Breakaway Brokers: What the Data Really Say
The actual figures are hard to track, since a significant number of breakaway brokers move into the dually-registered space, and affiliate with the myriad options in the independent broker-dealer community. In fact, many of the dually-registered advisors who affiliate with the independent custodians were, in fact, breakaway brokers from an earlier migration. When Scottrade Advisor Services CEO Brian Davis surveyed the advisors who were coming in his door, he found that roughly half were prototypical breakaway brokers moving from a wirehouse environment, and half were coming from the independent broker-dealer space. But when he looked deeper, he found that four out of every ten of the dually-registered advisors had been employed by full-service brokerage firms earlier in their careers.
"It's almost a phased approach," said Davis, "where they move to the independent broker-dealer model rather than jumping into the deep end of the pool immediately."
Perhaps more important than the actual numbers is the quality of advisors who are moving toward independence. Tim Oden, senior manager of business development at Schwab Advisor Services, agrees with Roame that there are two different categories of breakaway broker: those who are either forced out or encouraged to leave because their book of business doesn't meet the wirehouse's minimum production levels, and the larger teams. "The quality of advisors who are talking to us has been increasing each year," said Oden. "We are seeing seasoned, tenured, very successful teams, with very loyal clients coming in our direction," he says, noting that this is the type of broker who would have been impossible to dislodge five or seven years ago. Some, he says, are even paying back their retention bonuses in order to have the freedom to go independent.
"I think the wirehouses can downplay the breakaway broker trend by covering up the fact that they're losing advisors on one side as they bring in new advisors on the other," added Dorsey. "But if you were to strip out just the bigger teams and most experienced advisors, you'll find that they're leaving in droves."
Even more significant is a fundamental shift in the way wirehouse brokers now view the independent space. Some of this represents a new credibility in the space itself. "The independent market has gone from $1.3 trillion in assets to $2.8 trillion in 10 years," Oden pointed out. "When you look at the number of custodians who are spending the amounts of money they're spending, and the Hightowers and Dynasty Financials that have provided new options and alternatives to these teams, it makes the independent marketplace look a lot more attractive."
At the same time, brokers are getting more accurate information about life on the other side of the fence. "When somebody you know and respect, who you went through training school 20 years ago, tells you that he's gone independent and tells you why," Oden said, “that creates a lot of credibility."
This information cuts through some of the in-house propaganda that breakaway brokers say they have heard for most of their careers. "Historically, the wirehouses were successful at characterizing independent advisors as small fry who could not cut it in the wirehouse world," said Tibergien. But as some of their top-producing brethren leave for the independent world, brokers are gaining a new respect for the players in the independent space. Today, virtually every top producing brokerage team is now a phone call away from getting a better handle on what it means to go independent.
But are those in-house brokers picking up their cell phones? "We've been getting a lot of calls from brokerage teams who are interested," said Jim Pratt-Heaney, partner with LLBH Group Private Wealth Management, an SEC-registered advisory firm based in Westport, CT. "A big team from a different part of the country, with a very big brokerage firm, visited us yesterday," he reported. "We could be hosting one a day, I think, if we opened our doors to everybody."
"I can tell you, there are a lot of advisors in the brokerage environment who are contemplating this kind of decision," added Jim Maher, of Archford Capital Strategies, an RIA based in Swansea, IL. "There is a strong conduit of relationships there, and also a conduit of information and understanding."
Flexibility and meeting client needs
What are the breakaway brokers saying to their curious peers who still operate inside the wirehouse structure? LLBH's four partners have worked, during their careers, at E.F. Hutton and Smith Barney, and they thought they'd found a permanent home at Merrill Lynch's Private Banking & Investment Group. "We were all top producers when we moved over to Merrill, and our goal was to be able to focus on high-net-worth clients," says Pratt-Heaney. "We were at the top tier of what we wanted to do, surrounded by specialized people, and we found that we still couldn't deliver what our clients wanted. There were just too many restrictions."
After a year of planning, the team jumped ship in October of 2008, taking roughly $1 billion in client assets over to the independent space while the markets were delivering the scariest performance since the Great Depression. "We left in the middle of the storm, and it turned out to be just great," said Pratt-Heaney. "We just wish we had done it earlier."
The original impetus for the move was to better serve clients, and Pratt-Heaney says that goal was fulfilled on the independent side of the fence. "Our pledge to ourselves when we formed this business was that we were going to be painfully transparent," he said. "In the brokerage world, nothing was transparent. The question I dreaded most, literally, was somebody saying: how am I doing? How have I done since I've gotten here? We couldn't show our clients how we were doing across all their accounts. Today," he added, "we can show our clients their performance, what they pay for advice, for the assets under management and all the other costs."
Pratt-Heaney also thinks his clients benefit from the flexibility to choose among a broader array of service providers, plus the lower overhead on this side of the brokerage fence. "Now we can go to any firm, any desk, any money manager and get what we want; rather than have to pick off a list that somebody handed to us," he said. "The prices we can negotiate with managers, compared with what our clients were paying through Merrill, are the pure price, with nothing added on for the brokerage firm. We're able to get excellent pricing, and internally, we aren't losing 40% of our fees just on the production grid."
Many of those benefits were expected, but others were not. "I think our perception from the beginning was that it is a lot of work, leaving the wirehouse environment," said Pratt-Heaney. "But the reality is, there's a lot of work complying with what the brokerage firms want you to do. As far as SEC compliance, it is very clear-cut. If you just follow the rules, it's not that hard."
Beyond that, the independent side offered a measure of control over the service providers and tools on the desk that was missing in the captive environment. "When you're on the inside, you don't realize that there are competing vendors you can hire that do a fabulous job," said Pratt-Heaney. "And if they don't, you can fire them and get another vendor. You don't have to wait for the technology department to get around to making changes. You can establish an entire support system you need with people that you're clients of, rather than working for. That," Pratt-Heaney adds, "is not a subtle difference."
Other breakaway brokers are telling their former colleagues a similar story. Maher's firm is still in the process of moving clients over from Merrill, although he says that 95% of client assets are now in the pipeline. "I think the people who are most inclined to leave are the ones for whom it is most important to be able to provide multiple solutions," he said, "and the freedom to give their best advice, without a company agenda in the process."
Archford focuses on helping business owners prepare for transitions –including liquidating their firm or passing it on to the next generation – and Maher reports that he's now able to negotiate with a broader range of product and service providers. "Credit is an especially important piece of the puzzle," he said. "When you only have one vendor, versus many vendors that I can now freely shop with, it limits the help and advice that you can give to clients."
In his survey at Scottrade, Davis found these to be the common themes among advisors moving out of the brokerage environment. "Two-thirds of the respondents," he said, "decided to go out on their own for the flexibility to meet client needs better, and to make their own decisions."
Although most of the benefits they cite revolve around serving clients better, both Maher and Pratt-Heaney also talk about a part of the transition that they, themselves will benefit from down the road. "Today, for the first time, we're building equity with all our hard work, rather than just building income or getting some kind of up-front check," said Pratt-Heaney. "Now we own something, and that's a great feeling."
Tibergien thinks that stories like these, told often enough to enough brokers, could bring the brokerage industry to a tipping point. "When the Berlin wall went up in the 1960s, very few people, relatively speaking, escaped. But over time, enough did," he said. "They communicated with the people left behind about how much better life was on the other side, and eventually the wall came tumbling down. The reality," he continued, "is that once people leave the captive environment, they never go back."
So is this a trend, or isn't it? It's possible that both sides can claim to be right in this debate. When you look at the graph of any exponential trend – like, say, human population growth from the Roman era to today – the line runs along the bottom of the page for most of the graph, until suddenly it leaps almost straight up in the air. The brokerage firms, sitting on $5 trillion in assets, see the breakaway broker "trend" as a flat line and detect no existential threat.
But if you were to stop that same population graph at, say, the 1600s, and rescale it, you would see that the world's population was, indeed, growing rapidly from the perspective of a smaller base. The custodians and independent broker-dealers, whose asset bases are not nearly as large as the wirehouses', see a visible breakaway broker trend in terms of assets and quality of teams crossing the boundary between captive and independent.
Not only are they capitalizing on it, but they are encouraging it in every way possible. Pratt-Heaney reports that Pershing, its new custodian, had people living in a nearby hotel while LLBH set up its offices and went through the messy paperwork of transferring client funds. Schwab Advisor Services has given brokers who are looking to break away their own website, full of articles, white papers and other resources and an online calculator that helps them calculate their expenses inside and outside their current brokerage relationship.
TD Ameritrade, meanwhile, has created its own internal technology consultancy for breakaway brokerage teams. "Brokers come over to the independent side having used proprietary software, and when they see how many options they have, it's bewildering," said Dorsey. "Our technology folks walk them through the options with portfolio management, CRM, financial planning, web-based compliance systems, and it's like a traditional planning engagement," he added. "You sit down and listen to what they and their clients need, and what they need out of it, and then make some recommendations and let them choose what the best fit is going to be."
Both Tibergien and Dorsey report that their account transfer teams have experienced 90% success in moving client assets over, a number which both Pratt-Heaney and Maher think might be on the low side. Oden says that most of the breakaway teams will set a goal of moving 85% of their assets, but the actual numbers can be fuzzy – for an interesting reason. "Often, once they make the move, they find that they're able to consolidate assets that their clients had been diversifying with other asset managers," he says. "That increases their billable assets under management without increasing the number of clients." Privately, some breakaway brokers also report that they've won more than a few new clients who had been working with their former brokerage home – making the actual count of breakaway assets even harder to measure.
This dual viewpoint – trend/no trend – may be a blessing for the independent community, which can position itself inconspicuously as it poaches away the top talent from the brokerage world, luring them with the prospect of better serving their clients and the chance to build equity in their practices. Nobody really wants to awaken the sleeping giants while the move from broker to independent advisor is becoming easier than it has ever been. With the Protocol still in place, brokerage firms have gotten away from slapping temporary restraining orders on every departing broker, preventing them from contacting clients or transferring assets. Meanwhile, FINRA is in the early stages of requiring brokers to disclose any up-front incentives they receive from brokerage firms to stay put or move to another brokerage firm rather than toward independence.
Oden, who was the custodial representative most skeptical about whether there is an actual trend (he's open to the possibility that the breakaway broker phenomenon is simply a steady-state migration across the fence), recently surveyed a group of 40 advisors who had left the brokerage model. All of them had been on the independent side for two years.
Oden's team asked them a very simple question. "We asked all of them, would you do it again?" he said. "With everything you have been through, with all the hassles of setting up your own firm and everything, knowing what you know now, would you make the same decision to leave and go independent?"
The answer, he says, was yes. That is, 100% of the former brokers said they would make the move again. "We don't get 100% of anything around here," said Oden. He added, "When there is that much consistency, it sends all of us a message"
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