Right now, defections to other firms aren't that common. But the big Wall Street firms could soon see an exodus of top-level brokers
The relatively few reporters and editors who cover the world of financial advisers probably share my view that wirehouses are like the communist bloc before the fall of the Berlin Wall.
Even in this age of open communication, the few remaining big firms try to exert total control over their reps. One small example: Should a reporter quote a Merrill or Morgan broker on even an innocuous topic — the mutual funds that clients like, for example — the rep will receive a strong dressing-down from the wirehouse's KGB-like PR department, which keeps a tight lid on who can and cannot speak for the Motherland.
Wirehouses are so afraid of defections that they discourage their brokers from mingling with brokers from other firms. They also broadcast subtle and not-so-subtle propaganda about independent firms, implying that indies are second-rate, provide fewer resources and attract loser-type reps.
Like Moscow in the days of the hammer and sickle, when select world-class musicians and athletes were allowed to visit the West to showcase communist accomplishments, wirehouses permit a few of their elite brokers to mingle with the outside world in safe settings. At meetings of the Investment Management Consultants Association, for example, the mostly wirehouse crowd is allowed to come into contact with top-ranked independent brokers and RIAs since the focus is on investing, not practice management or other subjects that would shine an unflattering light on wirehouse rigidity.
One final analogy: The captive/wirehouse bloc may overpower the free world of independents and RIAs in terms of asset and broker count, but the indies are catching up in the arms race and excel at innovation and nimbleness.
Until now, even among top-tier brokers who see through their firms' propaganda and recognize the restraints, most have been unlikely to leave. After all, because they are big producers, the firms generally leave them alone to do their business in any way they see fit; the brokers have prestige and honor as members of the chairmen's circle and similar recognition programs; their payouts, while lower than what they would receive if they were independent, are offset by the firms' high level of service; and their business cards carry the impressive name of a big Wall Street firm.
Well, say good-bye to all that.
More and more of the big firms' best brokers are looking at the total equation and determining that the wirehouse value proposition just doesn't add up for them anymore. Here's why it doesn't and why more and more top reps will be leaving.
With wirehouses now part of organizations more gigantic than ever, the retail business has become less significant. To be sure, the people running the show at big firms now have never been advisers or paid more than lip service to the needs of advisers. Retail is certainly less profitable than credit cards and auto loans, which are far more important to the wirehouses' parents than is the retail-securities business.
As a result, top brokers are more kings of anthills than mountains, which makes a wirehouse home much less emotionally satisfying — not to mention less financially satisfying, since the value of company stock is so much less than it used to be.
Wirehouse names also have been seriously tarnished. More than just the regular reputation damage that comes when investment bankers or traders or researchers periodically run amok, the latest financial crisis has revealed the big Wall Street firms to be virtually bankrupt financially, ethically and managerially. What value comes from being associated with organizations that clients and potential clients don't hold in high esteem anymore?
The top brokers' wealthy clients now are even worried about the safety of their money at wirehouses. A Charles Schwab, TD Ameritrade, Bank of New York or Northern Trust sounds like a lot better place to park one's assets than a company that's a ward of the federal government.
Since the ties that bind top brokers to the wirehouses — prestige, money, loyalty, products, technology — are frayed, non-existent or no longer relevant, there's little other than inertia and possible contractual obligations keeping those brokers there. If there's any change for the worse in the tenuous status quo, watch the exodus begin.
