Wirehouse breakaway market seen thawing

More financing options seen as possible boon to independent channels in 2014

Feb 5, 2014 @ 11:24 am

By Trevor Hunnicutt

Until last month, Timothy B. Kneen and Clayton E. Hartman were locked in what some might consider a textbook example of “golden handcuffs.”

The longtime brokers still owed their employer, UBS Wealth Management Americas Inc., forgivable loans that they received as part of their compensation. And their deferred compensation wasn't yet within reach.

But those financial restraints didn't prevent the brokers and their team of more than a dozen people from leaving the wirehouse and starting IFM Capital Advisors with offices in Colorado and South Dakota.

“We think it's such a great opportunity,” said Mr. Hartman, the firm's co-founder. “Unfortunately, throughout the investment services business, it's just not everyone who has the capital ability to walk away from where they're presently at and be able to afford the startup costs.”

A UBS spokesman, Gregg Rosenberg, declined to comment.

After a mostly frigid 2013 for recruiting from wirehouse brokerages, those responsible for selling those brokers on the benefits of free agency are cautiously optimistic that a thaw has finally set in.

The InvestmentNews Advisers on the Move database, which tracks details about announced moves, reported that financial advisers who managed $17.4 billion in assets departed the wirehouses for non-wirehouse firms last year.

That was substantially less than the $31.2 billion in assets that left wirehouses in 2012, according to the database.

Nearly half the wirehouse departures last year took place in the fourth quarter.

For much of the past month, Tash Elwyn, president of Raymond James & Associates' Private Client Group, has been traveling the country and meeting with recruits. The employee channel of the broker-dealer has been among the most consistently successful firms at recruiting wirehouse teams.

Industry recruiting took a hit last year but has been on the upswing, Mr. Elwyn said.

During a 48-hour trip to Detroit this week that included other business, he said that he met with four prospective recruits from wirehouses.

Last week, he was meeting with brokers in Minnesota.

Other executives reported similar anecdotes.

“Our pipeline is more robust than it's ever been,” said Tom Valverde, head of business development and relationship management for Pershing Advisor Solutions. “But as with any year, we're optimistic but we're cautious — because it's a big leap and the due-diligence process for these advisers is usually very lengthy.”

Executives at Fidelity Institutional Wealth Services and TD Ameritrade Institutional echoed those views. But the brokerage firms, which have a financial stake in increasing the number of advisers who operate outside of the confines of a wirehouse, didn't provide data that would substantiate their claims about increased levels of interest.

Tim Oden, a senior managing director for business development at the largest custodian, a unit of the Charles Schwab Corp., said that his firm has seen a "steady" flow of interest.

Several recruiters that work with top-of-the-food-chain brokers agreed.

After a mostly slow year, recruitment activity out of wirehouses picked up in the fourth quarter last year, they said.

“2013 was the slowest year since we've been around,” said Nicholas Gudz, whose firm, StarPoint Consulting Group, was founded in 2008 to recruit advisers from wirehouses.

Now the story is different, he said.

“We're seeing more excitement from wirehouses than ever before, particularly the wirehouse adviser who is midway through their career. They're less interested in the larger check; they're more interested in the idea of independence," Mr. Gudz said.

Some departing brokers are finding it easier to make a move because of the range of options available to them. For instance, they can access the balance sheet of banks with greater ease if they need to finance the transition.

Live Oak Banking Co. launched a specialized investment advisory lending unit and announced a formal partnership with Fidelity last year.

The Royal Bank of Canada is offering advisers who work with their custody unit lines of credit secured by their investments or are making introductions to broker-dealers who are willing to make a similar kind of loan.

And firms, including other broker-dealers and boutiques such as Focus Financial Partners, which orchestrated Mr. Hartman's move, continue to provide upfront cash payments.

Ryan Marcus, a senior business development executive at RBC Advisor Services, said that golden handcuffs continue to be an obstacle for advisers but that he expects momentum to shift in the middle of this year to the third quarter of 2015.

RBC is looking to leverage its in-house financing abilities in conversations with brokers.

“We are going to start using that to strategically target breakaways,” Mr. Marcus said.

At the same time, some incentives for staying in the wirehouses are going away. For instance, some of the firms curtailed base pay or tied more of brokers' salaries to performance this year.

And by year's end, Merrill Lynch advisers who received retention loans after the brokerage was purchased by Bank of America Corp. in 2008 will no longer have to repay that debt, according to people familiar with the terms of those agreements.

BofA spokeswoman, Susan McCabe, said that the firm declined to comment.

But in the past, wirehouse executives have said that their attrition rates are low.

The four large U.S. brokerage firms employ nearly 55,000 brokers and manage nearly $6 trillion in assets, making them the largest segment of the country's advisory industry by the latter measure.

And the firms continue to offer a range of gilded incentives to top producers, from expense accounts to higher proportions of the revenue they help the firm bring in.

But for some who make the transition, the benefits of staying compare unfavorably to leaving.

Libby Cherrington left Morgan Stanley Wealth Management last week for broker-dealer FSC Securities Corp.

The broker, who said that she managed more than $300 million at the wirehouse, said that her decision was based in part by the firm's decision no longer to support financial planning software by an external provider, Lumen Systems Inc.

“With a large wirehouse they want everybody to do the same thing,” Ms. Cherrington said. “Going back to the independent side gives us the flexibility to do business on behalf of our clients.”

A Morgan Stanley spokeswoman, Tricia Nestfield, declined to comment.

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