Regional broker-dealers quietly making comeback now, but the future remains uncertain

After a period of decline, the regional brokerage industry is scoring recruiting gains at the expense of wirehouses

Dec 15, 2018 @ 6:00 am

By Bruce Kelly

The financial advice industry frequently focuses on the rise of registered investment advisers and the independent broker-dealer market when it talks about trends in the business. But quietly making a comeback are regional broker-dealers, firms that traditionally focused on a specific part of the country but which in some cases have grown into national firms.

As wirehouses such as Morgan Stanley, UBS Financial and Merrill Lynch have scaled back their recruiting efforts, or in the case of Wells Fargo Advisors, watched its workforce flee the firm because of a series of scandals at its parent bank, regional firms have been aggressively hiring wirehouse brokers. Many regionals still offer attractive signing bonuses and competitive compensation packages, but most of all, they maintain a workplace culture that harkens back to a time when brokers did not have to comply with so many rules.

(More: Is the worst over for Wells Fargo Advisors?)

"[Brokers] are not pleased with the controlling nature of the bank parent of the wirehouse broker-dealer and how the banks impose restrictions on communication or freedom of movement," said Jerome F. Lombard Jr., president of the private client group at regional broker Janney Montgomery Scott. "It's a refrain I hear over and over again. Wirehouse advisers say, 'I'm tired of it. They don't trust me.'"

Less the five years ago, the regional brokerage market was all but left for dead. Many of the more well-known regionals such as A.G. Edwards, Advest Inc., and McDonald & Co. had been acquired, and their names were slowly fading from the public's memory. The credit crisis hastened the demise of other firms such as Morgan Keegan and Stone & Youngberg, which were bought by other, stronger regional firms.

And yet, the remaining regionals, firms such as Janney Montgomery Scott, Hilliard Lyons, D. A. Davidson, and Robert W. Baird and Co., along with others such as Benjamin F. Edwards & Co. and RBC Wealth Management, are growing. Two other regionals, Raymond James and Stifel Financial Corp., have evolved into broker-dealers with national footprints.

Increase in advisers

Going back to 2016, those firms collectively have seen a net increase of 392 advisers or teams and a corresponding net increase of $116.5 billion in assets under management associated with those brokers, according to an analysis of InvestmentNews data. (InvestmentNews tracks adviser moves, but its database is not complete.) The vast majority of those advisers or teams — about 75% — were recruited from one of the four wirehouses.

The rate of growth in assets at regional firms has recently outpaced the increase at the wirehouses, according to a report earlier this year from Sanford C. Bernstein & Co. From 2007 through 2017, the four wirehouses had a compound annual growth rate of 3% of client assets.

Regional firms did better, though they admittedly have smaller amounts of assets. RBC recorded a compound annual growth rate of 5% over the same period, while Raymond James and Stifel, respectively, posted growth of 13% and 17%, according to the report. Those last two firms also made acquisitions during that time, adding to the growth of client assets.

NET count of advisers/teams added by regional brokerage firms by year
NET Total AUM of advisers/teams added by regional brokerage firms by year (in millions)
Source: InvestmentNews Research

Recruiting pullback

Facing regulatory hurdles for recruiting bonuses under the Department of Labor's former fiduciary rule, the wirehouses started to pull back from recruiting in 2016. Regional firms, along with independent broker-dealers and RIA breakaways, stepped into the fray.

Morgan Stanley and UBS opened the door wider last year when they announced they were leaving the broker protocol for recruiting agreement that makes it easier for brokers to move to a new employer, causing some of their advisers to bolt before the new policy took effect. And Wells Fargo Advisors has seen close to 1,000 advisers leave over the past two years in the aftermath of a barrage of client scandals at Wells Fargo Bank.

(More: Step one: Withdraw from the broker protocol)

"The regional or national regional firm is capitalizing on wirehouses stepping back from recruiting," said Ed Louis, senior analyst at Cerulli Associates.

For wirehouse brokers who want to continue to work for a firm as an employee as opposed to starting their own firm as an RIA or as a contractor affiliated with an independent broker-dealer such as LPL Financial, regional firms can be attractive.

The regionals will pay the most substantial recruiting bonuses in the industry, from 150% to 300% of a broker's prior year's fees and commissions in the form of a seven-to-nine year forgivable loan. For example, RBC last year was offering a recruiting bonus of 250% to 300% of a broker's prior year's fees and commissions, known in industry parlance as a broker's trailing 12.

(Watch: Regional brokerages are picking up assets, advisers from wirehouses)

While RIAs and IBDs lure wirehouse brokers with substantially higher overall payouts, regionals match or sometimes surpass wirehouses'.

Wirehouses typically have a payout grid in the range of 35% to 45% of an adviser's trailing 12, but Stifel, for example, has a payout of 50%, and that figure is almost sacred within the firm, said one executive.

"The grid has changed twice in 20 years," said John Pierce, Stifel's head of recruiting, noting that wirehouses often tinker or change their grids annually. "And we pay the same for brokerage or fee-based business. Most firms don't do that. Advisers don't have to worry about getting paid less or more based on what the firm wants them to do."

Previous firms of advisers/teams that joined regional brokerage firms in the last three years
Source: InvestmentNews Research

Regional firms are not just competing on a financial basis. They also try to ensure that they can offer the same services as wirehouses and also try to differentiate themselves in terms of corporate culture.

"Those regional-type firms recognize the opportunity, and are spending the money on recruiting and are also investing in their technology," Mr. Louis said. "They want to make sure the big teams coming over from the wires have the same level of resources, while also keeping their top teams happy."

Meanwhile, the regionals present themselves to recruits as an antidote to the bureaucracy of large institutions; they also eschew the wirehouse push for cross-selling, having brokers sell high-margin banking products to clients — a corporate initiative that many wirehouse advisers dislike.

Unlike all of the wirehouses, Raymond James makes it clear to recruits that they own the relationship with their clients, and that the firm will not try to hold onto the clients if the broker decides to leave the firm down the road.

Concerns about large-firm culture and frustration with senior management were the two leading complaints of advisers who left one firm for a new employer, according to a survey from Cerulli.

Ronald Holmes worked for Merrill Lynch for 10 years before moving over to Janney Montgomery Scott in November.

"We had been unhappy where we were," said Mr. Holmes, whose team manages more than $200 million in client assets. Earlier he had worked at Legg Mason Wood Walker Inc., a regional brokerage that was sold in 2005 to Citigroup Inc. and merged with Smith Barney.

"We knew what it was like to work at a regional firm," said Mr. Holmes, who was made available to InvestmentNews by his firm. "At Janney, we wanted to get back to a more compressed management structure. There were so many layers at Merrill between the broker and management that there was not a lot of opportunity for us to be heard."

And Merrill's emphasis on banking products for advisers' clients also got under Mr. Holmes' skin. "We were feeling more pressure of late to sell proprietary bank services and we were starting to feel a little uncomfortable," he said.

In a statement, Merrill Lynch spokeswoman Susan Atran said her firm offers "distinct competitve advantages" over regional firms.

"We offer a broad, open architecture platform covering a wide range of managers and offerings," she said. "And, our advisers have access to a strong and stable balance sheet that can provide solutions tailored to clients' lending and financing needs."

Wells Fargo Advisors has "vast resources available to advisers and clients," said Rich Getzoff, head of Advisor-led East, in a statement. "Our multi-channel model gives advisers the flexibility to choose a career path that meets their needs. Our compensation plan is one of the best in the industry, and we have the capital to invest in industry-leading platforms that focus on client experiences and outcomes."

Morgan Stanley spokeswoman Susan Siering said in statement: "Attrition is at record lows and productivity continues to increase as our advisers do more for their clients and leverage our full platform and technology to serve them."

UBS did not respond to a request for comment.

Challenges ahead

While the regionals have enjoyed a bit of a renaissance in the past decade, this set of brokerage firms is facing the same hurdles as the rest of the financial advice industry. That means growth in the future could be difficult.

Regionals don't train new advisers at the same scale as wirehouses, executives and recruiters said, and advisers at the regionals are aging and considering retirement, just like advisers across the business.

And, as noted, the wirehouses are trying to turn off the spigot of brokers leaving their shops, going so far as to file legal action against them if they believe the brokers have violated employment contracts. That could have a chilling effect on the pipeline of future prospects for the regional firms, experts said.

Last month, Baird said it agreed to acquire Hilliard Lyons. Combined, the two will have 1,270 brokers. There will be more consolidation in this segment of the brokerage industry in the future, executives and recruiters said.

"It makes sense to combine and give a solution for two firms," said Danny Sarch, an industry recruiter. "Any given firm has to come up with a way to compete or stay afloat because they all have the same aging adviser problem."

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