No Conflicts

"Our business model is not for everyone," he says. "We're geared to those advisors and clients who can best benefit from the breadth and resources of a leading global investment bank."

While lacking the clout of big brokerages, independent firms boast of one advantage with clients: no conflicts of interest. Brokers at Merrill Lynch, for instance, are pressured to sell funds managed or approved by the firm because they pay a higher commission than those run by other companies, says Paul De Rosa, who worked at the brokerage for 26 years before co-founding his own firm, Gateway Advisory LLC, in Westfield, N.J., in January.

De Rosa set up Gateway Advisory as a registered investment advisor, which has a fiduciary duty to put its clients' financial interest first when giving advice, according to U.S. Securities and Exchange Commission rules. RIA firms must also disclose conflicts. To avoid them, RIAs like Gateway typically shun commissions and charge a flat fee of less than 1% of assets under management regardless of the funds they recommend.

Discounter Recruiting

"Our clients know that when we make a recommendation, we're not getting compensated for that recommendation," says De Rosa, 61, whose firm manages more than $250 million.

Lyle LaMothe, who oversees Merrill Lynch's U.S. wealth management unit, says brokers don't push particular investments that pay more than others. The firm leaves it to the customer to decide whether to purchase a product sold on commission, or pay a fee for investment advice.

"That we have both methods is testimony to the fact that we are independent," LaMothe says.

Charles Schwab and TD Ameritrade are capitalizing on the flight of brokers. The discounters are providing independent firms with a host of fee-based services, from recruiting advisers to supplying clients and trading and custodial assistance. Omaha, Neb.-based TD Ameritrade announced in July that its recruiters helped bring 212 advisers from big brokerages to independent firms in the first seven months of 2010, a 44% increase over the same period a year earlier.

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