In a typical year, roughly 12 percent to 13 percent of financial advisers change firms, according to Bing Waldert, a director at Cerulli Associates. But clearly, we’ve not seen a typical year in some time. The industry upheaval of 2008 and 2009 caused the rate of broker movement to skyrocket in early 2009—and then slow down as the year drew to a close. So far this year, experts tell us advisor movement is noticeably down. We asked them why, what we can expect to see in the near future, and what—if anything—firms and branch managers can do about it.
“Broker movement was definitely down in the first three quarters of 2010,” says Mindy Diamond, president of Diamond Consultants, an industry recruiting firm, though she didn’t have exact figures. “But, this was mainly due to the fact that, in 2009, more than 24,000 advisors changed firms,” she says. “That’s the most we’ve ever seen in the industry.”
Aggressive and lucrative recruitment packages essentially prompted anyone who wanted a big check to move last year, Diamond says. This was in response to the 2008 market debacle, which also wiped out the value of FA’s differed comp plans. (Advisor differed comp plans often included company stock.) Many advisors fled their wirehouses with damaged reputations, both to appease anxious clients, and to replenish their own net worth with big signing bonuses.
“There was no place [for broker movement numbers] to go but down from there,” says Waldert.
The dwindling number of wirehouses is also a factor. “It used to be that two-thirds of brokers who moved did so from one wirehouse to another for the upfront money, “with the remaining third went to other models, predominately independence,” says Chip Roame, managing principal of Tiburon Strategic Advisors, an industry research and consulting firm. But, due to consolidation, there are fewer wirehouses to move to. “And, brokers seem never to go back to firms they were at before,” Roame says, “which means--after a broker moves once, he has fewer choices.” UBS has been on the receiving end of some negative press about its earnings and other issues, he says, which may make it a less appealing option.
The independent trend seems to be continuing at about the same pace, Roame continues, “not huge or hurtful, but still bringing pretty big bucks to the recipient channels.” Switching firms remains a financially feasible option for producers in the $300,000 to $500,000 range who don’t have to be concerned with returning retention money.
Many experts predict that recruiting will pick up at the wirehouses if the market continues to recover, and advisors aren't as worried about losing clients in a move. Diamond believes we’ll see this start to happen in the fourth quarter of 2010 and the first quarter of 2011. The reason: “A lot of reps who are under retention packages—and I’d say that’s about 90 percent of quality advisors—can only be kept in their seats for so long. Many are reaching their pain thresholds.”
Boutique firms should also do well with recruiting, she says. “I think the regionals have the least amount of traction, because brokers who want to leave the wirehouses are usually attracted to independence.” That said, Diamond offers that leaving a wirehouse can be hard too. “The economics often prove to be prohibitive when they consider lost deferred compensation and retention money.”
Waldert also expects broker movement to normalize over the next year, “to get close to where it was in the pre-financial crisis days.”
Another catalyst for movement? More firms continue to sign the broker Protocol agreement, which Diamond, Roame and Waldert concur is very conducive to this. The Protocol is an agreement among around 450 brokerage firms (including UBS, Morgan Stanley Smith Barney, Merrill Lynch and Wells Fargo Advisors) and individual investment advisory firms (RIAs) that states that if an advisor follows certain procedures when switching from one protocol firm to another protocol firm, there will be no litigation. Under these rules, the brokers cannot ask clients to follow them to a new firm until they have resigned from the old firm, and they can take only limited client data.
“The big firms obviously like it,” says Howard Diamond, Diamond Consultants’ managing director. “The very small firms tend not to because they stand to lose advisors. There had been some rumblings about the industry possibly doing away with it, but I don’t see that as likely. The agreement has dramatically curtailed litigation over movement to independence and gives advisors a greater sense of freedom.”
Can firms do to anything to speed up the anticipated increase in broker movement? “It’s always first and foremost about aggressive—and lucrative—recruiting packages,” Mindy Diamond says. “But, branch managers can help by being good listeners. Prospects want to know that the managers truly understand their individual challenges and goals. Sales pros will tell you that if you ask prospects enough questions, they will tell you enough about what they want for you to close the deal. It’s the same in this case.”
Roame thinks the wirehouses could curtail the movement of their advisors into independent channels “if they restructured their models, but I see no movement in this regard,” he says. “These firms are all on the same path: paying reps to move from one firm to another. You have to wonder, though, why they don’t respond to the reasons reps go independent instead of simply throwing money at them to override those underlying reasons? Independents are able to have their own B/D or RIA, and set their own rules. Why not open up [indie] models like Wells Fargo and Raymond James have done, giving reps the choice to go partially or fully independent? Independence allows reps to sell their businesses to the highest bidder at retirement time. Why not allow this, with no constraints?”
Waldert agrees that independent channels gain 1 percent to 2 percent of market share annually and that advisor movement is a ‘trickle’. “But, the wirehouses have still lost a lot of advisors and assets to this channel,” he says. “I also think it begs the question, ‘What can they do to reclaim some of what they’ve lost?’”
