Conventional wisdom suggested that 2008 would be the year that a huge chunk of the brokerage business would finally break off and slip from the fingers of the large wirehouse firms like Morgan Stanley, Merrill Lynch, UBS and Smith Barney, firms whose advisors would run off to join the swelling cottage industry of independents.

Not so fast.

It's true that more brokers, scandalized by the meltdowns of some of the largest Wall Street firms and facing a crisis of confidence among their clients, have been seeking to leave the ivory tower and go it on their own. It's an oft-repeated meme that the proud wirehouse advisor model is irreparably broken.

Yet the largest migrations, say recruiters, have continued to be from one wirehouse to another, as advisors have become wide-eyed at the big carrots held out to keep them in the fold-lucrative payouts that in some extreme cases have reached more than two times an advisor's last-12-month production. The big guys aren't going down easily.

Of all uprooted advisors, historically, 44.2% of those leaving a wirehouse firm have simply skipped to a new one, says Boston-based Cerulli Associates, while only 23.2% went to the independent broker-dealer channel and 3.5% joined registered investment advisories or morphed into their own RIAs.
But this year is different, right? According to recruiters, not necessarily.

There are still a lot of people in play anyway. Of those in 2008 who were asked where they would like to go if they left their current firm, 33.1% of those in the wirehouse channel said they would like to go to an independent broker-dealer, according to Cerulli, while 18.8% said they'd like to stay in the wirehouse format and another 18.8% said they'd like to go to an RIA format.

It might be a buzz killer, but many employee advisors still simply aren't ready to start running their own business, especially in this climate, says Bing Waldert, associate director at Cerulli. Though it may seem now is the best time to leave, there is also a counterintuitive argument: In a horrible market environment like this one, why would an advisor want to make a difficult transition where he or she would have to look for real estate, take care of paying rent, nail down health care packages and make sure the spools of toilet paper are always full?

"The general long-term trend is toward independence," says Waldert, "but you need to understand these people aren't these lemmings over a cliff coming out of Merrill Lynch offices and hanging their shingles."

And why would you want the hassle when a brokerage firm is dangling a big check in your face? That's what the big Wall Street firms have done to hold on to their prize herds of broker/advisors following a disastrous year, one in which the big firms were either bankrupted or sold (in Merrill Lynch's case, sold to Bank of America after the brokerage was pulled down in a skein with other troubled firms because of mortgage and real estate deals that led to huge write-offs).  

It has seemed like a good time to leave the mess, and independent B-Ds and custodians have begun to more aggressively woo these advisors away with newspaper ads, direct mail or cold calls. The interest has definitely been piqued.

Andrew Daniels, managing principal of field development for broker-dealer Commonwealth Financial Network, said in December that the firm's inbound inquiries from advisors looking at the firm had more than doubled in two months. Bill Morrissey, executive vice president of branch development at LPL Financial, says his firm saw a 160% year-over-year increase in leads from advisors between October 2007 and October 2008. Bill Van Law, national director of business development at Raymond James Financial Services, says in December that the number of people who had visited the firm's offices was already up 42.1% for the first quarter of the fiscal year (ending December) from the previous year's first fiscal quarter and was on track to hit 50% when December's numbers were in.

It's not just raw head count that's important though; it's the fact that the independents are luring bigger fish-advisors and teams with more assets under management. Raymond James said in its 10-K for its fiscal year ended Sept. 30 that it recruited 398 independent contractors in fiscal 2008, a net increase of only 81, but the average advisor production increased from $316,000 to $330,000.

Wirehouse Blues

Advisors with the big firms are facing clients angry about their brokerages' constant appearance in the headlines, about their inability to get money out of roach-motel vehicles like auction rate securities, and about the perception that the firms have been trying to sell their clients products they should never have touched.

Paul Weinstein and Nadine Wilkes, two advisors from UBS in Fort Myers, Fla., were two such unhappy campers in 2008, upset with the way their firm had handled the controversy with auction-rate securities (items they said were sold as cash equivalents but instead froze up and locked away clients' money). The two advisors bolted the firm in August and set up their own independent tent (Weinstein Wilkes Financial Group LLC) affiliated with Raymond James Financial Services in a condo some three miles away from their old office, claiming that they had to go because clients were leaving them explicitly because of their UBS affiliation.

"Sure," says Weinstein, "We could have left UBS and went to Smith Barney or we could have gone to Merrill Lynch or Wachovia or a number of other firms and maybe have received a seven-figure check. And you know a lot of people [other brokers] said you're stupid for not taking it."

Wanting to remain virtuous instead, and not wanting their image hurt anymore by someone else's decisions, they left, and took about 90% of their old $400 million business with them (though it is now reduced because of the market declines).

Their old colleagues, of course, tried to call and take some of that business back.

"We had some clients that were pitched a product on that initial phone call," says Wilkes. "I mean, what does that tell you?"

Still, recruiters say that among the wirehouses, Morgan Stanley and UBS have been cleaning up and grabbing many of the new brokers in play. Merrill Lynch and Smith Barney have been among the big losers.

"Certainly there are plenty of advisors who feel incredibly frustrated, sold out if you will, and really lost confidence in the senior management at their firms, particularly Merrill Lynch and Smith Barney," says Mindy Diamond, a headhunter with Diamond Consultants in Chester, N.J. "Those would be the top two, particularly because [the advisors there have] seen their entire deferred compensation, which is their wealth accumulation, blow up. They've lost confidence in senior leadership and they felt people were asleep at the wheel. That's a common complaint [of the advisors Diamond speaks with]."

Diamond agrees, however, that even though more than a few wirehouse advisors itch to go independent, they haven't broken into a stampede. Many aren't very entrepreneurial and are more concerned with recouping a lot of that money they lost at their old firms, which makes the big upfront check more tantalizing.

The economics of going indie don't work for these folks. "If an advisor is looking for the fastest wealth replacement strategy," she says, "Going independent isn't it."

Another thing that's holding advisors back from leaving this channel is the fear factor, especially fear of the troubled market itself. "I can tell you firsthand what's going on," says Trevor M. Callan, who made the big leap from Merrill Lynch to his own RIA firm, Callan Capital, in La Jolla, Calif., in January 2007 and still has friends at the brokerages. "They've got a lot of people who lost everything in their own company's stock. And net worth that has gone down 60%-80%-90% in a tremulous market. And the paycheck looks very nice. I know many of them who are still considering what to do at this point. But the big hurdle for them is to go independent, and until the market turns around, it's going to be hard for a lot of these people to take that risk."

Merrill has fought back to corral some of its thundering herd with an incentive package. The deal offered to advisors to stay in the Bank of America orbit, unveiled in October, is a 100% payout of last year's production for those producing $1.75 million (75% of that is up front in a seven-year forgivable loan; those in the lower tiers get less, the amounts depending on their growth, and the numbers start falling to 50% plus growth incentives for those who produced less than a million).

It remains to be seen if Merrill's enticement will hold, and some recruiters have argued that it's not as generous as it sounds. At least BofA won itself some goodwill when it signed on to a long-standing protocol between brokerages that allowed brokers to more easily move between firms.

It's much too soon to say how many of its some 17,000 brokers Merrill will retain, says Daniel Sarch of Leitner Sarch Consultants in White Plains, N.Y. "The full story on that script is not going to be finished until a year from now."

Big Love

Independent broker-dealers, meanwhile, can offer packages of only 10% to 30%, mainly as startup financing to help breakaway brokers get a new building, build their technology architecture and maybe overcome nettlesome problems, like payroll and health care costs, that beset every new business owner. The main value proposition is the ability to run your own business without having a corporate parent pushing products and sending your clients mail behind your back.

Some also think that the big payouts by the brokerages are a Pyrrhic victory-an unsustainable way to get back what they've lost from their tarnished brand image in the last six months, and otherwise a short-term payoff to get brokers to ignore a long-term problem.

"We've seen a significant ramp-up of what wirehouse firms want to pay for a highly producing broker to come over," says John Furey, director of strategic business development for Schwab Institutional, whose custodial services serve the RIA channel and have become a formidable competitor in sucking assets away from the wirehouse channel.

"In the early part of the decade you would see normally 100% of trailing 12 months for a five-year type contract," says Furey. "Well now you're seeing them ramp all the way up to 250%, even 275% for a nine-year contract. I think people in the industry believe the money is going to start running out and those packages will start declining."

Callan sees something more underhanded afoot.

"My conclusion is that everybody is going to take a deal of some sort or another and I think [the brokersages will] cut pay across the board. It's easy to cut pay and make it all back in three years."