Two surveys support idea of a wirehouse exodus

Two recent surveys lend credence to suggestions that the Wall Street meltdown may drive more financial advisers to independent firms from wirehouses. Following the September filing for bankruptcy protection by Lehman Brothers Holdings Inc. of New York and Charlotte, N.C.-based Bank of America Corp.'s agreement to purchase Merrill Lynch & Co. Inc. of New York, there was talk that many wirehouse advisers would escape to the registered investment adviser and independent-contractor brokerage models (InvestmentNews, Sept. 22). In "The Fidelity and National Financial Broker Attitude Research," a report released last month by Boston-based Fidelity Investments and its clearing unit, National Financial Services LLC, 36% of brokers said that they had considered either starting their own firm or joining an independent broker-dealer or RIA. "Advisers are looking at the brand that they are associated with and they want to make sure that that company will be there for the long term," said Sandra Metraux, executive vice president of National Financial. "People are going to switch channels based on a long-term perspective," she said. "But I don't think anyone is making any short-term decisions." In "Cerulli Quantitative Update: Advisor Metrics 2008," released last month by Cerulli Associates Inc. of Boston, 65% of wirehouse advisers said that they would prefer to become independent if they had to make a move. Some 33% indicated that they wanted to become an independent broker-dealer; 32% preferred joining an established RIA; 19% indicated that their first choice would be another wirehouse, 11% said they would rather work for a regional broker-dealer and 5% said they would go to an insurance agency.

NO GOLDEN HANDCUFFS

"Even before the collapse of Lehman Brothers, advisers at wirehouse firms were yearning to become independent," said Scott Smith, a senior analyst at Cerulli. "Now that the golden handcuffs are gone and forgotten, the unassailable image of the [wirehouses] may not be working in the favor of advisers in some cases." The findings of the surveys are "not particularly surprising," said Louis S. Harvey, president of Dalbar Inc., a financial services market research firm in Boston. "It is a wake-up call to the wirehouses to see what they are going to do in response to this potential exodus of reps that is sitting on their doorstep," he said. "After all that firms have been through, they have to come up with a more effective business model and they need to work with more-free-spirited reps that want to stay in the business but don't want to be stuck to old wirehouse policies." The surveys are ahead of the actual movement that we will see from brokerage firms, as people are becoming very careful in their analysis of where they will move, said Lee Dolan, a principal and national sales director at Brinker Capital in Berwyn, Pa., who noted that there will be a three- to six-month lag between the time that a wirehouse rep starts considering a move and when he or she actually does it. Among those who choose to move, the younger advisers and smaller producers will likely move to independent and registered broker-dealer firms, he said. The senior advisers, said Mr. Dolan, will get deals at larger firms because recruitment incentives still exist for advisers and million-dollar offers are still out there. One wirehouse industry expert concurred with the findings of the survey, but said it doesn't spell the downfall of the wirehouse model. Advisers have a stronger interest in moving to the independent broker-dealer or RIA model, said Danny Sarch, founder of Leitner Sarch Consultants Ltd., a broker recruitment firm in White Plains, N.Y. He noted that the increase in reps' movement away from the wirehouse business has been dramatic. However, Mr. Sarch questioned the surveys' finding that a flood of advisers are moving to the wirehouse model and said it remains to be seen if many of them have the "ability or gumption" to be independent. He said that while the tendency to move away from the wirehouse model is increasing and the big-firm model may be tarnished, it is not disappearing. E-mail Aaron Siegel at asiegel@investmentnews.com.