Custodians and independent broker-dealers are approaching the upheaval on Wall Street with all the subtlety of wolves converging on a wounded moose.

Firms such as Schwab, Fidelity, LPL and Raymond James have made no secret of their desire to take advantage of the distress on Wall Street by luring top producers from Merrill Lynch and other troubled wirehouses. Offering independence, robust fee-based platforms and a reputation unsullied by the subprime loan collapse, these firms say they have stepped up recruiting efforts and received a surge of inquiries from advisors looking to go independent.

Yet while this may turn out to be a good deal for registered reps and their recruiters, some observers wonder if this potential mass migration will be good for the RIA professional overall.

The move from wirehouse to independence can be expensive and complex, and involves going from a sales orientation to one defined by a fiduciary standard that places the interests of clients first. If these Wall Street brokers move only out of fear or necessity, it could raise questions about their commitment to the regulatory standards of the Advisers Act of 1940.

"I do think there is some reputational risk to what has been a relatively small pool of financial planners who have followed the fiduciary standards as a serious practice," says Duane Thompson, managing director of the Financial Planning Association's Washington, D.C., office. "When you have an influx of people who have had more of a sales culture, that could lead to problems."

Representatives of custodians and broker-dealers who are recruiting reps say breakaway brokers are carefully screened for their ability to run an RIA business and comply with Adviser Act regulations. They also note that most of the reps they recruit have already started serving asset-based fee accounts.

There is general agreement, however, that compliance issues can be a challenge for someone switching over from a wirehouse and are best addressed with the aid of a consultant.

Dan Bernstein, director of professional services at MarketCounsel in Englewood, N.J., notes that registered reps essentially have to become their own compliance officers when they become independent. That entails a working knowledge of Advisers Act regulations and all the associated documentation requirements.

"Coming from a full-service wirehouse situation, you may not be used to having any compliance responsibilities at all," he says.

New RIAs need to have a firm grasp of what constitutes a conflict of interest and how it should be reported, says Bryan Hill, president of RIA Compliance Consultants in Omaha, Neb.

"The No. 1 rule as a fiduciary is you have to disclose, disclose and disclose," he says. "That means all of the material facts, all of the conflicts of interest, have to be out on the table."

The regulatory process leading up to the establishment of an RIA firm has its own set of challenges, including the requirement to have a compliance manual. Advisors often assume a store-bought compliance manual fills the requirement, Bernstein says. It does not. The compliance manual, he notes, must be based on a firm's individual policies and practices.

"You do get a lot of off-the-shelf compliance manuals that come back to haunt the advisor" after an SEC examination, Bernstein says.

Brokers who make a move in today's environment may also face their own set of legal and compliance issues.
Non-solicit agreements and other restrictions limiting the ability of a broker to retain clients are always a potential legal issue, for example, but may now be more of a problem for reps. Bernstein and Hill both indicated that Wall Street firms have signaled they intend to take a more aggressive stance against brokers who attempt to take clients with them to a new firm.

Hill says he fully expects to see an increase in the number of lawsuits filed by wirehouses in an attempt to get restraining orders placed on their departing brokers.

"We've heard a lot of saber rattling," Hill says. "There's [also] a more concerted effort to warn reps of the risks of leaving and making sure that you are following the rules."

Along with strictly enforcing non-solicit agreements-which typically restrict a broker from recruiting his former clients for a year after he goes to a new firm-some wirehouses will attempt to use privacy regulations to sandbag brokers in cases where there is no non-solicit agreement, Hill says. Firms that use Regulation S-P in this way will typically argue that the regulations mean brokers "can't take certain client information or none at all," he says.

Recruiters say an advisor's ability to comply with regulations is one of the key issues discussed during the recruitment process.

"One of the things we always encourage them to do is make sure they've been in touch with a law firm that specializes in the area of establishing an RIA firm," says Scott Dell'Orfano, executive vice president at Fidelity Institutional Wealth Services.

One of the first steps Schwab takes to help advisors make the transition to independence is "introduce them to the best-in-class legal counsel," says John Furey, director of strategic business development for Schwab Institutional.
A broker who produces $1 million per year can expect to pay between $10,000 and $20,000 in legal and compliance costs when setting up an independent RIA, he adds.

Over the last month, Schwab has seen a 200% increase in the number of advisors contacting the firm to discuss a possible transition to independence, Furey says.

Raymond James has seen its inquiries rise by up to 30% and actual recruitment is expected to increase 50% from last year, says Michael Di Girolamo, managing director of Raymond James' investment advisor division.

Di Girolamo says the firm only considers candidates who have already started operating as an RIA or investment advisor representative. That way, he says, the candidate is already familiar with the compliance, legal and business issues involved with going independent.

"We're looking for entrepreneurial spirit," he says. "We try to gauge their understanding of what it takes to run a business."