As much as executives at custodian firms dream about scores of wirehouse brokers going independent, they say that it's just not happening.
Speaking at a recent conference for bank investors in New York, Fred Tomczyk, the new chief executive of TD Ameritrade Holding Corp., said he couldn't think of a more difficult time for wirehouse brokers to raise the capital, lay the operational groundwork and overcome the psychological barriers to setting up their own business.
"[RIAs are] the fastest growth channel in the wealth management business today," he said. "But if I was a broker today I'd be thinking twice about that."
Like rivals Charles Schwab & Co. Inc. in San Francisco and
Fidelity Investments of Boston, TD Ameritrade has captured near-record amounts of new assets in recent months from investors worried about the financial viability of Wall Street giants that have booked billion-dollar losses.
Most of the Omaha. Neb.-based firm's $23 billion of net new assets this year came from wirehouses, Bill Gerber, the firm's chief financial officer, said in an interview last week. But the money is flowing largely to the discounters' retail brokerage units, not to the custody units aimed at the mass affluent that support independent RIAs with wealthier clients.
Earlier this year, expectations were different. Executives and analysts waxed enthusiastically about the potential for custodians to capture assets from big-firm brokers fleeing to existing RIA firms or launching their own practices.
They said brokers were sick of defending formerly marquee employers such as
Citigroup Inc. of New York, which owns Smith Barney; Merrill Lynch & Co. Inc. of New York, which is being sold to
Bank of America Corp. of Charlotte, N.C.;
UBS AG of Zurich, Switzerland, which owns the former PaineWebber brokerage network; and Wachovia Corp. of Charlotte, N.C., which is being sold to
Wells Fargo & Co. of San Francisco.
As markets and the global economy deteriorated in recent months, however, the forecasters have grown more cautious.
"More folks are interested in these discussions, but they also are starting to say this might not be the right time," said Jim Dario, head of business development at Pershing Advisor Solutions LLC, the Jersey City, N.J.-based RIA custody arm of Bank of New York Mellon Corp. "They're waiting to see how this market disruption works out."
Pershing has held conversations with about 100 brokerage teams overseeing close to $24 billion in assets since last summer, but thus far has completed just two conversions of wirehouse teams.
Schwab, the leading custodian for RIAs, has opened discussions with about 400 prospects overseeing some $35 billion of assets, according to Bernie Clark, senior vice president of sales at the firm's adviser services unit.
But at Schwab's semiannual business update last month, he and other executives cautioned against expecting any quick mass conversions.
Not only does it take six to nine months to set up a new RIA practice, but the last things brokers want to do today is present clients with another major decision, such as following them into a new channel, said Trish Cox, chief financial officer of the adviser services unit.
Wirehouses, meanwhile, continue to dangle lucrative pay packages to recruit top brokers from each other, including upfront payments that can equal or exceed the revenue they produced in the previous 12 months.
Schwab's Mr. Clark estimated that about $600 billion of broker-controlled assets move among firms each year — mostly wirehouse to wirehouse — though he said Schwab's advisory channel hopes to capture about $50 billion of the flow.
Brokers and executives continue to debate whether this is the best — or worst — time to leave their tarnished homes, said Scott Smith, a senior analyst at Cerulli Associates Inc., a Boston-based consultant that tracks trends in wealth advisory channels.
"Brokers are more afraid than ever in this environment about having to pay the bills themselves" when they are independent, he said. "But we should see more movement over the next 12 months because there is less cachet to the wirehouse brands."
Deferred-stock and option bonus plans that kept brokers from moving in the past also have lost their golden-handcuff power now that brokerage company's shares have plummeted, Mr. Smith said.
"Breakaway brokers are an exciting trend for independent broker-dealers and custodians, but that being said, the trend is not happening as quickly as you might believe," said Bing Waldert, Cerulli's associate director of research.
Alan Reed, a recruiter at Michael King Associates Inc. in New York, has had only one conversation with a broker looking to go independent in recent weeks. Moreover, he has seen no movement from wirehouses to the RIA or independent brokerage channels despite a deluge of calls in mid-September after Merrill Lynch announced its planned sale to
Bank of America.
"These days, with the markets so tumultuous, they don't look at independence as being financially secure," Mr. Reed said.
For his part, Rudy Adolf, chief executive of Focus Financial Partners LLC, a New York firm that helps finance new RIA practices, said the current market volatility exacerbates the challenge of getting brokers over the "emotional" barriers of setting up their own businesses.
But he also believes that brokers going independent today are more primed for success because they have to have a strong client following even to consider a move to the RIA channel.
Brian Carlis, a lawyer at Stark & Stark in Princeton, N.J., who specializes in advising brokers on setting up RIA practices, said the year-end holiday period has always been a slow time for brokers to leave their firms.
Nevertheless, inquiries from disgruntled brokers have increased substantially. "I expect quite a lot more activity in the first quarter of 2009," Mr. Carlis said.
Even pessimists say that the RIA universe will maintain its status as the fastest-growing channel in the advisory business, with significant help from wirehouse emigrants.
"We may see some hesitation in the breakaway broker market, but I think you'll see the asset flows continue into that particular channel," Mr. Tomczyk said.
"The breakaway broker is alive and well," Mr. Gerber said.
E-mail Jed Horowitz at [email protected].
