Many wirehouse representatives toy with the idea of going independent. If they have a run-in with a manager, run afoul of some bureaucratic edict or discover that a former colleague is doing well on his own, the motivation to leave can become acute. But is going independent always the right choice? It depends.
For many wirehouse reps, there are several good reasons to stay put.
First, the turnover and attrition at the wirehouses means that many surviving reps inherit clients and assets from reps who depart. In some cases, these inherited clients and assets can be quite substantial and aren't worth giving up.
Other reps who should stay include those who do a lot of new-issue and other investment-banking-related business.
Such reps would have some access to these products at an independent firm, but to a lesser degree because independent firms have less active syndicate calendars. Similarly, reps who deal with institutional clients to any great degree should remain in the wirehouse environment because they need a big name behind them, as well as the big firm's capital base.
There are personal reasons for staying: Many reps simply don't want the responsibility of employing others, renting an office or running a business.
Others are waiting for a deferred-compensation plan to vest or for their company stock to recover. Still others can't imagine making a change without a large sign-on bonus.
On the flip side, there can be several good reasons to go independent. We have established six clear indicators:
Comfort with being an entrepreneur. Many wirehouse reps actually would welcome being responsible for setting up and running an office. Those who prefer help in handling those responsibilities can hire an office manager to run their businesses or join an existing independent that will supply office space and assistants. Some firms also offer hybrid platforms, which enable reps to operate as an independent while the home office handles the rest.
Desire for broader product choices. For reps with many accredited investors, the independent channel can offer broader choices in alternative investments, futures and private equity. In the advisory sphere, independent reps have access to a broader array of money managers. Another advantage: Independents can tap smaller managers with outstanding performance histories in niche categories that aren't on wirehouse platforms.
Desire for marketing flexibility. Their inability to market to a target audience of their own choosing has been a thorn in the side of reps at wirehouses, where rigid compliance is increasingly the norm. Compliance at independent firms typically is as thorough as at the wirehouses, but independent firms don't have their own consumer-oriented branding or marketing ax to grind, so they offer greater communications flexibility.
No need for a famous name. Some wirehouse advisers who have capitalized on their affiliation worry about not having a big name behind them. Of course, as 2008 showed, the same name that you sell to your clients can become your worst enemy when it gets trashed in the press. Independent reps tend to retain clients based on the quality of the relationships and the trust they have fostered, not because of TV commercials showing retirees on a beach. Independent advisers who like branding help, however, can piggyback off the marketing done by clearing firms or, if in the RIA channel, by custodians.
The chance of earning more. Payout is an obvious reason for choosing the independent model. Less apparent are areas where reps will net more, such as product commissions and as third-party money managers.
Creating enterprise value. Reps converting to a sizable advisory business or already have done so can create value by going independent. And selling an independent business after a long, profitable career is a way to ensure a comfortable retirement. There is also the opportunity to team with other advisers to build economies of scale that can bring institutional valuations to your practice.
If there is one primary factor that keeps wirehouse reps from going independent, it is large upfront bonuses.
Securities and Exchange Commission Chairman Mary Schapiro isn't a fan of these bonuses and has made it clear that change is imminent. Any new restriction would help open the floodgates to independence.
Jonathan Henschen is president of Henschen & Associates Inc., which helps match advisers and broker-dealers. He can be reached at [email protected].
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