In April 1998, David Edstrom was ready to throw in the towel as a broker. He had been a rep with Merrill Lynch in suburban Chicago for a few years, and he was burned out.
He took some time off to think about what to do next. "I came full circle," Edstrom says. "I wanted to keep doing what I was doing but in an environment that would be more conducive to myself, my family and my clients. I wanted to run my own business with a smaller client base. I didn't want work to control my life."
One important goal was to spend more time with his two kids, now ages 4 and 6. Going independent seemed to be the answer for him.
After doing some research, Edstrom scheduled a visit to D.E. Frey's home office in Denver. He was attracted to its "independent wirehouse" nature since its business was based on individual stocks and bonds, and its brokers were mostly from traditional firms.
He also liked that Frey cleared through PaineWebber. "I would still be affiliated with a large firm with access to research and their product base."
Edstrom spoke with and met several Frey reps. "It was a good fit," he says. He set up his office in Hinsdale, Ill., and he's happy. "You can make more money, work less and enjoy life more."
The only trouble Edstrom's had is sorting through the investment choices. "The benefit of being independent--unlimited investment products and services--is that you're not limited in providing services," he says. "On the flip side, the negative is that you have to define the screening process."
Jumping Hurdles Although the end result of going independent for Edstrom and others is often positive, the transition process itself can be problematic, reps warn.
In 1996, David Carey made the move from A.G. Edwards in Peru, Ill., to Robert Thomas, now called Raymond James Financial Services. He says the biggest hurdle was learning how to transfer accounts.
"I brought my assistant over from A.G. Edwards," Carey says. "But [Robert Thomas] had a different way of doing things. We had to reprogram ourselves overnight."
Moving 700 to 800 accounts was confusing, Carey says. "We were drowning in transfer forms. I don't ever care to go through that again. It's tough."
Duane Knopke also encountered account transfer problems when he moved from Everen Securities to Linsco/Private Ledger in Torrance, Calif., in 1998. His advice: Be patient. "Anticipate the firm you're leaving will not give up clients easily," Knopke says. "It can take six to eight months to get an account transferred."
The threat of a temporary restraining order weighed heavily on Phil Eggers, who switched from Morgan Stanley Dean Witter in Dallas to LPL in 1998. "When I got office space, I assumed I'd get sued," he says. "I got an office that was OK, but not as nice as it should have been."
After his lease expired 18 months later, Eggers moved to "Class A space" and got new furniture and equipment. "I should have gotten real nice space upfront," he says. "It was a hassle moving again and getting new phone numbers."
Ed Katz, a broker in partnership with his brother, Stanley, moved from PaineWebber to Round Hill Securities in Dayton, Ohio, in 1998. He has one regret. "We never got our clients' cost information, and that was a big problem," Katz says. "We should have paid to have it done by an outside firm. We were penny-wise and pound-foolish."
How did they rectify it? "Very painfully--person by person and security by security," says Ed's wife, Susie, who helps run the business.
Gauging Clients Most brokers interviewed did not notify their clients before they left their wirehouses. The Katzes, for example, got legal counsel before they lifted a finger. "It might cost clients, but if you do it by the book, it's so much less stressful," Susie says. "Not even our biggest clients or our staff knew we were leaving."
Roger Stromberg did not notify clients before quitting D.A. Davidson in 1997 for Corporate Securities Group, now JWGenesis Financial Services. "We sent an introductory letter telling clients what we had done and why, and followed up with phone calls," says Stromberg from his Missoula, Mont., office. He made house calls to his bigger clients.
Stromberg's monthly newsletter helped smooth the transition. "It told clients how the move was working," he says. "It made clients who had transferred comfortable, and for clients who hadn't, it kept the lines open."
Knopke, who was not under an employment contract at Everen, notified his clients within six months of leaving. He told them, "You can stay with me and move to another firm that's a better opportunity for you and me." Ninety-five percent transferred, he says.
One element that made Knopke's business more transferable was that much of it was fee-based, he says. "Your clients are with you because they're with you--they respect you and want to deal with you," he says.
Eggers agrees: "I think it comes down to the relationship with the client, not necessarily the type of business you're doing. Those who have strong, deep-rooted relationships with clients--who are almost friends--do well."
Independent broker/dealers have gained popularity. The number of reps at 300 independent firms has increased 43 percent since 1994 to 72,000, versus a 21 percent increase in reps at five wirehouses to 53,500, according to Cerulli Associates in Boston.
"Independent broker/dealers became popular in the mid-'90s. They offered more autonomy," says Ryan Tagal, a Cerulli analyst. "But the introduction of fee-based pricing at wirehouses has held the outflow at bay. We expect the number will be slowing down."
Demographics might also be boosting the number of independents, says Chet Helck, executive vice president of Raymond James Financial Services in Atlanta. "In the early '80s, a lot of people came into the industry--a bunch of baby boomers. It's been 15 to 20 years, and the independent contractor thing looks pretty attractive at this point in life."
Finally, wirehouses' falling commissions and lower fees have compressed margins, according to Helck. "The response has been to cut payouts," he says. That has motivated some brokers to hang their own shingles.
