After Morgan Stanley took control of Smith Barney in May 2009 from
Citigroup Inc., David Hopkins grew disillusioned with his new bosses.
Hopkins, 50, says he had built a roster of about 150 clients with $38 million in assets in nine years as a stock broker at Smith Barney in Southern California. After the acquisition, the New York-based bank imposed new maintenance fees on Smith Barney accounts and stripped away some of the autonomy of its brokers -- moves that Hopkins says were hurting his relationships with investors.
In March, Hopkins got a call from a headhunter who urged him to join a small advisory firm that works with TD Ameritrade Holding Corp., a discount brokerage. Although it meant Hopkins would have to return a retention bonus from Morgan Stanley worth a year's earnings, he decided to depart for Beacon Pointe Advisors LLC in Newport Beach, California, Bloomberg Markets magazine reports in its December issue.
“Smith Barney had a very hands-off environment, like you knew what was best for your clients,” Hopkins says. “With Morgan Stanley, it just became an unfriendly place. Smith Barney is dying a slow death. It's all about Morgan Stanley.”
More than 7,300 brokers have left the four biggest full service brokerages -- Morgan Stanley Smith Barney, Merrill Lynch,
Wells Fargo Advisors and
UBS Wealth Management Americas - - from the beginning of 2009 through June, according to financial services research firm Aite Group LLC in Boston and company filings.
(View the latest numbers on adviser headcounts at the big four brokerages here.)
Some brokers have fled internal clashes from mergers during the financial crisis:
Bank of America Corp. rescued Merrill Lynch four months before the Smith Barney deal. Others have been recruited by discounters such as
Charles Schwab Corp. to join their networks of independent firms.
The big banks, which count on their brokerages to generate a steady stream of fees, are losing assets as well as brokers. Assets under management at the four top brokerages dropped 16 percent to $4.75 trillion from 2007 through 2009, Aite Group says. During the same period, assets jumped almost 14 percent to $1.54 trillion at independent firms.
View some of the largest teams of advisers that have departed
Morgan Stanley Smith Barney, Wells Fargo, UBS, and
Bank of America Merill Lynch this year.
“It's hurting the big brokerages,” says Alois Pirker, an Aite Group research director. “They have lost assets, advisers and clients.”
Morgan Stanley says the loss of brokers and assets has been inconsequential. Spokesman Jim Wiggins says the bank is sorry to see employees depart who are frustrated by a lack of success at Morgan Stanley, which doesn't compete on price for clients with low-cost brokerages.
“Our business model is not for everyone,” he says. “We're geared to those advisers and clients who can best benefit from the breadth and resources of a leading global investment bank.”
While lacking the clout of big brokerages, independent firms boast of one advantage with clients: no conflicts of interest. Brokers at Merrill Lynch, for instance, are pressured to sell funds managed or approved by the firm because they pay a higher commission than those run by other companies, says Paul De Rosa, who worked at the brokerage for 26 years before co- founding his own firm, Gateway Advisory LLC, in Westfield, New Jersey, in January.
De Rosa set up Gateway Advisory as a registered investment adviser, which has a fiduciary duty to put its clients' financial interest first when giving advice, according to U.S. Securities and Exchange Commission rules. RIA firms must also disclose conflicts. To avoid them, RIAs like Gateway typically shun commissions and charge a flat fee of less than 1 percent of assets under management regardless of the funds they recommend.
“Our clients know that when we make a recommendation, we're not getting compensated for that recommendation,” says De Rosa, 61, whose firm manages more than $250 million.
Lyle LaMothe, who oversees Merrill Lynch's U.S. wealth management unit, says brokers don't push particular investments that pay more than others. The firm leaves it to the customer to decide whether to purchase a product sold on commission, or pay a fee for investment advice.
“That we have both methods is testimony to the fact that we are independent,” LaMothe says.
Charles Schwab and TD Ameritrade are capitalizing on the flight of brokers. The discounters are providing independent firms with a host of fee-based services, from recruiting advisers to supplying clients and trading and custodial assistance. Omaha, Nebraska-based TD Ameritrade announced in July that its recruiters helped bring 212 advisers from big brokerages to independent firms in the first seven months of 2010, a 44 percent increase over the same period a year earlier.
Schwab's unit that offers services to independent advisers and other institutional businesses is the most profitable part of the company. San Francisco-based Schwab has about 6,000 independent advisers in its network.
“There has been a bit of a pack mentality with advisers,” says Bernie Clark, head of Schwab Advisor Services. “When people started coming out and fostering growth in this industry, others saw it was possible and followed them.”
Independent firms depend on their partnerships with Schwab and TD Ameritrade to succeed. Dorie Rosenband says she quit Smith Barney last year because she grew tired of its high- pressure sales culture and preferred to use her training as a certified financial planner to give advice. So she started a business in New York and Baltimore in 2009.
Schwab helped Rosenband, 37, find office space and legal advisers and then hooked her up with Raylor Investments LLC, a Greenwich, Connecticut, consulting firm that screens investments for her clients. In exchange, Rosenband pays Schwab a fee for safekeeping her investors' money, executing trades and other transactions.
“You cannot underestimate the magnitude of setting up a new business,” says Rosenband, whose firm oversees $50 million. “You're leaving a turnkey environment where you don't even realize what's being done for you.”
Beacon Pointe, which manages $4 billion in assets, owes much of its recent expansion to TD Ameritrade. Beacon Pointe's 30 employees work in a ground-floor office decorated with undistinguished paintings by anonymous artists. To get to a bathroom, advisers have to either trudge down to the basement or take an elevator to the fourth floor. Beacon Pointe and TD Ameritrade formed an alliance in 2007: Beacon pays a fee for client trades through TD Ameritrade, and the discount brokerage funnels customers looking for advice to the small firm.
This year, the number of TD Ameritrade referrals is soaring, comprising 25 percent of Beacon's new clients through October. And Beacon is planning on acquiring an independent adviser with $120 million in assets in Scottsdale, Arizona, a first step in an expansion to get more business from TD Ameritrade branches across the country, says Matthew Cooper, Beacon's managing director.
Hopkins, the Beacon Pointe adviser, works a region between Orange County and Santa Barbara, talking with TD Ameritrade branch workers to find customers who need advice.
“They went to Ameritrade and thought they could do a self- directed approach but don't have the time or talent to do it,” Hopkins says. “So Ameritrade recommends us.”
