More Brokers Flee Big Firms, Taking Investors With Them
By E.S. BROWNING
financial advisers are gaining ground from Wall Street brokers in the
competition to manage more than $5 trillion in Americans' savings.
The ranks of brokers at major Wall Street firms have been shrinking,
along with those firms' share of the retail-investing market. At the
same time, independent advisers are growing in number and market share.
The financial turmoil of the past 18 months is fueling the shift.
Shaken by the collapse of some Wall Street firms and the tarnished
reputations of others, more big-firm brokers are breaking away to
manage money on their own, taking clients with them.
Sharkey, Eric Thurber and Fred Molfino, who oversaw $740 million in
business at Morgan Stanley Smith Barney, left in August to set up Three
Bridge Wealth Advisors in Menlo Park, Calif. Many clients followed.
Thurber and two associates, who oversaw $740 million at Morgan Stanley
Smith Barney, set up their own business in August. Many clients
After the collapse of Lehman Brothers in the fall of 2008, Mr.
Thurber says, "we realized that we could be at risk" even at a major
Boston research firm Cerulli Associates last year projected that
brokers leaving major firms would take $188 billion in client accounts
with them in 2009, the first year Cerulli has tried to measure that
movement of money. Cerulli expects the trend to continue this year.
Other data suggest that big firms saw money flow out in 2008, too.
Financial statements from the biggest brokerage firms, including UBS AG and Bank of America
Corp.'s Merrill Lynch Wealth Management, show a collective net outflow
in 2008 of about $20 billion in client money, counting both money
removed by departing brokers and money withdrawn by clients whose
brokers didn't leave. Those figures reflect client actions, not market
gains and losses.
The big firms say they are poised to rebound and that they wanted to
push out many of the departing brokers because they weren't bringing in
as much profit as others. "The majority of departures have been people
with below-average revenue production," says a spokeswoman for Morgan
Stanley Smith Barney.
Major Wall Street firms still handled 48% of the money from
individual investors under management at the end of 2008, while
independent advisers handled 19%, according to Cerulli. But Cerulli
forecasts that by 2012, the big-firm share will be down to 41%, while
the independent advisers' share will be more than 23%. The balance of
the money is managed by smaller brokerage firms, insurance companies
number of brokers serving individual clients at major firms fell 14% to
less than 55,000 in the three years ending in December 2008, while the
number of independent financial advisers rose 29% to 33,000, Cerulli
Mr. Thurber, the Morgan Stanley Smith Barney broker who jumped ship,
says he hadn't considered a change until Lehman collapsed and he saw
friends at that firm suffer. His employer then was Smith Barney, which
hadn't yet merged with Morgan Stanley and was part of Citigroup
Inc., whose stock was plunging. He and his two colleagues, whose
brokerage-firm salaries were well into the six figures, manage money
for entrepreneurs and venture capitalists in Silicon Valley.
They secretly planned their move for nine months before they left.
Mr. Thurber recalls a tense debate in the dining room of one of his
partners about whether they could afford to abandon their salaries and
"It certainly gave each of us pause about whether it made sense for
us to walk away," he says. Initially, the cost of starting and running
a business would reduce their incomes, he says. In the longer run, he
says, "we did the analysis that, counting equity in our new firm, if we
did all the hard work, it would be worth it."
At their new firm, Three Bridge Wealth Advisors in Menlo Park,
Calif., they are free of certain constraints, Mr. Thurber says. At big
brokerage firms, brokers can sell only financial products approved by
their firms. Independent advisers face no such restrictions.
A Morgan Stanley spokeswoman says that turnover among brokers overseeing larger amounts of money "is at historic lows."
Not all brokers leaving major firms are going it alone. Independent
firms say they're seeing an uptick in interest from big-firm brokers.
"We are receiving unsolicited resumes from senior people" at major
brokerage firms, says Steven Giacona, founder of wealth-advisory firm
Round Table Services in Westfield, N.J., which oversees about $700
million. "I have been talking to people who never imagined they would
be talking about these things. But these events have put them and their
clients in a situation where they feel they need to make a change." So
far, he says, he has hired one big-firm broker.
Brokerage firms are fueling the movement by pushing out lower-volume
brokers. A typical strategy is to cut compensation, a process known as
putting brokers "in the penalty box." Lower producers who had been
taking home 40% of their fees and commissions might be told they now
will keep only 20%. Their realistic choices: boost revenues, move to a
smaller firm or go independent.
Tim Noonan, who faced a compensation cut as a broker in Merrill's
Atlanta office, left in February 2009 with most of his clients. He
formed Noonan Capital Management with about $40 million in client
money, he says.
Mr. Noonan says he didn't like being pressed to boost revenues. He
also didn't like working in a system where he was paid more to put his
clients into stocks than into certificates of deposit. At his own firm,
he charges clients a flat percentage of money under management, no
matter how it's invested.
"I wanted to own my own business, create my own value," he says. "I can will it to my children. I can sell it."
Independent advisers have a powerful ally in the competition with big firms: discount brokerage firms.
Independent advisers need someone to conduct trades, store
securities, keep track of client accounts and perform other back-office
jobs. The discount-brokerage operations of Charles Schwab Corp.,
Fidelity Investments and TD Ameritrade Holding Corp., among others,
have built big businesses doing those things for independent advisers.
As the trend toward independence grows, the discounters are redoubling
efforts to persuade brokers to go independent.
Tom Cantillon leads a group in Schwab's New York office that urges
brokers to go independent and bring their business to Schwab. He and
his people phone brokers at their offices, sometimes early in the
morning or at night in hopes the brokers will pick up directly. Mr.
Cantillon says he asks: "Have you ever considered a different model for
Discount firms are using emails, seminars and junk mail to lure
brokers into independence. They offer free help with paperwork, free
software, and reduced-cost or free trades during the transition period.
If breakaway brokers aren't comfortable creating their own businesses,
the discount firms will help them, for no charge, find existing
independent financial firms that want new associates.
Schwab held workshops around the country last year to show brokers
how to go independent. Fidelity hired a senior executive from Morgan
Stanley to handle its business with independent advisers, including
attracting them from brokerage firms. In the first three quarters of
2009, Fidelity says, breakaway brokers brought it more than $6 billion
in new money to be managed, equaling the amount it received in all of
Brian Doe left Merrill in 2009, urged on by Schwab recruiters.
Before the financial crisis hit, he and his clients liked being at a
big, established firm, Mr. Doe says. After Merrill teetered and was
sold to Bank of America, Mr. Doe, a nine-year Merrill veteran who
managed more than $50 million for 90 clients, rethought his position.
"The day that a company of that tenure and stature can get sold off
to a bank over a weekend is a little disconcerting to someone at my
career level," says Mr. Doe, who is 42 years old. "I was spending a lot
of time explaining what the firm was doing, at a time when the market
was down and people's portfolio values were careening."
Unhappy to see Merrill cutting support staff, he began speaking with
others in the business and discovered that the man who had helped him
start at Merrill had founded his own firm, Atlanta's Gratus Capital
Management. Mr. Doe joined Gratus in February 2009.
Steven Schwalb, a client, says he was happy with Mr. Doe but wary of
the hassle of moving his money from Merrill. His mortgage-banking
business was chaotic and he was helping care for newborn twins, so he
didn't follow Mr. Doe to Gratus.
"We had a lot going on in our lives, so the last thing we wanted to
do was upset anything else," he says. "We weren't really sure it was
the right move for us to go to a smaller company."
But he says he didn't develop as good a relationship with his new
Merrill broker, so he got back in touch with Mr. Doe and moved his
money to Gratus. At Gratus, Mr. Schwalb says, he has access to a wide
range of mutual funds and other investments, with lower commission
costs than at big brokerage firms. The Schwalbs pay Mr. Doe an annual
fee to monitor their finances, including advising them on all
investment and financial-planning decisions.
A Bank of America spokeswoman says clients are benefiting from the
Merrill acquisition, internal surveys indicate that they are satisfied,
and "we continue to attract and retain highly successful advisers."
Some banks are trying to take advantage of the changes. The brokerage arm of Wells Fargo
& Co., which acquired Wachovia Securities in late 2008, is offering
brokers who want to go independent the chance to work with it on a
contract basis, even if they are former Wells Fargo brokers. They sell
financial products through Wells Fargo's trading desk but operate as
independent businesses. Wells Fargo now works with about 1,000
Officials at other brokerage firms say the shift toward independent
advisers is something they can reverse. Many brokers are more
comfortable staying at big firms, which take care of product support
and back-office issues. Big firms say they are retaining brokers they
want to keep, notably those who handle wealthier investors.
"I think that we have capabilities in this business to be able to do
things for clients that the boutiques will just not be able to do,"
Robert McCann, chief executive of UBS's U.S. brokerage arm, said at a
Some in the brokerage business argue that the Madoff Ponzi-scheme
scandal will frighten clients of smaller firms, pushing them toward
brand-name brokerages. They also say that if money managers face new
regulation, as has been discussed, smaller firms might be less
well-equipped to deal with the burden.
That doesn't appear to be diminishing interest among brokers contemplating change.
Ralph Courage, a broker in Norfolk, Va., left UBS to set up an
independent firm in 2008. "I have received many calls from top
investment folks at brokerage firms around the country," he says, "who
have heard that we have made this move, saying, 'We would really like
to do this and tell me all about it.'[nbsp ]"