Breakaway Brokers: What the Data Really Say
During the recent Tiburon Summit meeting at the Ritz Carlton Hotel in New York City, Tiburon CEO Chip Roame created a controversy among the C-level executives in attendance. In his "state of the industry" opening remarks, he said that he was not able to identify a visible trend of breakaway brokers leaving the wirehouse world.
The logic, fleshed out in a series of email messages, boils down to this: Tiburon has calculated that large brokerage firms, in aggregate, lost $27.1 billion in breakaway assets in 2010, $32.8 billion in 2011 and $64.9 billion in 2012. On the surface, that is a strong trend. However, of that 2012 figure, $35.9 billion represents assets moving from one brokerage firm to another. Tiburon estimates that last year, regional brokerage firms received a net $9.7 billion in assets from brokers on the move. Add it up, and only about $19.3 billion actually "broke away" into the independent space.
"Mathematically, this is a small drop in the bucket compared to the $5 trillion that is managed by the wirehouses," said Roame. "Even if we somehow missed half the moves out there, it is less than two percent attrition. That seems," Roame continued, "like natural business to me."
When you try to count actual numbers of departing brokers, the mathematics get messier, since each year the wirehouse firms hand out thousands of pink slips to brokers who aren't meeting their sales quotas – even though many of them are good potential customers to firms in other channels. "A broker with $20-$30 million is exciting to receive [for independent BDs and custodians]," said Roame, "but we have to remember that the wires fired them, not lost them."
A phone call away
For the past 15 years, and especially since 2008, few assumptions have been accepted as widely or confidently in the financial services world as the idea that brokers are leaving the wirehouse environment in increasing numbers – and taking their clients with them. Underlying that assumption is another: that the trend is accelerating, and will continue to do so until the brokerage industry's retail footprint has been severely diminished. The more extreme projections see the entire brokerage asset gatherer/sales model following Lehman, E. F. Hutton and Bear Stearns into extinction.
But is this true? Is it possible that the pundits who talk about the "breakaway broker trend" are simply misinterpreting white noise? Is it possible that thriving firms like Hightower Advisors, Washington Wealth Management and Dynasty Financial Partners, whose business models are centered on attracting breakaway brokers (and their assets), are just picking up random scraps off the brokerage table? Is it simply coincidence that rollup firm Focus Financial has, for the first time, created a recruiting team exclusively devoted to breakaway brokers? Seemingly every few weeks we hear about another large team moving from Morgan Stanley, Bank of America Merrill Lynch, UBS and others to independence. Are these all random data points allowing competitors to the wirehouse business model to engage in wishful thinking?
If you look at the numbers from the perspective of the brokerage firms, it's hard to see any trend at all. Roame's slide deck from the Tiburon Summit argues that the erosion of wirehouses and regional broker-dealer market share has stabilized over the past few years. He estimates that the two groups, together, held 62% of all assets under management in 2007, falling to 60% in 2008, then to 58% in 2009. Since then, Tiburon's estimate of their combined market share has held steady at 57% through the end of 2012. Cerulli Associates has estimated that the brokerage industry's share of total assets under management (its calculation does not include the regional brokerages) fell from 47.8% at the end of 2007 to just over 41.1% at the end of 2011 – a faster leak, but the consultancy has estimated that their overall share is stabilizing at around 40%.
There is evidence that some of the brokerage firms are actually gaining ground. Recently, the industry press reported that UBS Wealth Management added 93 advisors and experienced net new money inflows of $22 billion, while Wells Fargo Advisors saw its advisor numbers increase by 1% and client assets by 7%.
However, if you look at the trend through the eyes of the recipients of the breakaway brokers, you see a different picture. "I strongly disagree with the idea that there is no trend," said Mark Tibergien, president of Pershing Advisor Solutions (PAS), which services larger independent RIA firms. "We currently have in our funnel 150 teams from employer-based investment firms and banks, representing over $30 billion of AUM." Compared with PAS's total AUM estimated at about $106 billion, this is a significant figure.
Pete Dorsey, managing director of institutional sales at TD Ameritrade, says that while the numbers may look small to the brokerage firms, the flow of brokers and assets is accelerating. "The growth has been somewhere around 25%, year over year, for the last couple of years in a row," he said.