The Great Broker Breakout
Amid the upheaval, big producers at investment houses are being urged by customers to move to independent firms
It was almost like the end of a marriage for broker Lori Van Dusen. After 22 years at Citigroup (C) managing client money, she decided it was time to leave.
From her Rochester (N.Y.) office, Van Dusen manages money for high-net-worth families and institutions, with her average client account worth around $40 million. Brokers like Van Dusen switch firms all the time. But her reasons for leaving are certainly not typical of many brokers. Van Dusen already had a degree of autonomy that’s rare in the brokerage industry. However, the approval process for a new investment was long and arduous and Van Dusen believed it was in the best interest of her clients to find a firm than catered to the needs of high-net-worth investors.
So after a year and a half of looking at options with her partner, George Dunn, she decided to join Convergent Wealth Advisors. Together, the team brought around $7 billion in client assets, more than doubling Convergent’s size. &qout;We had a business inside a business,” Van Dusen says. “But we have a sophisticated client base and we needed an infrastructure designed for our clients.”
Billions in Asset Outflow
In the industry, Van Dusen is known as a breakaway broker. For many years now, many brokers have left their wirehouse homes to become independent. Amid the current turmoil on Wall Street, that outflow has increased from a steady stream to a rush. It’s difficult to quantify exact numbers—no one can say exactly how many brokers have left in the past year. But assets transferred from these brokers to independent brokerages like Charles Schwab (SCHW), Fidelity Investments, and TD Ameritrade (AMTD) have increased tremendously.
In the first half of 2008, Fidelity gained 55 breakaway brokers and $7 billion in assets. Schwab Institutional, a division of Charles Schwab, added $9.4 billion in net new assets from newly independent advisers during the first half of 2008, up 300% from the same period last year and outpacing 2007’s total $9.2 billion. “If you look at the 5,000 advisors associated with Schwab, that little ragtag army has outgained the entire Wall Street combined in the last decade,” says Timothy Welsh, president of Nexus Strategy, a firm that assists brokers in going independent.
Wall Street should be worried. The departing advisers are not the B-team. Rather, many are like Van Dusen and have been at their firms for years. They’re older—60% leave during their 40s and 50s, according to information from Discovery Database, which tracks adviser movement. They’re also established—83% of brokers considering leaving have assets of $10 million
Unlocking the Golden Handcuffs
Why the exodus? For one, there are fewer reasons to stay. Firms like Schwab and Fidelity now specialize in setting up an adviser’s infrastructure, everything from clearing trades to financial software, which helps make for a seamless transition. Furthermore, with the stock prices of Wall Street firms decimated, the value of the shares that provided additional compensation and gave advisers a stake in the company’s future have plummeted. The once “golden handcuffs” are now aluminum foil.
Finally, the prominent names like Merrill Lynch (MER) and Morgan Stanley (MS) are no longer selling points and have become a detriment in the eyes of clients. “It’s baggage to have those brands on business cards,” says Welsh, who helps advisers make the transition.
More than anything, though, customers are driving the push. “People are tired of auction-rate securities,” Welsh says. “They’re tired of Wall Street conflicts ending up in their portfolios.” Instead, many are demanding more from their advisers. Investors want advisers to act in the client’s best interest, not push products that their firm would profit from. And they want financial planning services that include products from other firms. “One thing they demanded was access to everything on the shelf, not just what’s at Merrill,” says John Krambeer, an adviser with Camden Capital Management in El Segundo, Calif., who left Merrill Lynch in 2004 after 16 years at the firm.
Big Firms Are Forced to Adjust
The Aite study predicted that if a mass exodus occurred, the top five firms—Merrill Lynch, Citi Smith Barney, Wachovia Securities (WB), Morgan Stanley, and UBS (UBS)—could lose $2 trillion in assets and $7.5 billion in revenues. The brokerages, of course, aren’t taking the challenge lightly. Some brokers have responded by creating independent broker dealers. Others are shifting their business model away from sales to a more overarching approach and offer more services, including estate and other financial planning.
However, to compete, they will have to get nimbler and more flexible. And if they succeed, that could spell the end of a Wall Street staple: the stock broker. Says Ruediger Adolph, chief executive officer of Focus Financial, the largest independent wealth management partnership in the U.S: “I’m convinced that we’ll ultimately conclude this was the beginning of the end.”
Original article: The Great Broker Breakout From businessweek
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