Pizzichillo, who typically gets referrals from custodians, independent broker-dealers or mutual fund wholesalers, often looks for red flags in the language employed by a broker thinking of breaking away. "Are they comfortable with fee-based terms or are they talking about books of business and payouts?" he explains. "If five minutes into the call they are talking about how do I keep my trails [commissions,] then independence may be right for them several years down the road."
It's unusual for a new client to have a detailed formal business plan or have considered independence for more than three years to the extent Luminous did. "Typically, they may have an outline with some primary goals and they will have some questions," Hamburger says. "Starting a business has a lot of moving parts, so we are a bit like an air traffic controller."
Maintaining confidentiality is critical since information leaks can result in disasters. "The number one reason these projects run off the rails is pre-termination disclosure," Hamburger says. "Say someone is playing cards with his buddies and tells them about starting a business and then it gets mentioned in an e-mail." Needless to say, wirehouses routinely engage in e-mail surveillance.
For several reasons, Hamburger tells advisors to be deliberately vague if they mention their plans to clients at all. "You still want to fulfill your business obligations to your current employer," he says. "You can't be soliciting or selling away. You don't want to violate FINRA or your employment contract. You can tell clients we are evaluating several different business models and trying to figure the one that best suits your interest."
For his part, Pizzichillo acknowledges that forming a new business is not something anyone should underestimate. Many advisors who have been pampered in a wirehouse fail to realize all the so-called "moving parts" involved.
Unpleasant surprises can crop up. "When you are dealing with folks who aren't that well-organized, they can get overwhelmed and don't realize how many choices and decisions they will have to make," Pizzichillo says. "There are a lot of long nights and shouting matches about how things are going to run."
Moreover, the corner office teams at big firms are compensated comfortably, and while the long-term economic rewards of owning a business may be superior, the risks also are greater. "You have to really want it and have the fire to start your business," Pizzichillo explains.
But the psychic rewards of going independent may often outweigh the financial upside. "People have told me post-transition that they knew their clients appreciated them but they underestimated how much clients needed and supported them," Pizzichillo says.
For Ip, the biggest surprise comes from "just how much fun we are having."
Wirehouse Exodus Normalizes
When Wall Street's wirehouses were teetering on the edge of insolvency in late 2008, the stream of breakaway brokers heading for the exits had reached a feverish pace. For custodians and independent brokerages, it represented the opportunity of a lifetime.
Raymond James Financial, which targets much of its recruiting at wirehouse brokers, offers custodial services to RIAs as well as four other advisory platforms, including independent contractor, employee, regional brokerage and bank models. In 2009, it experienced a net increase of 750 new advisors.
"In the last year, we've seen much more of a balanced momentum," says Chet Helck, president and chief operating officer at the firm.
Two years ago when Wall Street was clinging to survival with money from the Troubled Asset Relief Program, Raymond James' employee model was the most popular because of the security it offered. But that model is limited by where Raymond James has office space; it's not economic to open an office for one or two people.
"In the last year, the independent contractor model gained steam," Helck says. "People are making decisions in a much more considered way."
This is confirmed by MarketCounsel's Pizzichillo. In late 2008 and early 2009, many wirehouse brokers were given very short notice to sign bonus retention packages at a time when whatever shares they owned in their firms were approaching penny-stock valuations.
"The same people are coming back and talking to us," Pizzichillo says. "Now there is no impending event that they have to make a decision by Friday. They say, 'I didn't want to do it as a fire drill.'"