Talk about an exodus. In 2009, in the wake of arguably one of the biggest financial crises this country has seen since the Great Depression, over 3,000 financial advisors left Merrill Lynch, UBS, Morgan Stanley and Wells Fargo to start life over at an independent broker/dealer or RIA firm, according to data provided to Registered Rep. by Meridian-IQ*, an independent research firm that used SEC data to tally results. That's about 6 percent of the total wirehouse FA population.

Some of them left because they were shown the door by their firms for lackluster production. Other FAs scrammed after Merrill was forced into the arms of Bank of America and Wachovia was scooped up by Wells Fargo, because they doubted their employers financial stablity, or chafed against the idea of bank ownership. Many were devastated by the loss of value in their stock options, which wiped out more than a few retirement nest eggs. Still others had long wanted more control over product selection, hiring and pricing and decided the market crash was the perfect catalyst to start fresh. It was a recruiting bonanza for independent broker/dealers and RIA aggregators and custodians, and some began to predict the demise of Wall Street's retail brokerage model.

“Going independent” was nothing new, of course. Plenty of advisors made similar moves (though in much smaller numbers) in the preceding decade and had already earned themselves a nickname — breakaway brokers. But in 2008-2009, the world was turned upside down, and it was easy to imagine that all the old models were defunct.

The thing is this: While the trend is real, and 6 percent is significant, today the breakaways represent more of a trickle than a flood. In fact, the number of FAs leaving the wirehouses to go independent declined dramatically in 2010 and the first half of 2011 at most firms, Meridian-IQ data show (See “The Indie Route” at right). At Merrill Lynch, for example, the number of FAs going independent dropped from around 1,000 in 2009 to around 350 advisors last year, and that represents just 3 percent of the firm's cherished thundering herd of financial advisors. Only at Morgan Stanley, the number of breakaways hasn't declined much since 2009, remaining steady at between 3 percent and 4 percent of headcount a year over the past three years. (Morgan, which has over 17,000 FAs, says Meridian's tallies are high, but declined to offer its own numbers).

“It's clearly in the independents' advantage to create the perception that, ‘Hey, everyone is doing it,’ but the numbers just don't bear that out,” says David Lessing, chief operating officer of wealth management at Morgan Stanley Smith Barney in the U.S. “There have been a few instances in last 10 to 15 years in which people have suggested that there was some existential threat to the wirehouses. The first was online brokerage. That didn't bear out to the extent suggested. The second was the supposed aging of our client base, which actually has been offset by our continued ability to attract new clients. The third is this exodus to independence, which has been talked about more than it's actually happened,” he says.

Or as Philip Palaveev, president of Fusion Advisor Network, once put it, “It's a lot like teenagers and sex. There is a lot of talk but little action.” Fusion is a consultant to a network of independent RIAs.

Loosening Handcuffs

A number of RIA industry executives, consultants and analysts, including Nexus Strategy CEO Tim Welsh and Aite Group analyst Alois Pirker, predict another giant wave of breakaways will begin early next year, when big portions of the retention contracts that were awarded a few years ago will be forgiven.

A survey from Aite Group that got 75 responses from wirehouse advisors suggests there may be about 550 top advisors at Merrill and Morgan who are currently locked in by retention packages and are more than 50 percent certain they would like to switch to an independent firm in the next 18 to 24 months. That's about 2 percent of all financial advisors at each firm, but it represents at least 4 percent of overall revenue, according to Aite's calculations. The biggest reason given for wanting to break away: a higher payout (22 percent). The second biggest was “uncertainty at current employer” (16 percent).

“We believe that 2012 could be a landmark year in potential breakaway volume,” says Pirker. “But we need to see what the wirehouses are going to do about it, and we are going to see who actually moves because ultimately [these FAs] still need to pull the trigger.”

Some FAs tell us about friends who are just waiting for the contracts to expire to make their moves. “I know people who just took a check and wish they could give it back,” says Scott Bell, who worked at Morgan Stanley for eight years. He left in July of 2008 and now manages about $50 million with an RIA called Gross Domestic Product Inc. that he runs with two other advisors in California. But there's a difference between wanting to move and actually making the leap. “Some people are lazy, some people are trapped,” says Bell. “It's scary to go independent. It's like unplugging from the matrix.”

It's definitely not just golden handcuffs that are keeping FAs in their seats. The reality is, the number of UBS and Wells Fargo brokers departing for indie firms has also fallen dramatically, and neither firm offered retention — in the first half of 2011 defections to indie firms from each sat at around 2 percent of headcount. Sure, Wells and UBS didn't have the kind of mortgage trouble that Merrill and Morgan did, but they faced other complications. Wells had the acquisition of Wachovia to digest, and such deals are always fraught with attrition risk. UBS was plagued by tax evasion scuffles between the IRS and the Swiss government, as well as auction rate securities litigation, and more recently a scandalous $2.3 billion trading loss and the subsequent resignation of CEO Oswald Grubel.

He Said, She Said

Ultimately, it's the assets and revenues that matter most to firms on both sides of the divide, rather than the headcount. “Three percent isn't something to worry about generally, but which 3 percent?” asks Nexus Strategy's Welsh. “If it is your best advisors, then you should be very concerned. Also, if that is long-term shrinkage, then you are not growing, you are losing market share and will go the way of the auto industry.”

According to Cerulli Associates data, the wirehouse channel's market share of assets will decline to 35 percent in 2013 from 40.1 percent today. Meanwhile, Cerulli estimates the RIA industry's market share of assets will climb to 14 percent in 2013 from 12.4 percent. Dually registered market share is seen flatlining at 7.3 percent.

The wirehouse firms offer only production numbers, not assets, corresponding to the advisors who have left them to go independent. Morgan Stanley's David Lessing, for example, says the average FA the firm loses to independence (RIAs and IBDs) generates about $370,000 in annualized revenue, about half the firm-wide average of $785,000. Morgan has been pushing lower-end FAs out the door of late anyway, according to earnings reports. Likewise, Merrill's Tom Fickinger, head of financial advisor strategy, says the average FA who leaves Merrill to go independent generates $220,000 in annual revenue.

Merrill says how much a breakaway manages in assets is a moot point anyway, because the firm keeps about 50 percent of client assets when an advisor leaves. But a 2010 Aite Group survey suggests AUM retention by departing FAs might be higher, at least industry-wide: Fifty percent of wirehouse breakaways surveyed said they took 75 to 100 percent of their book of business with them.

Then there are the RIA recruiters, aggregators, custodians and even independent broker/dealers that say the breakaways they're recruiting today have more assets than ever. Fidelity Institutional, for example, says average breakaway team assets recruited rose to $98 million during the first half of 2011, up 38 percent versus last year; so far this year, the custodian has picked up 10 breakaways with over $250 million. But it's hard to get clean comparisons because these “breakaway” numbers include FAs from independent broker/dealers as well as wirehouses.

It may be that in 2009, the exodus consisted primarily of a large number of smaller-end advisors who primarily left to join independent broker/dealers, whereas today it's mostly a smaller number of larger FAs going to RIA aggregators or custodians. UBS was willing to agree that the FAs who consider the RIA model tend to generate significant revenue. “Anyone thinking about going to an RIA has to be substantial. You've got to be a $1 million plus producer,” says Paul Santucci, COO of UBS' wealth management Americas group. Santucci also believes that the model will always hold attraction for some advisors. “It's a fantastic alternative, but at the same time, once you're entrenched at a wirehouse, a firm with tremendous tools and resources, sometimes it's hard to back out and say, ‘I can start my own business, and find all the tools and resources from different places.’”

The biggest threat seems to come from firms like HighTower and Focus Financial, which have had great success attracting teams with over $1 billion in assets with their offers of equity, upfront cash, wirehouse-like support and the flexibility to run one's practice independently. “The way we describe this is we solve for the brain damage that comes with running your own business,” says HighTower managing director of recruiting Mike Papedis. The equity RIA firms can offer may be especially attractive, given the depressed values of Wall Street firms' share prices. But Merrill and its wirehouse rivals counter that they now offer succession planning programs that allow retiring FAs to cash out in other ways.

Stacking Up: RIAs versus Wirehouses

Pirker says to protect themselves against more mass defections, the wirehouses could either offer up more bonus money to existing FAs, or even, eventually, roll out their own independent platforms. The latter has worked for Wells Fargo and RBC. RBC has no cap on who or how many advisors can make the switch, and neither firm has seen mass defections to the indie platform. RBC executives say the economics are exactly the same on the independent and the full-service sides of the business in any case, according to Pirker.

But ultimately, the wirehouses say that FAs going indie is simply not a big worry for them. In fact, more FAs who leave a wirehouse go to another wirehouse than go independent, Meridian-IQ numbers show. “What makes us attractive to larger producers is the quality of our managed money program, the quality of our dedicated capital markets business, the quality of our intellectual capital and investment advice,” says Morgan's Lessing.

Merrill, meanwhile, claims it has greater resources than any of the independents, including a 30-person research division that does nothing but due diligence on new money managers. Tom Fickinger, head of advisor growth and development, says Merrill also does a better job helping FAs grow than any of the independents. Plus, indies don't have access to the kinds of banking products Merrill advisors now have through Bank of America, including lending, deposits and safe alternatives, he says.

“The wirehouse space is the best oiled machinery out there,” agrees Pirker. “If you are keen to grow a practice you can probably do it best in the wirehouse segment.”

On the other hand, you do have less flexibility to run your business the way you want at the wirehouses, say analysts and former wirehouse advisors. The compensation grids may not favor certain products, but they do favor high-net-worth clients. And while financial advisors can't get incentives to sell in-house products, branch managers, regional directors and product wholesalers do, says Bell. FAs feel some pressure, however subtle.

Bell left Morgan, he says, because he was tired of the firm constantly tweaking and changing the rules on products, compensation and focus and tired of apologizing for things he had nothing to do with. But the last straw was when he realized he got paid nothing to advise his clients to go to cash in 2008, which was the best advice he'd ever given them, he says. “The advice business can be really profitable if you run it right. I had to ask myself, ‘Am I going to build a business where I control most of the moving parts and make more money, or take a check and grin and bear it?’”

There may be a contradiction inherent in the independent RIA model, however. Ultimately, wealth management is a game of scale. If you don't have the assets, it's harder to get some money managers to pay you any mind and it's harder to cut deals with custodians and other service providers. “The whole roll-up idea is about scale,” says Pirker. “Things don't happen overnight. A fully built rollup firm can rival a wirehouse, but it will be a while.” Even HighTower is not there yet, he says.

But once small independent RIA shops become behemoths, what happens to the independent spirit? Some boutique RIAs have gotten so large that high-powered advisors who work there are “breaking away” to aggregators, as a Convergent wealth executive did when she recently left for Focus Financial Partners. “At some point, the label ‘independent’ doesn't apply anymore. Instead they become large corporate organizations,” says Palaveev.

There's also the little matter of Dodd-Frank. Will new regulatory standards and compliance hurdles make independence too costly and eliminate the fiduciary advantage that so many RIAs use to market themselves to clients?

Says one former wirehouse advisor now RIA who preferred to remain anonymous: “I'm talking to some people [at an RIA aggregator] about joining up, because the regulatory stuff is becoming onerous and if FINRA does really become the regulator that's just going to be a nightmare for the RIA community.”

There's no question it's a difficult time to work at a Wall Street firm. In recent months, both Merrill Lynch and UBS have weathered further storms, which have crushed stock prices and resulted in virulent rumors in both cases that the wealth management operations would be put on the block. All this amid an environment of growing hostility to Wall Street from certain segments of Main Street, embodied by the “Occupy Wall Street” movements. (See related story on page 112).

As one UBS advisor told the magazine, “It's just exhausting. You're walking around with a target on your back. There's so much reputational damage caused by being associated with Wall Street.”

And yet, that same UBS advisor said he has no plans or inclination to leave. He doesn't want to start over and neither do his clients. They like the comfort of a big brand, he says. And then he says something else: “It comes down to money. If someone has a practice that's big enough, or can afford not to get paid, they might go independent.”


*This magazine's parent company Penton Media is an investor in Meridian-IQ.