Expected boom in breakaways a dud so far

Improved financial markets and retention money could be keeping wirehouse reps in their seats

Feb 12, 2013 @ 3:25 pm

By Andrew Osterland

Jeff Spears, like every other executive recruiting wirehouse brokers to the independent channel, was hoping that business would pick up for his firm this year.

Mr. Spears is the chief executive of Sanctuary Wealth Services LLC, which provides business support, back-office services and investment solutions for independent advisers and those interested in going independent. With another year amortizing off the typical seven-year retention packages given to thousands of wirehouse brokers after the financial crisis, Mr. Spears expected a new wave of advisers would be ready to jump ship from their Wall Street firms this year.

“Everyone is saying it's a great environment for recruiting these advisers, but so far, the first quarter has been a dud,” said Mr. Spears.

Well, not a complete dud. Sanctuary has had some recent success recruiting already independent wealth managers. It signed up an adviser team from investment bank/money management firm ThinkEquity LLC, which renamed itself Crosspoint Capital Management. It was also hired by two veteran investment professionals — Michael Battey and Hannah Sullivan, who launched Emerald Bay Wealth Management in 2011. Sanctuary now provides services to eight firms with a total of $2.28 billion in assets under management.

The wirehouse recruiting channel, however, has been quiet of late, said Mr. Spears. “It's been a reality check for me,” he said. “I assumed the market [for breakaway brokers] was going to be bigger.”

He sees two major reasons for the relative lack of brokers making the break for independence these days. The first is the improved financial markets, which are making life a lot easier for everyone. “The advisers who stayed with their firms after the financial crisis are doing a lot better now,” said Mr. Spears.

The second reason is the retention money that advisers would have to pay back if they were to leave their firms now. As they received the money as a forgivable loan in 2008 or early 2009, they still have at least two years left on their agreements. A move to another wirehouse would likely come with a signing bonus that could cover the remainder of their retention packages — one reason another wirehouse is the most frequent destination for Wall Street brokers leaving their firms.

Mr. Spears does not invest in advisory practices, so he doesn't offer upfront money to bring new client firms to Sanctuary. He has, however, been working with a Los Angeles bank to craft a loan package that could help breakaway brokers pay off the rest of their forgivable loans. He's hoping that leads to Sanctuary's signing up more wirehouse advisers.

Jonathan Henschen, who recruits advisers to the independent broker-dealer channel, agreed that the market for breakaways is soft. "Last year was a dud as well for recruiting wirehouse brokers," said Mr. Henschen. He attributes the relative lack of movement out of the wirehouses to the volatile financial markets. "Reps don't like to disrupt the gravy train when the markets are good, and when the markets are bad, they're afraid that their clients will leave them if they move," he said. "Flat markets are probably the ideal recruiting environment."

The increased competition for breakaway brokers will continue to be a challenge for firms, suggested Danny Sarch, president of recruiting firm Leitner Sarch Consultants Ltd. “Around half of wirehouse brokers leaving their firms go to another wirehouse,” he said. “Every other company is competing for the rest of that pool of people. That's the challenge."

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