John Krambeer's asset growth of the past couple of years is nothing to sniff at. In 2008, Krambeer's El Segundo, Calif.-based RIA, Camden Capital Management, brought in $150 million in net new assets. In 2009, the firm added another $300 million in net new assets, bringing Camden's total assets to $550 million. The kicker: 90 percent or more of that net new $450 million came from former clients of wirehouse advisors. “We're not really picking up any assets from other RIAs,” Krambeer says. “We're seeing it come from the big firms.”

First, there was the breakaway broker phenomenon; now, it seems, we have a growing vogue of breakaway clients — former wirehouse investors who ditch their old advisors for new ones at independent RIAs or broker/dealers. Indeed, according to research from the Spectrum Group, the popularity of full-service brokers among mass affluent investors (with net worth of $100,000 to $1 million) has declined. About 22 percent of mass affluent households now use independent financial planners as their primary advisors, up from 20 percent in 2008. Another 22 percent use full-service brokers, but that's down from 30 percent in 2008, a pretty substantial drop.

Of course, wirehouses still dominate the investment advisory business: they collectively control a much bigger slice of assets and advisors. What's more, they claim that the exodus of assets witnessed over the past year is over. But their focus has been on disgruntled brokers, rather than disgruntled clients. “A lot of the attention to date has been placed on reasons why an advisor would leave a wirehouse and bring his assets to the RIA model,” says Dan Inveen, founder of FA Insight, an advisory consulting firm in Tacoma, Wash. “What is looked over is that clients play a huge role in assets being moved over.”

Morgan Stanley Smith Barney CEO James Gorman, for example, recently predicted that advisor turnover will return to normal low rates over the next couple of years. Sallie Krawcheck, President of Global Wealth and Investment Management at Bank of America Merrill Lynch, said in January that turnover among the firm's thundering herd of FAs has already flatlined. Indeed, as the market recovers and merger integration proceeds at the Wall Street megafirms, morale does seem to have improved among wirehouse advisors. The firms are hiring more brokers, offering record sign-on bonuses and, as Gorman puts it, seeing “the lowest attrition rates in ten years.”

Further, executives at a major firm who spoke on condition of anonymity say that the RIA firms and custodians claim a false advantage. They are not, in fact, more independent, or free of conflicts, because these days, most FAs at the big firms are registered under the Investment Advisers Act of 1940, allowing them to act as fiduciaries.

But the executives' statements suggest a bit of defensiveness. “We're in the middle of this shouting match between custodians and wirehouse executives,” says Inveen. “The wirehouses may be feeling a little threatened, because this trend is talked about so often. They may be trying to counter all the talk.”

There has been a lot of talk, indeed. Schwab, Fidelity and TD Ameritrade have touted their superior fiduciary model and have rolled out press release after press release declaring the growing numbers of breakaway brokers they have secreted away from Wall Street. What's more, they say the best is yet to come. Schwab added 172 advisor teams to its platform in 2009 and has predicted that 2010 may be sweeter. The firm says it has about 300 to 400 teams of brokers who manage $30 billion in assets in its pipeline. That's 50 percent more than it had at this time last year, according to the firm. TD Ameritrade also expects a good recruiting year in 2010. Like at Schwab, its breakaway broker pipeline is up 50 percent from the same time last year with potential recruits worth about $210 billion. Echoing the others, Scott Dell'Orfano, executive vice president of Fidelity Institutional Wealth Management, says he expects 2010 to be better than 2009, when the firm added a record 191 breakaway brokers.

There is no doubt the RIA channels has become a bigger presence in the industry over the past half decade, primarily through the hybrid channel. The hybrids, which do both fee-based RIA business and commission-based brokerage, are the fastest-growing segment of the advisory business, with assets under management growing at a compound annual growth rate (CAGR) of 20 percent between 2004 and 2008. The RIA-only model is the second-fastest growing segment, with a CAGR of 5 percent, according to Cerulli Associates. Doesn't sound like much. But keep in mind, of that $1.4 billion in the hybrid space, 73 percent is on the RIA side. Meanwhile, wirehouse market share of total retail client assets (which stood at about $8.3 trillion at the end of 2008) declined from 48 percent at the end of 2008 to 45 percent last year, while the RIA channel saw its market share increase from 11 to 12 percent over the same period, according to Cerulli. The firm predicts a further decrease of wirehouse market share to 44 percent in 2010, and says RIA market share should inch up about half a percent.

Breakaway Clients

Whether broker attrition subsides may be irrelevant if individual investors continue to take their business to the independents themselves, leaving their brokers behind.

“There is obviously a disconnect between these two sides in terms of whether or not they believe brokers are breaking away. But the bigger story is about whether or not the end client is staying [at the wirehouses.] That will be a bigger factor over the next year or so,” says Pirker.

Already, Schwab Advisor Services says the majority of the $41 billion in net new assets it gathered in 2009 came directly from breakaway clients joining the firm's existing base of RIAs. “One of the main reasons wirehouse brokers cite when talking about breaking away is that their clients, the investors, are raising concerns about the wirehouse model,” says Tim Oden, a managing director at Schwab Advisor Services. “If those concerns are the impetus for many advisors to break away in the first place, then it makes a lot of sense for us to see assets coming in directly from wirehouse clients.”

In a TD Ameritrade Institutional survey of about 500 of its RIAs in June 2009, over 80 percent reported that their new client numbers were either up or remained steady over the prior six months. Half of the RIAs surveyed reported an increase in new clients, and, according to the report, “many” said their new clients were looking for an alternative to full service brokerages. Also, 34 percent of respondents said their new clients cited dissatisfaction with service, advice, performance or fees at full-service brokerage firms as reasons for leaving those firms and choosing TD Ameritrade instead.

The situation is the same at Fidelity. Dell'Orfano says a significant portion of the net new asset growth at his firm is coming through existing RIAs adding more wirehouse clients to their base. Fidelity IWS added about $41 billion in net new assets in 2009, and Dell'Orfano says those assets represent both breakaway brokers and clients. “When we ask our advisors where they're seeing the growth coming from, most say it's coming from wirehouse clients,” Dell'Orfano says.

Alan Zafran is one of those advisors. His firm, Luminous Capital, of Menlo Park, Calif., brought in almost $1 billion in net new assets in 2009. Luminous, which has a client asset minimum of $10 million, manages a total of $2.8 billion. The firm captured $800 million of that in 2009, the majority of it directly from wirehouse clients. He suggests that clients may delay deciding to move their assets due to an emotional process similar to the Kübler-Ross model, or the five stages of grief. “They've been in denial, they've been angry, they've tried to come to terms with what's happened, they are upset about it and now they are accepting what went wrong and moving on,” Zafran says.

Zafran and Krambeer say these breakaway clients left their wirehouse brokers for different reasons. One of Zafran's breakaway clients says he wasn't getting enough attention from his broker when the market was collapsing; another says there was not enough transparency on pricing; others complain they weren't getting answers to detailed questions about their portfolios. Mostly, though, these clients say they wanted to find a firm that wasn't getting negative press and work with an advisor who was not distracted by his firm's troubles, according to advisors. “It comes to a point for a lot of these clients where they don't want to be associated with a big name firm, but they also have a loyalty to the broker they've worked with for so long. It's not an easy choice sometimes,” Krambeer says.

Occasionally, he says, clients who quit their long-term wirehouse broker will leave behind a small portfolio of assets to show there are no hard feelings. “I've had some clients that come over and will bring $10 million in assets from their old wirehouse account but leave their old broker $500,000. It might be a broker they worked with for ten or 15 years,” Krambeer says. Not all breakaway clients feel so protective of their wirehouse brokers. “It's up to the client if he wants to notify the losing broker about the move. Sometimes the losing broker doesn't find out a client is leaving until he sees the account transfer forms, and by that time the client has already made up his mind,” he adds.

Schwab's Oden says there is an advantage for both parties when a breakaway client finds an RIA with breakaway brokers. He says clients are sometimes more comfortable with their decision to move their assets over when they know the investment advisor they're joining was once at a wirehouse as well. It legitimizes their decision to move, and the new advisor can relate to the client's experience at the wirehouse. “Former wirehouse advisors who are now RIAs know how to speak to these clients. This is a great opportunity for the advisors to highlight firsthand why the independent channel is better,” Oden says.

Trevor Callan, CEO of Callan Capital, of La Jolla, Calif., says, “We have found that individuals questioning their wirehouse relationship find us uniquely qualified to provide a second opinion given our backgrounds.” Callan runs the firm with his two brothers. Callan started the firm in early 2007 after spending 13 years at Merrill Lynch. The group doubled its assets in 2009 and is now managing about $260 million in assets.

Breakaway? What Breakaway?

While advisors like Callan, Zafran and Krambeer are busy keeping track of their new assets, the wirehouses are busy trying to stanch outflows. Consider that Morgan Stanley Smith Barney reported net asset outflows in three of the last four quarters totaling about $16 billion. Meanwhile, UBS Wealth Management Americas reported CHF 28 billion in net asset outflows during the last three quarters of 2009; 202 advisors also walked in the fourth quarter bringing total advisor headcount down to 7,084 from 7,286. (Merrill does not report net asset outflows, but Aite Group research director Alois Pirker believes the firm isn't seeing any significant net asset inflow, and is likely also suffering net asset outflows.) “The numbers don't lie and these firms need to put a stop to such outflows immediately,” Pirker says. (See table on page 37.)

Of course at the end of 2010, even if Cerulli's estimates are right, the wirehouse channel will still be bigger than any other in terms of client assets. “The wirehouses aren't going away by any means. I don't think anyone is trying to believe that,” Inveen says. “But independent RIAs will continue to put dents in wirehouse market share, especially since no broker goes back to work for a wirehouse after they've left.”