The stock market's downturn is reshaping the retail-brokerage industry, with disgruntled clients replacing wirehouse brokers with independent representatives and financial advisers.
"We're having a field day," said Nathan Bachrach, co-managing partner of the Financial Network Group Ltd. "Eighty-five percent of [new] clients are coming from the banks and wirehouses."
Mr. Bachrach isn't alone.
An
InvestmentNews survey of 650 advisers found that 87.3% were building their client base amid the downturn. The vast majority of those advisers (72.6%) said that their new clients were coming from wirehouse firms.
Fifty-six percent of survey respondents were affiliated with an independent broker-dealer.
"Clients were sold on the stability of the big firm," said Charles Zhang, managing partner of Zhang Financial in Portage, Mich. "That's actually not so."
Zhang Financial, which manages $800 million in client assets and is affiliated with
LPL Financial of Boston, has picked up about two dozen clients from wirehouses since the downturn, Mr. Zhang said.
Poor communication on the part of brokers appears to be driving clients away from wirehouses. Indeed, many clients made the decision to sever ties with their brokers after those brokers failed to return telephone calls amid the market's spectacular collapse starting in September, independent reps and advisers said.
Fifty-percent of advisers who responded to the survey said that the new clients they had picked up from wirehouses had left their previous broker because that broker did a poor job of communicating with them.
"The wirehouses have a mantra: Hang in there," said Mr. Bachrach, whose firm is based in Cincinnati and has $850 million in client assets. "At the end of the year, clients realized how bad the damage was, and they were furious."
His firm is affiliated with Royal Alliance Associates Inc. of New York.
Meanwhile, 40% said that their clients left their previous broker because they were dissatisfied with the financial advice that they were given.
"We've just completed our best quarter," Mr. Bachrach said, adding that since Jan. 1, his firm has landed 100 new clients. "What's become obvious is that the planning model is really alive and in living color."
Indeed, tough economic times have put the spotlight on what independent reps and advisers do best, one consultant noted.
"The
recession and down market have placed the spotlight on retirement and retirement savings," said Dennis Gallant, president of Gallant Distribution Consulting of Sherborn, Mass.
"The independent market, both [independent-registered- investment-adviser and independent-broker-dealer reps], lead the industry in providing retirement income solutions and advice delivery," he said. "Combine that with the negative press and upheaval on Wall Street, and it's not surprising that wirehouses are losing clients to independents."
The overwhelming majority of the advisers surveyed (79%) said that they were getting new business from referrals, while 19% said that they were gathering clients via prospecting.
According to the survey, the largest single firm losing accounts to independent advisers was Merrill Lynch & Co. Inc. of New York, which was acquired by Charlotte, N.C.-based
Bank of America Corp. in January.
According to the survey, 30% of the advisers and reps said that their new clients hailed from Merrill Lynch, while 17% said that they came from Smith Barney, the brokerage unit of New York-based
Citigroup Inc.
Citigroup this year will spin off Smith Barney into a joint venture with New York-based Morgan Stanley.
Many clients who are leaving the wirehouses are seeking a change because their brokers failed to put in place a selling strategy that would release clients from the typically high-yielding investments they recommended, said Douglas Flynn, co-founder of Flynn Zito Capital Management LLC of Garden City, N.Y.
"It was a great yield, maybe 10% or 11%, but the stock was down 30% to 70%," he said, adding that the wirehouse advisers "sold everything on the
dividend."
They failed to put in place simple selling strategies such as stop losses, Mr. Flynn said. The advisers were "not offering clients solutions, other than: 'Hang in there. It will come back,'" he said.
Since September, Flynn Zito has won about a dozen client accounts of at least $1 million who had their money with wirehouses.
E-mail Bruce Kelly at [email protected].
