"Independence is not for everyone." So said my friend, a senior brokerage firm executive, after reading my last column on corporate culture.
And, of course, he is right.
While going independent with a registered investment adviser or an independent broker-dealer gets a lot of attention, more than half of the advisers who have left wirehouses have joined regional firms.
There are a few reasons why wirehouses are shrinking, and so-called regionals are appealing.
1. Bigger is no longer better, either with technology or with brand.
In the computer era that was pre-internet, the technology in the industry was "client-server." Big servers crunched the data and cost big money. For years, wirehouse advisers saw going to a small firm as a compromise in the services and products they could provide to their clients. The internet and the cloud revolutions have "democratized" these services to the point that even a client who is willing to buy the right software can have the same capabilities as the most sophisticated adviser or money manager.
Advisers who are taking the time to test drive the technology of regional firms are realizing that the wirehouse advantage in capability and usability is old news.
Some might argue that the luster of the big firms' brands still resonates with high-net-worth clients. But I think that most would agree that the financial crisis diminished the reputational advantage the wirehouses once had. Working at large, bureaucratic mega-banks means assuming the possibility of headline risk that threatens the brand constantly. Just ask Wells Fargo advisers.
If a household name were that important, then the independent movement would be doomed to failure. Clients are following their advisers who depart the wirehouses to both unknown names (new firms) and to lesser-known names (regional firms) because their loyalty is to the practitioner and not that adviser's former company.
2. Big firms no longer place a priority on helping advisers solve operational problems.
For decades, advisers relied upon their branch managers for service. The best ones created a special branch culture and typically "walked the floor," armed with a yellow pad ready take obstacles away from their advisers so they could spend time with their clients. The managers today who have survived the purges of the past decade are now responsible for four times as many advisers as they did 10 years ago. Even with the best of intentions, they no longer have the time to help as many advisers as they did before. And advisers also tell me that branch managers do not have the authority to make even the most basic decisions. It's no surprise then that service to the advisers has suffered: One Morgan Stanley adviser told me: "My branch manager has very little authority and my complex manager is responsible for over 200 advisers. I'm lucky the complex guy knows my name. And I've had four different regional directors in the last six years."
Regional firms, on the other hand, are run with offices only a fraction of the size of the wirehouses. Branch managers not only have more time to tend to their advisers' challenges, but are empowered to do more within a flatter management structure. Regionals have also upgraded the talent in their own ranks by picking up former wirehouse managers, whose choices appear to be limited to making an impact at a smaller shop, going back into production, or starting their own headhunting firm.
3. The wirehouses are cutting adviser payouts and have been for years, while simultaneously making compensation plans ever more complicated.
"It's like death by a thousand cuts," one Merrill adviser told me. This was after Merrill in November 2018 announced that they would not pay advisers for the first $4,000 in fees and commissions that advisers generate every month beginning in January 2019, only the latest "cut" in a series of changes in compensation. Morgan Stanley now defers up to 15% of adviser's compensation every month. Their compensation plan is over 30 pages long.
Regional firms' compensation plans are simple, lucrative, and rarely change.
Years ago, the understood trade-off for an adviser with the big firms was a better name, an amazing culture, and a better toolbox for less pay. Just as their cultures became subsumed by mergers, the other wirehouse advantages have disappeared too.
Regional firms offer a true culture of service, empowerment, and respect and are very attractive to the fleeing wirehouse adviser who does not want either independence or compromises in client solutions. As one of my clients, Tash Elwyn, the president and CEO of Raymond James & Associates, (employee channel) told me: "Our advisers' clients are their clients and we, in turn, support our advisers as our clients."
Danny Sarch is the founder and owner of Leitner Sarch Consultants, a wealth management recruiting firm based in White Plains, N.Y.