Morgan Stanley exec sees breakaway trend reversing

NEW YORK (Reuters) - Morgan Stanley Smith Barney President Charlie Johnston contends the "breakaway broker" movement is greatly exaggerated and eventually will go into reverse as advisers discover the rigors of independence.

Morgan Stanley (MS.N) and Citigroup Inc's (C.N) Smith Barney formed the largest U.S. brokerage last June, and like other major brokerages suffered a wave of defections. Hundreds of advisers decamped to rivals while a good number joined or launched start-up advisory firms.

Johnston said the movement has garnered a lot of press attention but inflicted little damage on his firm.

"This notion that we're losing all our people to independents is just factually wrong," Johnston told Reuters in an interview on Tuesday. "We lose very few people to the independent channel, and when we do the average gross tends to be below $300,000" a year.

Johnston's comments echoed those of his boss, Morgan Stanley Chief Executive James Gorman, and Bank of America Corp (BAC.N) global wealth management chief Sallie Krawcheck. The two largest brokerages, these executive said, saw attrition levels plunge in the latter months of 2009.

Defections among the top producers, in particular, fell to record lows during the fourth quarter, they said.

The comments contradict executives at Charles Schwab Corp (SCHW.N), TD Ameritrade AMTD.O, regional firms and boutiques who predict last year's break-away trend will continue. They say independent firms are increasingly attracting top producers frustrated by big-firm conflicts of interest and bureaucracy and lured by the higher fiduciary standards of an investment advisory firm.

Among the four largest firms, Morgan Stanley Smith Barney was hit hardest by the "breakaway broker" movement last year, with 3,241 brokers departing and just 1,393 being added, according to industry tracker Discovery.

Last month a Morgan Stanley Smith Barney team managing $500 million of assets in Purchase, New York, known as the Strata Group, quit to join HighTower Advisors, a Chicago company acquiring independent firms around the United States.

Morgan Stanley sued the team's five senior members to block their move. Johnston declined to comment on the suit, which is still pending in court.

Johnston played down the breakaway trend as one that largely involves brokers with lagging revenue production choosing to start their own firms rather than suffer in a brokerage's "penalty box" of diminished payouts.

He predicted many advisers will come back to the big full-service firms as they contend with the challenges of managing a business and navigating regulatory requirements.

"I think independence is always going to be a viable channel, but I think the pendulum swung way over, for a variety of reasons. Now, I think you're going to see it come back over here," he said. "It's a matter of do you want to manage clients or manage a business."

(Reporting by Joseph A. Giannone; editing by John Wallace)