October 3, 2008 / 3:58 PM / in 9 years

Some advisers opt to break ties with brokerages

By Bob Margolis - Analysis

NEW YORK (Reuters) - In a typical week, Scott Dell‘Orfano, executive vice president of Fidelity’s Institutional Wealth Service, would meet with three or four teams of financial advisers coming into his Boston office.

But on a recent rainy Wednesday, he met with four groups before noon.

More brokers are considering moving from a big brokerage house to set up their own shop and aligning themselves with a custodial firm such as Fidelity, the big mutual fund firm.

While the adviser teams -- numbering anywhere from three to a dozen -- are just kicking the tires and considering whether to leave a big firm for greener pastures, the number of visits has intensified lately.

“We have been seeing a trend in top producers researching and setting up their own shop in what three years ago was a fairly unknown space -- that being the RIA (Registered Independent Adviser) model,” Dell‘Orfano said.

Fidelity said last week that 55 “breakaway brokers” -- a term used to describe advisers or brokers leaving a large company to set up independent shops -- selected the company as the custodian for their newly established independent firms during the first six months of 2008.

The newly independent firms brought more than $7 billion in assets through July 1, more than double the assets from new breakaway clients during all of 2007, according to Fidelity.


In recent weeks, especially during the past two weeks of extreme market volatility, consumers have increasingly picked an adviser based on the individual rather than the company affiliation, according to consultants.

“Not so long ago, guys used to lead with their card,” said Dan Bernstein of Market Counsel, a regulatory consulting firm. “ But now, that just creates more anxiety. It’s like leading with your chin -- a bad idea. A client can easily say ‘If you guys can’t handle your own balance sheet, what about mine?'”

In recent months, Bear Stearns was bought in a fire sale by JPMorgan Chase & Co (JPM.N), Lehman Brothers LEHMQ.PK filed for bankruptcy protection, and Merrill Lynch MER.N is being bought by Bank of America (BAC.N).

Whether that trend will last remains an open question.

“I‘m not sure the levee has broken, maybe it’s just an overflow,” said Mark Tibergien, chief executive of Pershing Advisor Solutions, a firm that has met with over 100 teams of advisers formally affiliated with a big firm over the past two weeks.

Schwab Institutional, a unit of discount brokerage Charles Schwab Corp SCHW.O that provides a corporate roof for breakaway brokers and their assets, said it saw an unprecedented 200 percent spike in inbound call volume from brokers interested in going independent between September 15 and September 19.

The $9.4 billion in net new assets that came into Schwab from newly independent advisers in the first half of 2008 is more than triple year-ago levels and has already exceeded Schwab’s total of $9.2 billion in net new assets from this group in year-end 2007.

“It’s a great time for us, and just continues to head in the RIA direction,” said Bernie Clark, senior vice president of sales and relationship management at Schwab Institutional.

“The lion’s share of the calls we are getting from brokers looking to set up their own shop center around being tired of seeing clients being bought and sold on Wall Street over and over again,” he said.


    Advisers no longer risk losing big-paying compensation packages, so more of them see this as the right time to leave a parent company.

    “The cost of getting out of those handcuffs isn’t that high anymore, since a lot of high-end advisers were paid through deferred compensation tied to the company’s stock,” said Sanford Bernstein analyst Brad Hintz.

    “The decline in stock prices at the big firms like Morgan Stanley (MS.N), Wachovia WB.N and the demise of Bear Stearns means if you as an adviser had any indie bias, now the opportunity costs are much lower.”

    Merrill Lynch & Co Inc, which includes the world’s largest retail brokerage, denied any unusual exodus of advisers in the wake of its agreement last month to sell itself to Bank of America Corp.

    “As always, recruiting and retaining quality advisers are top priorities for Merrill Lynch,” said a spokeswoman, Selena Morris. “We continue to attract advisers and our turnover rate is near an historic low.”

    Wachovia Corp WB.N didn’t immediately return phone calls seeking comment. Wachovia said on Friday it agreed to be purchased by Wells Fargo & Co (WFC.N), just days after it signed a government-brokered deal with Citigroup Inc (C.N).

    Rudy Adolf, president of Focus Financial Partners, a consulting firm that works with independent brokers, said brokerage firms can no longer justify the hefty percent of an advisers’ take-home compensation, which can be as high as 60 to 70 percent of a client’s assets.

    Clients would be the biggest beneficiaries of more independent financial advisers, he said.

    “Dealing with a large firm like a Merrill, is like going to a Ford dealer. No matter what, you are sold a Ford product, good or bad.”

    Editing by Jeffrey Benkoe

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