Brokers are in motion. Always have been, always will be. Granted, the pace has slowed since the frenetic days of the '08-'09 financial implosion that tarnished the images of Wall Street brokerage firms and sparked a game of musical chairs as thousands of traditional wirehouse brokers switched employers. But after a lull last year, recruiters say more brokers are kicking tires again and exploring their options.
"People are getting their mojo back and are saying, 'If I'm going to move, might as well do it now,' " says Carri Degenhardt-Burke, president of Degenhardt Consulting, a recruiting firm in Jersey City, N.J.
Specifically addressing the wirehouse channel, she cites several reasons why the mojo is back. For starters, brokers who initially took a wait-and-see approach during the turmoil two or three years ago now have a better sense of the landscape and what direction they might want to go. In addition, brokers are meeting markers in the retention packages they got during the 2008-2009 period, and the amount of money they owe on their loans is dwindling to the point where it's feasible for some advisors to think about changing employers. And some people are simply dissatisfied with management at their firms.
Specifically, Degenhardt-Burke cites Merrill Lynch and the prospect for tough times ahead for the "thundering herd" after a recent spate of bad news at parent company Bank of America. That includes the late-summer ouster of Sallie Krawcheck as chief of the bank's high-profile Merrill Lynch wealth management business. BofA "brought in a lot of bankers, and a lot of Merrill people are frustrated because they want someone familiar with the brokerage business on their side, not a banker," Degenhardt-Burke says. "Those are two opposite cultures to deal with."
Mindy Diamond, president and CEO of Diamond Consultants in Chester, N.J., says the recruiting business was much slower in 2010 and early 2011, but things picked up so much this summer that she canceled a September vacation to Paris to keep up with the flow. Part of the uptick comes from the bad publicity surrounding some of the Wall Street brokerages during the recent economic tumult. "That makes advisors rethink the notion of being a captive employee," Diamond says.
As a result, she says brokers are looking at all their options. "People are taking a Chinese menu approach--one from Column A and one from Column B. They're weighing the long-term benefits of independence versus the short-term remuneration of a major windfall they can get by going to another wirehouse."
Best Of Both Worlds
Many wirehouse brokers like the comfort of a big corporation and don't want to go independent. That means there's still a lot of intra-channel movement among the traditional brokerages.
Wirehouse firms have been paying 330% transition packages for top advisors during the past few years, or three and a third times an advisor's trailing-12-month production. Diamond says that multi-million-dollar showcase teams are now getting a little more than that. "What's happening is that with compression in the [wirehouse] industry and some attrition among the firms, they're aggressively recruiting showcase teams," she says.
That said, one of the big trends in recent years has been the growing number of breakaway brokers leaving the wirehouse channel in favor of independence. Increasingly, some of the best wirehouse advisors are riding that wave.
"We're seeing higher-quality, larger advisor teams doing their due diligence to see if it makes sense [to go independent]," says John Peluso, president and senior managing director at Wells Fargo Advisors Financial Network, or FiNet, the independent contractor business of Wells Fargo (which is distinct from the company's bank and wirehouse advisor channels). "My sense is those who've gone before them have proven independence is a valid option and are spreading the word."
Peluso says FiNet crafts each transition package based on an advisor's own practice. "We look at it like we're making a non-equity investment in helping them establish a small business. Part of the incentive to have them join us as an independent partner is to offer an up-front loan package that will vary from 25% to 100% of their trailing-12-month revenue." (Independent broker-dealers, or IBDs, typically offer smaller up-front packages, in part because they don't have the resources of the large brokerage firms, and also because they let advisors keep a larger chunk of the business they generate than do wirehouses.)
FiNet's generous transition packages, coupled with a core platform it shares with Wells Fargo's other two advisor channels, have made it a winner in the recruiting wars, allowing it to attract advisors who want the best of both worlds, says Diamond. "It's an independent within a bigger company," she says.
Another firm offering the best of both worlds, she says, is HighTower Advisors, which has a quasi-independent, hybrid model that accommodates both brokers and RIAs. That has made it attractive to wirehouse brokers thinking of moving.
"[Wirehouse] teams are now contacting us directly," says Mike Papedis, HighTower's managing director of business development. "Our pipeline is absolutely brimming." Created in 2008 with the backing of several outside institutional investor groups, HighÂTower has a high-powered pedigree and a knack for attracting marquee high-net-worth practices desiring an independent model backed by sophisticated back office support.
Papedis says HighTower's ideal advisor has at least $300 million in assets, is located in a section of the U.S. where the firm wants to expand, and wants to run a fiduciary-oriented, fee-based practice. The firm has attracted 26 advisor teams with roughly $20 billion in assets since it was launched. Papedis says eight teams have joined HighTower so far in 2011--seven former wirehouse teams and one independent advisor--bringing along assets of almost $5 billion altogether. He says the firm's transition packages include cash and equity. The cash helps advisors establish their office and unwind from any retention packages they might have; the equity helps them establish an ownership stake in the firm.
Unlocking The Lockups
The financial meltdown was a big game-changer because it shattered public perceptions of the big Wall Street brokerages and accelerated both clients' desire for independent advice and the breakaway broker movement, says Larry Papike, president of Cross-Search, a Jamul, Calif.-based independent broker-dealer recruiting firm. He adds that the large retention packages scored by many wirehouse advisors during the '08-'09 period locked them up and slowed their migration to the IBDs.
But despite the lockups, the larger IBDs are still landing recruits from the wirehouses.
Raymond James & Associates (the company's employee broker-dealer) has a platform designed to compete with the wirehouses, says Bill Van Law, the national director of business development for Raymond James Financial Services (the company's independent contractor broker-dealer). He adds that instead of focusing on wirehouse advisors who've already decided they want to be independent, the company focuses on advisors unhappy at their current firms with the aim of helping them understand the benefits of being independent.
Van Law says Raymond James' broker-dealer recruiting in fiscal 2011 (ended September) was flat with last year, which was down from the high-water year of 2009. But he puts that into perspective: "Our numbers in 2010 and 2011 are close to what we did in 2008, and that was up significantly from 2006 and 2007. So we've seen significant increase during the past few years."
As part of its transition package for brokers, Raymond James gives them a mix of cash to meet short-term business needs; deferred compensation to replace some of the money they might leave on the table to come to Raymond James; and a business loan. "The package size depends on the individual," Van Law says.
Bill Morrissey, the executive vice president and business development chief at LPL Financial, the nation's largest IBD, says the firm historically gets one-third of its recruits from the wirehouses, one-third from other independents, 20% from insurance firms and the rest from banks and other financial institutions. And it recruits from the registered rep, hybrid and custodial models. "The fact we recruit across all major channels has sheltered us from the cyclicality of the marketplace and lets us take advantage of when and where disruptions occur in the marketplace."
Morrissey says LPL's recruiting team has about 45 people, and the majority are outside consultants located around the country. "Their job is to get to know advisors in their territory and use a consultative approach to help them either go independent for the first time or to change their broker-dealer."
Morrissey wouldn't specify the size of the firm's transition package, saying only that the amount depends on an advisor's volume and mix of business, the types of accounts he or she has, and the fixed costs associated with either changing broker-dealers or going independent. "We're helping advisors launch their own small business, so the multiples for each advisor can be very different," he says.
Morrissey says one of the trends he's seen is the flight to quality in the IBD space. A number of smaller IBDs have shut down because they couldn't meet their net capital requirements or they got caught up in the Regulation D private placement snafus involving Medical Capital Holdings and Provident Royalties. "The consolidation rate has accelerated and will continue in the next couple of years, and we're seeing larger, more seasoned independent advisors looking at their options," he says.
IBD Movement
Indeed, some of the biggest players in the independent channel are scooping up their share of advisors from smaller IBDs. That includes Cambridge Investment Research, which does the vast majority of its recruiting in the IBD space.
"We're within shooting distance of our recruiting goals to add $60 million in new production," says Jim Guy, Cambridge's first executive vice president and chief marketing officer. The firm was at $50 million as of early October and had another $10 million in the pipeline.
Guy says his firm's value proposition includes its large variety of fee options (more than 50 third-party fee managers and ten fee platforms) and more than 50 new alternative investment products added since January 2009. "This has been extremely attractive [to new recruits]," he says.
Guy says the IBD industry during the past five years has gone from bare bones transition packages of maybe 1% to 3% of last year's trailing gross dealer concession to up-front packages of 5% to 40%. "Cambridge will never be at the high end of that, but we're committed to being competitive with other broker-dealers," he says.
David Fischer, the managing director at Independent Financial Group, says his midsize company (475 reps with expected 2011 revenue of roughly $60 million) recruits by turning the tables on some of the bigger players in the space. "The small to midsized independent firms are picking up advisors from the big mother ships among the independents," he says. "That's where 99% of our recruiting comes from."
He adds that people leaving the larger IBDs are telling him they're doing so because they're not experiencing the family feeling or getting the service support they once did. "Our attraction is we're smaller and offer more personalized service."
IFG doesn't get caught up in bidding wars for top brokers. "We don't pay up-front money because we feel it's a conflict of interest," says Fischer, adding that he expects IFG to add 100 new reps this year, which would be on par with last year. "There's so much movement out there that we don't need to pay up-front money. It's a culture fit for us, and we feel good about our product offering."