The demise of Lehman Brothers and the sale of Merrill Lynch to Bank of America will likely trigger a surge in the number of advisors looking to transition into the independent RIA marketplace, according to observers. It may also mean that those looking to make the transition will find themselves in more of a buyer's market-one in which the competition for jobs is more fierce, and the rewards less lucrative.
"I would say that as their choices narrow, the value of the deals will be decreasing," says Michael Di Girolamo, managing director of the investment advisor division of Raymond James.
The financial services market-and the financial world in general-suffered dramatic changes on September 15, when two of Wall Street's most prestigious financial institutions fell under the weight of bad real estate investments. For Lehman Brothers, it marked the end of a history that predates the Civil War. Merrill Lynch, which brought Wall Street to Main Street in the post World War II era, managed to avoid liquidation and struck a deal that will have it bought by Bank of America for $50 billion in stock.
Thomas Bradley, president of TD Ameritrade Institutional, believes a number of Lehman and Merrill advisors will gravitate toward the independent RIA space. "Especially those who are already thinking about going independent," he says. "I think they may jump on this opportunity rather than stick around someplace with a lot of instability."
The number of breakaway brokers had already been increasing even before the large national wirehouses started to crumble from excessive exposure the subprime mortgage space, Di Girolamo notes. The Lehman and Merrill Lynch troubles only highlight the trend, he adds.
"I think [reps] look at the Mother Merrill model and the large wirehouse model and say, 'How much safety is there really in my career and for my clients?'" he says. "If I am already significantly fee-based, what's behind that brand? Is it a value or is it a hindrance?"
Some wirehouse brokers are more likely to affiliate with an independent brokerage firm so they can hang on to their commission-based clients. "Commonwealth has historically thrived from a recruiting perspective in these times of extreme turbulence, as advisors seek affiliations with firms that offer conflict-free advice that are not making headlines for the wrong reason," says Wayne Bloom, director of wealth management at Boston-based Commonwealth Financial Network.
Bradley says it's usually larger broker/advisor groups with a structure in place, typically with $250 million to $500 million in managed assets, who tend to make the transition. "The ones with the best profile to go independent are primarily fee-based and basically running their office now and relying less on their current firm," Bradley says. "Percentage wise, the majority of brokers will probably stay where they are. While the percentage of those who'll break away probably won't be great, I think the numbers [who do] will be pretty decent."
As for existing RIAs, observers say the most immediate impact has been the need to prop up the confidence of clients in what may be the scariest marketplace since the Great Depression. "The bad news of course is that our advisors are taking a lot of calls from nervous clients and having to settle them through this by explaining the difference in our business model from what they're seeing on CNN and CNBC," Bloom says.
The regulatory front is another area in which RIAs may see an impact from the tumult on Wall Street, says Duane Thompson, managing director of the Financial Planning Association's Washington, D.C. office. The collapse of Lehman and Merrill Lynch, he says, could cause Congress to give greater attention to regulatory reform next year.
"The only connection is that if it does create more impetus for reform, then financial planners and advisors could get sucked into the current along with everyone else," Thompson says.