The wall around the wirehouses

In one of my recent OpINion Online columns, I compared wirehouse management to communist regimes before the fall of the Berlin Wall. That line won't win any awards for diplomacy, but I was trying to make the point that big firms muzzle their representatives to control their public utterances and discourage reps from mingling with other financial advisers lest they entertain thoughts of leaving. I also said that as the reputation of big firms comes under increasing attack, more wirehouse reps are likely to leave. As you might expect, advisers wrote back, saying that I am biased against wirehouses. One noted that the independent channel is populated by wirehouse castaways; most of the brokers at wirehouses are productive, top-flight reps who remain there, he said, because they want to continue advising clients and not be bothered with running their own businesses. That point about productivity is true. As InvestmentNews reporter Dan Jamieson notes in a story on Page 25, wirehouse brokers are about six times more productive on average than independent brokers when looking at assets under management. But let me explain my argument and acknowledge the criticism. As those of us in the press know, asking a question of a big-firm broker is an exercise in futility because wirehouse reps aren't permitted to speak freely. Part of that control is understandable because broker-dealers are so heavily regulated; compliance requires that any statement that possibly can be interpreted as a sales message be vetted. But part of the reason for keeping brokers under the corporate thumb is just the nature of command-and-control management at big companies. Above all, wirehouse reps are employees, not free agents, and heeding management comes first. (That hints at the issue of rep as fiduciary, which is a subject for another column.) As far as keeping reps from mingling with others, wirehouses would probably say that they provide enough education in-house and that reps should be out meeting prospective clients and gathering assets, not talking shop with other reps. I would argue that professional betterment is a good thing, in and of itself. If reps were viewed as financial professionals, not as members of a sales force, sitting next to a registered investment adviser or independent rep at a neutral gathering wouldn't seem so threatening. Finally, I said that more wirehouse reps are likely to leave in the future, noting that the reputations of the firms have become tarnished and because traditional wirehouse culture, which many brokers find attractive, has eroded due to bank ownership. Although that is true, I probably overdramatized those points (especially given the public's shorter-than-ever attention span) and underplayed the forces keeping wirehouse brokers in place. The strongest tie that binds reps to wirehouses is money. After the value of the stock in their deferred-compensation plans tanked, wirehouse brokers received hefty retention bonuses that will tie them to their firms for some time. The second-strongest tie is money. For many million-dollar producers at wirehouses, going independent won't dramatically increase their net pay. If the broker and clients are relatively happy, why go through the hassle, especially if the wirehouse deal still works? As long as brokers continue to gather assets, steer clear of the not-so-wealthy and don't mind the constraints, they will have a big name on the door, lots of resources and no worries about rent or copying machines. Those who want more freedom will go independent — but probably not to the degree that I thought, because I tend to underestimate inertia. The ultra-high-producing reps at the top of the wirehouse food chain are a bit of a different story. Members of this elite group are so rare, so productive and so difficult to grow in-house, that wirehouse managers pamper them with service and leave them alone to do whatever lucrative business they are into — whether it is managing the portfolios of wealthy individuals, selling retirement plans or serving as mini-investment bankers. It is probably these top guys who most worry wirehouse management. Despite their good deals, a small number of them are setting up their own RIA shops to monetize their franchises, do better for their clients and run their own show. Given their perks, don't expect an army of these top guys to storm through the wirehouse walls anytime soon. But the trickle of defections is likely to continue over the coming years and may increase. I guess you might say that the wall isn't falling, it's just getting more porous. Evan Cooper is the deputy editor of InvestmentNews.