Study: Breakaway trend may slow as wirehouse mergers start to click

A new study suggests that the future strength of the breakaway movement depends on how successfully wirehouses recover from the mergers, consolidations and upheaval of the past two years.

The study: “Wealth management on the move: An end to the breakaway trend?” has a title punctuated with a question mark.

In an interview, author Alois Pirker, senior research director for Aite Group of Boston, said he believes that wirehouses are still faced with more questions than answers about how to stop the bleeding of clients, advisors and their assets.

“I think there could be a slowdown over time but it won’t be 2010 and it won’t be 2011,” he says in an interview from his home in Austria. “It depends on how much bloodshed there is along the way. It depends on the culture. If they do a great job with the integration, [the breakaway rate] will slow down sooner.”

Giant shotgun marriages

In other words, Merrill Lynch/Bank of America, Morgan Stanley/Smith Barney and Wachovia/Wells Fargo will need to make their giant shotgun marriages work. Bob McCann needs to better define the path that UBS will take.

“There’s no wirehouse out there right now that’s not a construction site right now – rightsizing, integrating and reorganizing,” Pirker says.

Nobody wants to live in a construction site for long; they are not good for inner peace. At wirehouses, a certain number of brokers will leave every year seeking a place where they can interact with clients without disruption, distraction and a sense of uncertainty about what their new organization will look like when the scaffolding is removed and the jackhammers abate.

The Aite study’s survey of 402 advisors during the last three months of 2009 seems to bear that out. Only about 20% of the brokers responding say that they are highly satisfied with their current employer. Of captive brokers, more than 66% say that there is at least a chance that they’ll break away.

It also underscores the point that practitioners at asset custodians like Schwab, Fidelity and TD Ameritrade make all the time: that wirehouse bullpens currently are the fertile ground for recruiting. At wirehouses, only 15% of brokers have no appetite at all to break away compared to 38% of financial advisors at non-wirehouse full-service brokerage firms, according to the study.

To raise the job satisfaction equation at their firms, wirehouse executives will need to do some soul-searching and reframe their value proposition against other platforms – like those of independent broker-dealers, asset custodians, roll-ups and RIA firms.

Telling a believable story

“Advisors need to buy into the [wirehouse] story for them to stay long-term and the story hasn’t been written yet,” Pirker says.

The problem with the current story is that it doesn’t assuage the overarching concern of the wirehouse advisor – the confidence that their book of business is a secure source of income for the long haul, Pirker explains.

The former – and current – wirehouse “story” was built on four pillars: being the only game in town, great branding, tremendous technology and a “great vehicle to make a lot of money,” according to Sean Cunniff, research director of the brokerage and wealth management service for TowerGroup of Needham, Mass.

“All of these things have been tremendously harmed,” he says.

Crowd at the exits

This is a big reason that brokers are crowding near the exits. Of wirehouse brokers, 20% “will more likely than not break away” within 24 months – representing about 11,000 brokers on the move, according to the Aite study.

Around 33% of potential breakaways from wirehouses and other brokerage firms would opt for a wirehouse when leaving their firm. The independent sector is the second-most desired destination — preferred by 26%— for wirehouse brokers considering breaking away, according to the study.

Sean Cunniff: I don’t think anything
is off the table.

The bottom line: brokers need to feel like they have a secure place to build their practice, Pirker says.

“A broker has a long-term view; the book of business is an annuity; it’s something to live off,” he says. “Once they see the book declining, they have a long-term view that the value of that book is decreasing. [For many advisors] that hurts more than losing money [i.e. forgoing a retention bonus and/or losing some assets through a transition to another custodian] right now.”

With so much at stake – and retention bonuses having a limited effect – Plan B is looking better for the Sallie Krawcheks and James Gormans of the world.

Some level of independence

“I think the wirehouses are contemplating offering some level of independence and working with the top producers to give that independence,” Pirker adds. “They say: are we getting away [with less expense] if we do it that way. If we get [the] clearing and custody [business of the advisors], that’s a nice chunk [of revenue] and we don’t need to pay the crazy retention bonuses.”

Cunniff agrees that some creative solutions may be coming down the pike.

“We’re hearing similar things,” he says. “The conversations I’ve had with wirehouse people; they are struggling for a way to respond. Firms are coming to us and looking at a variety of things. I don’t think anything is off the table.”

With wirehouse executives opening their minds to save their franchises, changes are likely to occur.

“Not stupid”

“They watching this trend very closely,” Pirker says. “They’re not stupid.”