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* Easy money may have been made at boutiques
* Big firms willing to use their balance sheets again
* Some professionals still looking to move to boutiques
NEW YORK, Feb 25 (Reuters) - Wall Street's prodigal children are coming back.
Salespeople and traders who moved to boutique banks in 2007 and 2008 are returning to major sellside firms, or trying to, after finding that earning money at small shops is harder than it used to be.
The talent drain from boutique banks, particularly trading boutiques, could force many small firms to scale back their ambitions or go out of business all together.
"For small firms, it's survival of the fittest. Margins have shrunk and the larger firms are taking a larger share of the pie again," said Rob Weinstein, partner at boutique investment bank Lighthouse Financial Group in New York.
Margins for trading boutiques are shrinking with good reason. The biggest banks were reluctant to hold securities in their inventories for much of 2007 and 2008, forcing them to sell securities within moments of buying them from clients.
When major banks were holding minimal inventories, small boutiques with little capacity to own bonds could suddenly compete. The potential profits were enormous, particularly on the fixed income side, as the prices at which securities could be sold to clients rose dramatically relative to the prices at which securities could be bought.
Boutiques mushroomed -- Alan Guarino, a recruiter at Korn/Ferry, estimates that 150 firms were formed in the months after Lehman Brothers failed in September 2008. Salespeople and traders moved from major banks to boutiques in droves.
Regional banks and brokerages -- ranging from Stifel Nicolaus (SF.N) to U.S. Bancorp (USB.N) -- also staffed up, adding fixed-income trading operations and other businesses.
But many professionals that joined smaller companies or started their own are having second thoughts now. The profusion of new firms left some of their clients exasperated, making it harder to trade.
Said one salesman who had gone to a boutique and then back to a larger sell-side bank, "accounts are annoyed with how many people are calling them all the time."
Buysiders said they are willing to talk to a boutique if the firm has some advantage over large firms, like better information about unusual assets. Many investors say boutiques with a good niche can win a lot of business.
But one East Coast bond fund manager said salespeople at smaller firms often cannot provide better service or information than employees at big firms.
One part of better service is a bank's willingness to buy large blocks of securities and hold onto them if necessary, investors said.
EARNING YOUR KEEP
Beyond the business forces in play, there are often cultural issues for professionals moving to boutiques traders and bankers said. Small firms often have fewer resources in the way of administrative support.
Many bankers that have moved to boutiques have found that smaller firms demand what can politely be called a more entrepreneurial mindset, or less politely, the willingness to do more of one's own grunt work.
"People in large institutions often complain about the bureaucracy. When you work at a boutique, you don't have the bureaucracy and it can be rewarding, but you also have to earn your keep every day," said Marino Marin, an investment banker at boutique brokerage and investment bank Laidlaw & Co.
Getting hard statistics to document this trend is difficult, but with just a few phone calls, Reuters found at least half a dozen traders or salespeople that had made the move from large banks to boutiques and back to large banks.
Big banks are hiring enough employees that some small boutiques are struggling to find talented employees, or to hold onto them.
"The market is very hot. People are paying money that I think is hard to justify," lamented one senior equity derivatives professional at a boutique.
Losing professionals only adds to the other pressures that boutiques are facing now. Pali Capital, a boutique bank founded in the 1990s, said earlier this month that it plans to close after failing to find a buyer. [ID:nN16225533]
Legal conflicts were at the core of Pali's inability to sell itself, but the departure of numerous professionals did not help.
For some people on Wall Street, boutiques are still an attractive option. Large banks may be saddled with restrictive regulations in coming years that translate into lower compensation for many employees.
The Volcker Rule -- which limits banks' trading their own funds -- seems likely to be heavily watered down if it ever becomes a law, but many traders fear that regulation will turn major banks into what are essentially stodgy utilities.
Wall Street firms pay out a large portion of their compensation in shares these days, while boutiques often pay in cash. The future value of shares is highly uncertain now.
"Some people are very disgruntled with the politics and the overbearing compliance and HR functions at some of these shops, so they'd rather go to a smaller firm," said Gary Goldstein, founder and chief executive of search firm Whitney Group.
But many employees at boutiques are disgruntled. One senior trader at a major hedge fund said, "If I could hire a lot of people now, I'd go shopping at the boutiques." (Reporting by Dan Wilchins and Elinor Comlay. Editing by Robert MacMillan)