Despite all the hoopla about breakaway brokers, most of the wirehouse representatives going to independent broker-dealers are relatively low producers who fit the B-Ds' packaged-product and fee-based model.
At the end of 2008, the average independent broker had $11.9 million in assets under management, well below the $71.9 million managed by the average wirehouse representative, according to Cerulli Associates Inc.
“Large wirehouse teams [are] least likely to make that move” to independents, said Bing Waldert, director of research at Cerulli.
“Maybe you could say they're fat, dumb and happy, but they also have pretty thriving businesses, and to break out and hang up their own shingle is a huge risk,” he said. “Even [reps with] midsize [AUM] are fish out of water” at independent broker-dealers, Mr. Waldert said.
Independent broker-dealers find it hard to recruit top producers, for a number of reasons.
For one, their support systems are built for small producers comfortable with their packaged-product and fee-based models. Also, many independent broker-dealers are affiliated with insurance companies and focused on selling variable annuity products, not the stocks, bonds and other investment products wirehouse brokers sell.
Another challenge independents face is that many top wirehouse advisers don't want to run their own businesses.
“The industry has underestimated the cultural leap” required to become an independent entrepreneur, Mr. Waldert said.
Hybrid platforms could help attract more top fee-based wirehouse reps because these arrangements allow advisers to set up their own registered investment advisory businesses and continue to run securities businesses through broker-dealers.
But in the minds of potential big-firm recruits, hybrids are associated with independent brokerage firms, said Jim Guy, first executive vice president and chief marketing officer at Cambridge Investment Research Inc., a hybrid firm.
“It's not an idea that gets a lot of currency among the real big [wirehouse] teams,” he said.
The RIA channel has more appeal for most of the top wirehouse fee-based practices that want to go independent. Because RIAs keep all their revenue, large teams can often do better with their own shops than they would by affiliating with an independent brokerage.
Although high-profile wirehouse practices are the ones that go the RIA route, independents might gain an advantage if regulatory reform puts more compliance burdens on advisers, said Dennis Gallant, president of the consulting firm GDC Research.
Finally, huge upfront recruitment deals make it all but impossible for independents to compete for the better wirehouse brokers.
“When you're talking 320% [all-in from a recruitment deal], there's not much else to talk about,” said Larry Papike, president of the recruiting firm Cross-Search, which works for independent-contractor firms. “An LPL [Financial] is never going to throw around that kind of money.”
A top-tier wirehouse team, which probably produces about $3 million in revenue, can command a $7 million to $8 million recruitment offer from another wirehouse, Mr. Waldert said.
However, the big deals look good only when the advisers grow their businesses over seven to nine years, according to Bill Van Law, national director of business development at Raymond James Financial Services Inc.
“If you use those growth projections and compare [pay] to what you'd earn as an independent adviser [with a higher payout], it's not free money,” he said.
Economics aside, wirehouse brokers often wonder if the independents can give them the support they need, observers said.
In most cases, they are not going to depend on the promises of a broker-dealer trying to recruit them.
“The key driver is getting an endorsement from someone who is already there” at an independent, Mr. Gallant said. “That takes the mystery out of it [and assures a recruit that they would] not be jumping off a cliff.”
Mr. Van Law, a former Merrill Lynch broker and manager, agrees.
“Once you have some of these folks, and they have a positive experience, move their clients over and get the tools they need, word gets out. ... It tends to build on itself,” he said.
Even if they don't attract the corner-office types, the independent brokerages can grow by landing just about any type of wirehouse representative, Mr. Waldert said.
Lower-tier wirehouse reps, as measured by Cerulli, have an average asset base of about $23 million, Mr. Waldert said.That still compares favorably to assets managed by the average independent contractor rep.
E-mail Dan Jamieson at [email protected].
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