission has its eye on up-front signing bonuses could also speed recruiting. SEC Chairman Mary Schapiro has expressed concern about how huge advisor bonuses might be affecting service to clients.

Says Waldert, "If you want a big recruiting package, you better go now before they regulate it."