For years, many wirehouse brokers wouldn't consider moving to an independent broker-dealer — and for good reason. The technology at IBDs wasn't on par with the wires. They had no public branding to bring clients in the door. And perhaps above all else, their recruiting bonuses were measly compared with those offered by wirehouses.
And while the four wirehouses — Morgan Stanley, Merrill Lynch, Wells Fargo Advisors and UBS Wealth Management Americas — still get their fair share of recruits from each other, IBDs have been making considerable inroads in recruiting wirehouse brokers, often the most experienced and productive in the industry.
The evidence is striking. The three largest IBDs — LPL Financial, Ameriprise Financial Inc. and Raymond James Financial Inc. — recruited 118 teams from the wirehouses in 2017, a 42% increase over a year earlier, when those same three firms saw 83 such moves, according to InvestmentNews data.
Looked at in another way, those three firms recruited teams that had managed assets of $27.9 billion in 2017, an increase of 23% over the year before, when they recruited wirehouse brokers who had managed $22.7 billion in assets.
While the InvestmentNews data doesn't capture all adviser moves — and some of those wirehouse brokers, at least in the case of Raymond James and Ameriprise, moved to the firms' employee channel and not their independent contractor channel — they provide a window into broker movement.
So, what has changed?
In many areas, such as technology and investment products, IBDs have closed the gap between themselves and the wirehouses in what they can offer brokers who are considering a move.
"The key for the successful wirehouse adviser moving to an IBD is that they don't want to give up any of the resources they are able to make available to clients," said Scott Curtis, president of Raymond James Financial Services Inc., the independent broker-dealer unit of Raymond James. "That includes lending, wealth management, alternative products and trusts they don't have to source through a third party. At Raymond James, the independent [adviser] who will be successful will replicate those services and resources."
Tom Halloran, CEO of independent broker-dealer Voya Financial Advisors Inc., also claimed there's little difference in what top IBDs can offer compared with wirehouses.
"There are three big reasons wirehouse reps are more interested today in independent broker-dealers than they once were: technology, branding and underwriting IPOs," said Mr. Halloran, a former Merrill Lynch executive. "Branding and technology are at par. Everyone knows who Voya is. And when I was at Merrill, the technology was always superior. But that's not the case anymore. IBDs have done an outstanding job getting technology inserted into the business today."
As for initial public offerings, Mr. Halloran said it's more difficult for wirehouse brokers to deliver those shares for their clients these days. "That was a big deal," Mr. Halloran said. "Top reps could get allocations of IPOs. Now, that's going to the institutional clients."
Spokeswomen from Merrill Lynch, Morgan Stanely and UBS declined to comment for this story. But an executive at Wells Fargo said his firm was better protected than its competitors from advisers leaving to join IBDs because it offers that opportunity internally.
"Of the Big Four, we're the only firm with an independent channel," said Alex David, head of branch development at Wells Fargo Advisors Financial Network, its independent contractor brokerage known as FiNet. "That allows us to capture wirehouse advisers looking for the same touch and feel for themselves and their clients."
While IBDs have been stepping up their game, wirehouses are undergoing major shifts that appear to benefit independent broker-dealers at the moment.
Before the Department of Labor's fiduciary rule, parts of which took effect last year, brokers could still receive huge signing bonuses when leaving one wirehouse to work at another. The fiduciary rule forced firms to cut recruiting deals to avoid any potential conflicts of interest, a key element of the new rule. The DOL's new regulation also led the largest firms to institute uniform pricing models to eliminate any potential conflicts of interest.
Leaving the broker protocol
And perhaps most significantly, two of the four wirehouses, Morgan Stanley and UBS, turned the landscape for recruiting advisers upside down when they recently left the industry agreement known as the protocol for broker recruiting. Agreed to in 2004, the broker protocol has made it easier for brokers to move to new firms by allowing them to carry a limited amount of client information during the transition. It also cuts down on costly legal fees by limiting lawsuits against brokers when they change firms.
It's not clear yet what long-term effect Morgan Stanley's and UBS' decision will have on brokers leaving wirehouses — short-term Morgan Stanley reported that an above-average number of brokers left the firm in the fourth quarter — but it could spur some wirehouse brokers to examine independent contractor broker-dealers more seriously as an option.
James Poer, president and CEO of Kestra Investment Services, said the changes at wirehouses, including the broker recruiting protocol, are generating interest among wirehouse advisers. "We are in conversation with a lot of good wirehouse advisers who want to learn about independence," he said.
While industry changes seem to be helping IBDs in the recruiting wars, executives and industry recruiters say the underlying reasons wirehouse brokers would want to move to an IBD remain the same: the brokers' ability to have more control over their books of business and the potential for increased compensation.
According to a 2017 survey by Cerulli Associates, 69% of breakaway advisers, meaning those moving from a wirehouse or regional firms to a pure or hybrid RIA or independent broker-dealer, said that a "desire for greater independence" was a "major factor" in their decision to move firms. At the same time, 56% said "concerns about quality of broker-dealer's culture" was a "major factor" in deciding to move.
A major difference between wirehouses and IBDs is how they view clients. In general, wirehouses consider clients to be property of the firm, not the adviser. IBDs preach the direct opposite, which is more aligned with a broker's view.
In terms of compensation, a veteran wirehouse broker is paid about 40 cents for every dollar of revenue he generates. At an independent broker-dealer, the same broker would be paid 80 cents per dollar, although he would have to pay for his own overhead, such as office space and other related expenses.
Whether wirehouse brokers are leaving for IBDs or other channels such as regional employee firms or registered investment advisers, the exodus of client assets is stunning.
In 2016, the four wirehouses saw $70 billion in assets controlled by advisers move to other firms, but close to $30 billion of that amount, or 43%, moved from one wirehouse to another, according to InvestmentNews data. That means the Big Four in 2016 had a net exit of $40 billion, or 57%, leaving for IBDs and other adviser channels.
In 2017, the movement of assets away from wirehouses accelerated dramatically. Wirehouses saw $94 billion in assets move, but just about 21%, or $20 billion, went to other wirehouses. That means $75 billion, or about 79% of wirehouse assets that moved, went to an IBD, regional broker or RIA.
Turning up the heat
Against this backdrop, IBDs are turning up the heat on wirehouses. At least one IBD network, Advisor Group, wants to double its recruiting of wirehouse advisers in 2018.
"We are wrapping our arms around a strategy for wirehouse advisers," said Jamie Price, Advisor Group's CEO and a former senior executive at UBS. "I don't think we have made it as easy for the wirehouse adviser to understand how they can move and create enterprise value for their own practices."
Advisor Group typically recruits 5% of its revenue from wirehouse advisers, but wants to raise that to about 10%, he said.
"What we're working at now is how we create a better marketing approach and effort to [attract] wirehouse advisers," Mr. Price said. "It's unbelievable to me that there aren't more wirehouse advisers saying they want to create more value in their businesses."
That may change, according to Dennis Gallant, an industry consultant, as changes in the wirehouse industry sink in.
"Some wirehouse advisers are saying, 'I'm going to cut ties before it gets ugly,'" Mr. Gallant said. "A lot of them are voting with their feet. The next five years could be active recruiting years with advisers, many of them older, looking to find a final home."