Why Smith Barney is now the most target-rich environment for recruiters of breakaways

Brooke’s note: Here at RIABiz we spend a lot of time interviewing people who have recently left wirehouses. We notice little things. We also notice elephants in the room. Recently it seems like an outsized portion of defectors to the RIA realm are coming from Smith Barney. They don’t say they’re coming from Morgan Stanley Smith Barney. They say Smith Barney. Was it a coincidence, we wondered? Recruiters and others on the front lines of the breakaway movement told us that it wasn’t.

Morgan Stanley’s effort to impose a top-down, hierarchical structure on Smith Barney brokers accustomed to more autonomy is driving a growing number of former Smith Barney brokers, especially managers, to seek a home in the independent world.

“Morgan Stanley won the culture war and it’s a different culture than Smith Barney,” says Matthew Cooper, principal of Beacon Pointe Advisors, an RIA in Newport Beach Calif. that manages about $4 billion of assets. His firm has sought to bring aboard breakaways including Smith Barney brokers.

Largest on Wall Street

Though it’s tough to put numbers on just how many breakaways have left Smith Barney, RIABiz has written about many — and there are likely to be more. The wirehouse is now the largest on Wall Street with about 18,000 advisors and this complicates the issue of putting a fence around all of them. Here are some of the recent headlines of related articles we’ve run:

• Smith Barney broker leaves wirehouse realm after 38 years
• Dorie Rosenband’s post-maternity return to Smith Barney shocked her into becoming an RIA
• HighTower doubles recruiting staff and seeks green pastures of Morgan Stanley Smith Barney brokers
• How an Olympic hurdler and Smith Barney broker made the leap to his own RIA
• Citigroup share plunge triggers elite Smith Barney team to consider breakaway

The trend is all the more striking because for so many years, recruiters regarded Smith Barney as one of the hardest silos on Wall Street. Since Citigroup sold Smith Barney to Morgan Stanley a little over a year ago, that view has changed.

“We couldn’t get people out of Smith Barney with dynamite a few years ago,” says Fred St. Laurent managing director of recruiter SCI Partners in Atlanta, Ga. “They’d hang up on us all day long.

“Now it’s one of our most fruitful reserves.”

Morgan Stanley Smith Barney spokeswoman Tricia Nostfield did not respond to two requests for comment by the time of publication of this article. She said she may provide a prepared statement and if she does, we’ll add it. See: Counterpoint: Intra-Wall Street recruiting by Morgan Stanley Smith Barney has picked up in the past 60 days

Smith Barney brokers began taking recruiting calls after the wirehouse’s parent company Citigroup nearly went bust in 2008. As part of its efforts to raise cash, Citi sold Smith Barney to Morgan Stanley, which took over in June of 2009 and there was a predictable effect: discontent in the subsumed group.

“It’s cultural, it’s financial and you’re not dealing with a particularly contented group to begin with. The Dean Witter and Morgan Stanley cultures never integrated so you have two cultures taking in a third culture – Smith Barney,” said Elliot Weissbluth, CEO of HighTower Advisors, the big Chicago-based aggregator of wirehouse breakaways.

Some more specific factors have also brought about the big shift in attitudes of Smith Barney brokers, according to Curtis Coles, president and executive search consultant for People Capital Inc. in Denver, Colo.

“A year ago, the MSSB brokers would not consider a move,” he says. “Now, when I call on those same brokers, they seem much more interested in a change. I think this is driven by the reduction in grid payouts, the higher T12 benchmarks required to maintain employment, the expansion of the broker protocol, and the fact that there are lots of opportunities out there with less micromanagement and better payouts.”

One of the biggest sources of discord between the Morgan Stanley workforce and that of Smith Barney is the firm’s differing attitudes toward advice, said Steve Winks, principal of SrConsultant.com in Richmond, Va., in an earlier interview.

Intensive compliance

“Morgan Stanley has the most [intensive] compliance department in the industry,” he says. “They maintain brokers do not render advice and make sure that is the case. Smith Barney — heir of the old E.F. Hutton, through Shearson — had the most progressive advisory services platform on Wall Street. Thus the two mix like oil and water. ... Because Morgan Stanley is providing direction, the new Morgan Stanley Smith Barney is a disappointment to old advice hands who have pioneered advice within a brokerage environment.”

Merging the branch management structures of the two firms is also proving difficult, say industry observers.

Smith Barney traditionally used on-site branch managers. Morgan Stanley – like other wirehouses – was more likely to employ a hub-and-spoke management structure that had one manager overseeing multiple branches.

Cooper says that there are so many ex-branch managers on the loose right now that he has a stack of their resumes on his desk.

As part of its post-merger streamlining efforts Morgan Stanley eliminated many branch managers – and in so doing — may also have eliminated the “last thread” of loyalty for advisors who were already on the brink of turning independent, according to Mark Tibergien, CEO of Pershing Advisor Solutions of Jersey City, N.J.

'No tie to anything’

“Branch managers always served a role,” he says. “Brokers at wirehouses don’t want to be loyal. (Their attitude is): ‘I needed you before but now I don’t seven to 15 years into my career.’ If a broker’s whole life is tied to remote management there’s no tie to anything.”

See this RIABiz story about a Smith Barney manager who broke away and was followed by other members of his team: How Ameriprise used its franchise system to snare a Smith Barney breakaway.

Even Smith Barney branches with managers are more subject to poaching, says Danny Sarch, principal of White Plains, N.Y.-based Leitner Sarch Consultants.

“The managers that stayed have been emasculated” by Morgan Stanley’s practice of exerting more centralized control, he says.

Today’s Morgan Stanley Smith Barney may be reaping the crop sowed years ago by Smith Barney when it created its Portfolio Management Group. The program puts a number of brokers under a single ADV, which allows them to act upon investment decisions they make on behalf of clients. Smith Barney also allows these brokers to charge an asset-based fee rather than commissions.

At the time of its formation, the program may have lessened the lure of independence because it afforded brokers autonomy.

Detachable pods

Yet it also carried risks because it allowed brokers to create detachable pods — that included their own private brands — that hit the ground running as effective RIA practices. This made a rush for exits probable if the equilibrium got upset, according to Sarch.

“It’s long overdue; they had the biggest percentage of guys that were effectively an RIA in their firm,” he says.

One of those ex-Smith Barney portfolio managers, Jack Swope, now has his own RIA in Wayne, Pa., that manages $350 million after 23 years at the wirehouse. He and his son, Doug, left as a team in June of 2009. See: Independent-within-Smith Barney breaks away after hitting wall.

“It was the best move we ever made – even looking at the [retention bonus] money we left on the table,” says Jack Swope, the senior director and principal of Stillwater Capital Advisors. It went by the name Swope Group within Smith Barney.

Fidelity Investments is using the Swopes as part of its advertising campaign aimed at attracting RIAs to its custody platform.