Even under the protocol, leaving a big brokerage with the intention to take along a large chunk of client assets is a bare-knuckled undertaking in which the slightest slip-up can spell disaster.
Hamburger recalls a case in which a graphic designer posted online a mock-up of a business card for an adviser who was planning to go independent. The adviser was promptly called into a meeting with lawyers at his brokerage firm, where he immediately quit. Even afterward, he was dragged into a costly two-year regulatory dispute over whether he’d violated the prohibition against operating an undisclosed business before leaving his job. Regulators took no action against the adviser.
Financial Incentive
Advisers have a strong financial incentive to leave big brokerages and go independent. Wire houses pay advisers 40 percent of the fees and commissions they generate. Independents keep 100 percent of revenue, after covering their overhead.
Wealth managers who leave traditional wire houses usually succeed in bringing well over 90 percent of client assets with them, says John Phoenix, who’s worked on hundreds of breakaways at Envestnet, which provides services to independent wealth managers.
“Advisers have seen colleagues with smaller books than them do this and have astounding success,” Hamburger said. “They think ‘If this idiot can to it, I can too.’ ”
The defections have helped reshape the industry. So-called independent Registered Investment Advisers more than doubled their assets under management in the eight years through 2015, to $2.8 trillion, according to the consultancy Aite Group LLC. At the wire houses, by contrast, assets grew 12 percent during that time, to $6.4 trillion, as their market share fell steadily to one-third of the $19 trillion U.S. asset-management business. Internet brokerages have also contributed to the shift.
Big firms often gripe at industry conferences about how breakaways are using the protocol, but it’s unclear what, if anything, they can do about it. Even if they came up with an alternative, there is no governing body to appeal to. Besides, any renegotiation would pit them against hundreds of firms that have benefited from the rules as they are.
This story was provided by Bloomberg News.