June 18, 2015 12:04 am

Wirehouses in decline as advisers seek independence

Tom Stabile

Along with the startling financial headlines in the closing months of 2008 came news that big adviser teams were leaving the US wirehouse brokerages — footsteps that threatened to lead to a stampede.

The high-profile exits of a $5bn group led by Lori Van Dusen from Smith Barney, and a nearly $1bn team of four Merrill Lynch veterans (who formed LLBH Private Wealth Management) were most notable for where they went: to the independent channel. And they led a flurry in the years since, not only of wirehouse advisers going independent but also of platforms launching to support these breakaways.

Today, however, the breakaway movement is no longer big news, even though the wirehouse share of assets in the US adviser market has shrunk from more than 50 per cent before 2008 to less than 40 per cent today. By 2017 it may fall to 37 per cent, behind the independent sector for the first time, according to Cerulli Associates. Has breakaway growth levelled off, or moved into the deceptively calm eye of the storm?

It may be just that the market is now used to advisers going their own way, says Bill Willis, president of Willis Consulting, an adviser recruiting company. “It’s not quite as shocking as it was three or four or five years ago,” he says.

Indeed, the phenomenon that once made headlines has become “an old story”, says Shirl Penney, president and chief executive of Dynasty Financial Partners, a platform that provides wirehouse-calibre products and services to independent advisers including Dynasty Private Wealth Management, an FT 300 company.

“It’s now accepted as the norm,” says Mr Penney. He was a Smith Barney executive before he helped form Dynasty Financial in 2010; it now has nearly $30bn in assets.

Some of the original buzz stemmed from turmoil at the big companies after 2008, with Smith Barney being sold to Morgan Stanley and Merrill Lynch to Bank of America. That made breaking away more compelling, says Jeff Fuhrman, chief operating officer at LLBH, which is now affiliated with Focus Financial Partners, an “aggregator” of independent advisers.

“Arguably [LLBH was] leaving a big, stable firm. But soon, independence looked far more stable,” he says.

Today, the breakaway movement may also seem less exotic because many advisers have at least enquired about the basics, says Mr Willis. “We were getting a lot more calls a few years ago from people who wanted to learn what going independent meant,” he says.

The breakaway movement may not be retreating, but rather settling into a regular flow, says Mr Penney.

“But it has kept pace because the number of advisers moving has slowed, but the teams moving to independence now are larger and more sophisticated,” he says.

Other factors may also have tempered the growth rate, including an equity bull market since 2009 and wirehouse efforts to lock in advisers with retention bonus packages of nine-year “forgivable loans”, says Tim Welsh, president of Nexus Strategy, a strategic consultant.

Advisers jumping ship today are responding to the main argument for independence — giving clients advice without ties to investment product sales and offering independent custody, trading and service plans, Mr Penney says. “Clients respond to that model where the adviser gives you choice,” he adds.

The pitch to wirehouse advisers and their clients is that independence is “the same religion, different church”, says Mr Fuhrman.

Independence is also attractive to wirehouse advisers in their 50s and 60s who aim to “monetise” their practices by gaining ownership and selling them in the future, says Mr Willis.

However, a big change since 2008 is that the market now has a large network of providers which can smooth the path for wirehouse advisers to become independent, helping with transitions and operations, says Mr Welsh. “The fact that many of them won’t have to do it from scratch but can go to a platform that supports them, or join an existing firm, is significant,” he says.

Today’s independent channel options, from product platforms to custody, are much more “credible” and similar to what wirehouse advisers might leave behind, says Mr Willis. In that light, with a ramp of viable independent platforms already built, any tipping point could lead to a dramatic breakaway movement revival and “exponential growth” for the independent channel, says Mr Welsh.

“We will see Breakaway 2.0,” he adds. “There is really nothing holding them back.”