Breaking Free
Mark Gottlieb tried to roll with the changes when UBS bought his former firm Piper Jaffray in August 2006. Many of his fellow advisors were heading for the door, but Gottlieb decided to give his new wirehouse the old college try.
Within half a year, he was tired of rolling-he just wanted a change. So in January 2007, he left UBS for Raymond James Financial Services. "I did not like it," he says of his UBS stint. "UBS was not client-friendly or advisor-friendly."
Gottlieb, a Wayzata, Minn.-based advisor, rehashes a litany of new policies from the wirehouse that irked his clients, including an across-the-board $150 account fee. Gottlieb says that UBS' position was that the fee covered a checking and Visa card. Despite his protests that the vast majority of his clients did not use those services, UBS declined to waive the fee, he says. By comparison, Piper had a $50 fee that was waived on accounts over a certain size. UBS also reduced the money-market rate that clients received based on the combined value of the client's money-market balance and overall portfolio size, Gottlieb recalls. "To get a normal rate, you had to have a household value of $2 million," he says. Also, UBS tried an aggressive cross-marketing mailing approach that further irritated Gottlieb's clients, who were already complaining about the service and the new account fees. He passed along the complaints, to no avail. The corporate practices continued.
Gottlieb left the wirehouse more than a year ago, but industry observers say that it's still a good time for any wirehouse advisor considering the leap to independence. But it has to be for the right reasons-and money is not at the top of the list.
If it were, Gottlieb likely would have taken another path. Other wirehouses were offering him what he calls "large checks," but he decided to forego the upfront money and stake out his independence instead. "You really have to be committed to this," he says. "For the right reasons-for the clients and the freedom of the independent model."
Analysts and industry participants, including recruiters at Wachovia Securities and at two of the biggest independent firms, LPL and Raymond James, echo Gottlieb's sentiments. (Raymond James and Wachovia each have both a traditional employee channel and an independent channel.) All three firms agree that the number one reason for advisors to leave a wirehouse is a burning desire to run their own businesses-not for a bigger payout.
The money can be tempting. LPL recently increased payouts to up to 98% for producers bringing in $4 million a year. But advisors need to recognize there will also be higher costs if they go independent and those payouts can be eaten up quickly.
Rebecca Pomering, an analyst at Moss Adams, says, "If an advisor is evaluating going independent, it's not the external factors-the market and competitors and sliding firm share prices-they should consider first-but the internal strategic decision. Is the independent environment good for the kind of business the advisor wants to build?" She adds that many aspiring independents make an early misstep by asking themselves a common question: "Could I make more money doing what I do in a different environment?" Pomering notes that they "could get caught up in the economics and forget the actual transition from being an employee to being a business owner."
Control Versus Camaraderie.
Independence is not for everyone, says Chet Helck, the president and chief operating officer of Raymond James Financial. Advisors who will succeed at it, he says, must be "willing and able to handle the responsibility of being a manager of a business and an owner of a business in addition to being able to handle the responsibility of being a financial advisor to [their] clients. Not everybody is willing and able to do that."
Those responsibilities include acting as your own office manager and human resources person as well as scouting your own office space. Helck's firm and other independents (including LPL) offer help with these chores, but the ultimate responsibility is still on the advisor-turned-business owner.
For advisors who have that entrepreneurial drive, though, going independent can be life-changing. Warren Whatley, for one, works in Raymond James' independent arm under the name Birmingham Investment Group in Birmingham, Ala., and says that going out on his own was "the best thing I ever did, no question about it."
Whatley says the decision boiled down to control. And now that he has had a taste of it, he likes it. He says he has immediate access to his compliance officer or other back-office specialists, instead of having to deal with a manager first. "At a wirehouse, you're an employee and you have a lot of layers of people who are watching over you-manager, operations manager, administration manager-and lots of layers you have to go through to get things done."
He adds that he had a great branch manager at Wachovia, but the company infrastructure still got in the way. Specifically, the ability to set pricing was one of the biggest concerns. His 19-year career path in the business started at regional firm JC Bradford, and he made stops at ever-bigger firms due to acquisitions-Paine Webber, Prudential and, finally, Wachovia. At Wachovia, he says, he had a $95 minimum ticket charge; as an independent, his minimum is $22 per trade plus a penny-and-a-half per share.
In addition to the true entrepreneurs, prime candidates to make this move are advisors who have concluded that they cannot deliver the desired level of service while working at a wirehouse, says Moss Adams' Pomering. Those who feel strongly about being a fiduciary to their clients are also good candidates. She notes that most wirehouse advisors aren't allowed to be fiduciaries-they'd have to put the client's interests first and that's not always possible. "They can't say that in an organization that [persuades] them to use proprietary products, which is putting the firm's interests before the client's," she says. Some firms still lack open architecture and, consequently, cannot always offer the best overall option for the client, she says.
Gottlieb of Raymond James acknowledges two losses after leaving a wirehouse: the camaraderie of working at a bigger office, and the name recognition from a big firm's broad-based advertising campaign. Even so, he says, "I never had anybody at UBS walk in the door because they saw a UBS ad."
Rick Peterson, head of Houston-based executive search firm Rick Peterson & Associates, which specializes in placing brokers, says that in bad economic times clients generally "feel safer under the umbrella of a larger name." An advisor turning independent, he adds, would run the risk of a client saying: "Yeah, but what are my legal recourses if your recommendations turn sour, or if we don't get the execution we ask for? What is the safety factor?"
Ongoing Storms.
But that "stay with the safety net" rule, is not holding true in the current economic slowdown, Peterson says. "There's a lot of angst on the part of clients," he says, adding that they're worried about their own financial well-being in light of the big writedowns by Wall Street firms and the general marketplace malaise.
In fact, the industry has been buffeted recently by ongoing storms ranging from the subprime mortgage debacle and the resulting credit crunch to the freeze of the auction-rate securities market.
Due to the subprime crisis, several firms, including Merrill Lynch, Morgan Stanley and Citigroup, have raised cash by selling pieces of themselves to foreign investors. UBS, which has written off more debt from the subprime crisis than any other bank, recently saw a former top banker indicted for allegedly helping a client evade taxes, according to published reports. Meanwhile, Wachovia saw its unexpected first quarter loss nearly double in the second quarter, partly due to writedowns related to life insurance policies. It is now facing inquiries from the Securities and Exchange Commission and other regulators over auction-rate securities. The venerable Bear Stearns needed a bailout by JPMorgan Chase (with the help of the Federal Reserve), and management at some of the biggest firms-Citigroup, Merrill, Wachovia-have changed because of these problems.
Those stories have had a definite impact on Wall Street's share prices. The five major wirehouses have seen their stocks plunge by roughly 50% in the last year. Even though many of these high-profile problems have happened in divisions separate from retail brokerage, the result has been a black eye to brokers' reputations. "Investors trust advisors, but are getting increasingly leery of the firms," says Bill Morrissey, executive vice president of branch development at LPL, the biggest of the independent firms. "Advisors are endlessly having to reassure clients who are becoming concerned; not with their advisors, but with the financial services sector itself."
Brokers are telling Morrissey that clients are asking hard questions about debt writedowns and ratings downgrades for municipal bond issuers. Some clients holding auction-rate securities as money-market instruments are seeing their liquidity dry up. "Advisors are getting tired of defending their firms-and they're starting to look at a different model," he says.
In the first quarter, the number of advisors from other firms requesting
exploratory interviews with LPL soared 150% from the same period in 2007, Morrissey says. Meetings with new recruits-advisors who are further along in the process-were up 82%. Raymond James is seeing a similar surge of interest, reporting a 95% jump in recruiting for its independent contractor arm.
"Ironically, volatility in the marketplace is creating more churn in wirehouse advisors with large and more sophisticated practices," Morrissey says. "We're talking to advisors who'd never thought of going independent in the past," he says, adding that advisors who joined in the first quarter of 2008 had businesses that were 30% larger than those who joined in the prior year.
Still, those early interviews may be just talk. Bing Waldert, head of the intermediary practice at Cerulli Associates, says that the trend of advisors leaving their firms have stayed similar to last year. Nearly half go to another wirehouse, about a quarter go independent, and another quarter go elsewhere, such as a bank or regional firm. Waldert thinks being forced to answer for their parent companies' missteps has made advisors edgy, but most will not make a move while markets are turbulent and clients are dissatisfied. "But you'll see the results of this activity when the market improves," he predicts.
Several wirehouse firms contacted for this article either declined to comment or did not respond. UBS, though, said in a statement that it "continually strives to meet the needs of advisors so that they can best serve their clients' needs." Wachovia Securities, which has both a traditional employee channel as well as an independent channel, made the point that each has its own pluses and minuses. Chip Walker, the firm's managing director of Financial Advisor Integration, presides over recruiting for all channels, and says advisors considering independence must ask themselves: "Do you truly want to be an independent business owner and all that that implies?" If not, remaining an employee might be best.
A Merrill spokeswoman responded with a lengthy email. "The industry as a whole is operating in an extremely difficult and challenging environment. But Merrill Lynch's core franchise is healthy, well-capitalized, and has more than $80 billion of excess liquidity on the balance sheet," the e-mail stated. "Our businesses are strong and well-positioned, and this is particularly true in Global Wealth Management, where our performance in the first quarter continued to be outstanding." The e-mail further stated that the company feels that the breadth, depth and flexibility of its "industry-leading client platform, paired with our proven operating structure, provides advisors with a competitive operating edge that allows them to deliver superior service to their clients. That said, we want to clarify that though there are some cases of advisors leaving full-service firms from time to time to become independent, this is not a trend that we have experienced." Merrill also cited its $4 billion of net new money and $9 billon of net inflows of client assets into annuitized revenue products.
You Are Invited to Join Us…
Chip Roame, managing principal at industry consultancy Tiburon Strategic Advisors, says that advisors working at a wirehouse used to have three reasons to stay put.
Today, they have only one.
The first of those three-wirehouses traditionally had better technology, support and product offerings than independent firms-has eroded over the last decade. Now, the technological playing field is pretty even, he says.
The second traditional advantage came in the form of deferred compensation in company stock or options-the so-called golden handcuffs. Advisors were reluctant to walk away because those perks vested over a period of time. But with share prices at financial services firms taking such a hit, those handcuffs more closely resemble cheap plastic.
But the third reason-the difficulty of holding onto client accounts-continues to hinder any move. "The headache factor of moving means asking all your clients to fill out new client paperwork," Roame says. "If you have 300, 400, 600 clients, you have to meet with each one of them. That means you're not doing any production anymore. You're basically a paperwork-filler-outer. It also gives your client a reason to leave you. This is a big headache-way bigger than many people realize."
Adding to those complications are the legal issues surrounding the process of taking your clients with you. Boston-based securities attorney Pete Michaels, a name partner with Michaels, Ward & Rabinovitz LLP, says he has seen more brokers get sued this year than in the last five to eight years.
Over the last several years, all the major wirehouses signed "The Protocol," an industry agreement that essentially declared a cease-fire in the bidding war for talent. As long as advisors followed The Protocol, they were unlikely to be sued. The rules were strict, but fairly straightforward: Advisors leaving a firm could take only their clients' names, types of account, phone numbers, addresses and e-mail addresses. They could not take Social Security numbers, account numbers, or pre-populated ACAT (Automated Customer Account Transfer) forms for the new firm. Further, those clients cannot be contacted until the advisor has actually left the old firm.
An advisor was also allowed to send cards-known in the industry as "wedding announcements"-to clients with the news that he was moving to a new firm, and how he could be contacted. Adhering to The Protocol would override any contracts that the wirehouses might have made the advisor sign promising not to solicit clients when leaving the firm.
Although most independent firms are not signatories to The Protocol, anecdotal evidence suggests that in recent years wirehouses had not been suing advisors who left to go independent. Michaels says that has changed in recent months. Because of the slowing economy, the wirehouses are less likely to allow top producers to leave without a fight.
"If you're a million-dollar producer and you leave, you're getting sued if you don't follow The Protocol-period," Michaels says.
So, his advice is simple: Follow The Protocol carefully. If your new firm is not a signatory, you can still be sued, but it's your best defense-your old firm, as a signatory, should honor it.
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