Reps leaving Morgan Stanley Smith Barney blame technology

Jun 17, 2012 @ 12:01 am

By Andrew Osterland

+ Zoom
The recent wave of departures may boil down to one word: Technology.

The implementation of Morgan Stanley Smith Barney LLC's new broker workstation is contributing to a wave of financial adviser defections at the nation's largest retail-brokerage firm.

MSSB, a joint venture between Morgan Stanley and Citigroup Inc. that employs more than 17,000 advisers, is moving the last 4,000 legacy Smith Barney advisers to its new 3D technology platform early next month, completing the migration to the new system six to nine months later than anticipated. The rollout of the system has been plagued by slowdowns and glitches, advisers said.

“We wanted to get out ahead of the transition and not put our clients through it,” said Walter Urban, one of a team of three MSSB advisers managing $187 million in assets who joined Raymond James & Associates Inc. last month. (See more info on Mr. Urban's team.)

“We were being phased onto the platform, but the big transition is next month,” he said. “That influenced the timing of our decision.”

Data compiled by InvestmentNews on adviser movement within the industry show a significant increase in the number of advisers leaving MSSB so far this year.

Year-to-date, InvestmentNews has tracked 43 advisers leaving MSSB who were credited with a total of $12.2 billion in assets under management (two advisers didn't disclose assets under management). That compares with 55 departures for all of last year, representing $15.2 billion in assets. (View recent MSSB departures.)

The data may significantly underestimate the number of defections going on at MSSB, as not all adviser moves are publicly disclosed by the destination firms.

Recruiters confirm that the pace of departures from MSSB has picked up of late.

“There has been a noticeable uptick in broker defections at MSSB in recent weeks, especially of high-end teams,” said recruiter Mark Elzweig.

He suggested that the still-smoldering resentment of Smith Barney advisers over the merger is one factor, but also pointed to the migration to the 3D platform.

“The conversion to the new technology has been a paperwork nightmare that's generated a lot of ill will from brokers and clients alike,” Mr. Elzweig said.

Part of that stems from the firm's effort to gather more information from clients in order to comply with the Financial Industry Regulatory Authority Inc.'s stricter know-your-customer rules, which go into effect July 9.

A separate issue irking legacy Smith Barney brokers is the firm's higher minimum for “household” accounts — $1 million, not $500,000 — and annual fees for trusts and accounts governed by the Employee Retirement Income Security Act of 1974, even if part of a household, Mr. Elzweig said.

He expects the pace of adviser defections to intensify next month after the rollout of the 3D platform is complete.

Once an adviser's accounts are in the new system, transfer requests through the Depository Trust and Clearing Corp.'s automated customer account transfer system will become easier.

MSSB takes issue with the implication that advisers are unhappy.

“While the recruiters have an obvious vested interest, the facts are that attrition is not materially higher than it has been over the past few years, and we continue to recruit high-quality financial advisers from across the competition,” said company spokesman James Wiggins.

Steve Beierlein, a former MSSB adviser who managed about $250 million in assets with partner Craig Adams, recently left the firm to join Stratos Wealth Partners, an independent registered investment adviser affiliated with LPL Financial LLC, in part because of the looming technology transition.

“It was a factor in our decision. I was dreading all the new paperwork we would have to do for our clients,” Mr. Beierlein said. (See more info on Mr. Beierlein's team.)

To be sure, there may be other reasons that more advisers are leaving Morgan Stanley. The retention packages put in place after the merger are winding down, meaning that advisers now leave less on the table if they move to another firm.


There is also MSSB's strategy to push its advisers to shed smaller customers that the firm can serve more cheaply online and from call centers. The changes in fee structure and commissions for smaller accounts at MSSB has rubbed some advisers the wrong way.

“From a pure revenue standpoint, it may make sense for [MSSB] and other wirehouses to do this, but the idea that some of our clients aren't big enough to warrant our attention anymore didn't sit well with us,” Mr. Beierlein said.

MSSB also faces a downgrade to its credit rating from Moody's Investors Service Inc. sometime this month because of its exposure to global capital markets. Moody's has warned that it could knock the rating down three notches from A3.

Former MSSB adviser Michael Nutt, a member of a three-man team that manages $450 million in assets, cited the uncertainty as one reason for moving to Wells Fargo Advisors last week.

“It's a more stable environment at Wells Fargo. Our clients like having their assets at an AAA-rated bank,” Mr. Nutt said. (See more info on Mr. Nutt and his team.)

Add in the Facebook Inc. initial public offering, for which MSSB was the lead underwriter, and there are plenty of reasons that advisers might be unhappy with their firm.

“We don't have to explain the negative headline of the day when our clients see that once again the bank has stepped in it,” Mr. Urban said.

MSSB, however, isn't alone when it comes to bad publicity.

Whether it was the big trading losses last year at UBS Wealth Management Americas or the management upheaval and broker disaffection at Bank of America Merrill Lynch, the wirehouses — with the possible exception of Wells Fargo — have all struggled.

“Every big firm has had their headline issues and Morgan Stanley's haven't been any more egregious than the others,” said recruiter Rick Peterson. “It's the technology and the July transition ahead that's the big issue for advisers.”


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