Fidelity gleans why so many 'attractive' advisors cling to wirehouses and Cerulli's newest RIA data shows plenty find courage

Brooke’s Note: Early on in RIABiz history, we spent much of our time debriefing wirehouse teams that became RIAs and gathered them into breakaway stories. One of the questions I demanded we ask was: How did your wife (or, occasionally, husband) react to all this? Inevitably this question elicited the frankest, rawest, revealing answer of any of them. The advisors whose spouses were pushing them along were ones that seemed to breeze through the process. This is not to pat ourselves on the back for 'getting’ the family angle ahead of the crowd. But is our way of affirming that Fidelity’s study is very much on to something. Good job Fidelity. The most telling RIA numbers from Cerulli are deeper in the article.

As the flames rise higher on the hot RIA bonfire, recruiters and custodians are trying to pour more gasoline to make it spread — with all sorts of tricks like jazzed up technology and new methodologies.

But it turns out that the oldest reason in the world for career moves is also the telling factor involving advisors making a move — family. Without the support of loved ones, advisors often default to the safety of staying put.

The findings released today from Boston-based Fidelity Investments come in the wake of new Cerulli Associates Inc. data showing there are brokers aplenty moving to the RIA model. See: The RIA world according to Cerulli.

Stay, just a little bit longer

The Fidelity study provides insight from a group of people rarely surveyed — those “fence-sitters” who thought of making a move in the last year, but ultimately stayed put. The company’s second Insights on Independence Study, also looked at advisors who have made a move in the last five years and a third group dubbed as “entrenched” who have not even considered moving. See: Fidelity’s big advisor survey: Independent channel seen as most profitable after banner years for firm-switching.

Of those wirehouse and former wirehose advisors surveyed, about one-third have made a move to a new firm in the past five years, and one-third are dubbed “fence-sitters” who considered making a move but chose not to and the final group are considered “entrenched” advisors who have never considered making a move.

While Fidelity probe the psyche of potential RIAs, Cerulli’s just-released data showed RIAs grew 13% from 2010 to 2011, rising from $1.234 trillion to $1.416 trillion. The analysis firm, which tracks RIA, wirehouse and hybrid markets, shows a trend away from wirehouses. Dually registered advisors — hybrids with commission and fees — rose 19% from $772.8 billion in 2010 to $920.7 billion in 2011, according to the report, “The State of the U.S. Retail and Institutional Asset Management 2012.” See: Rough markets cull the advisory herd but in a healthy way, new Cerulli data shows.

'Attractive’ advisors

This was Fidelity’s second study but it’s the first time the data collectors have spoken with the fence-sitters, defined as advisors who considered leaving their current firm but chose to stay. It appears that family plays a key role in advisors’ decision to stay or leave. In fact, of those who made moves, 40% said family members encouraged them. In comparison, just 8% of those fence-sitters had support of their family, said Sanjiv Mirchandani, president of National Financial at Fidelity Investments. See: How my experiences with RIA pioneers, and the love of my mother, inspired me to a different breakaway story.

For those who were on the fence rails, the analysis shows that more often family actually discouraged the move. “They didn’t want to go through the hassles of moving,” Mirchandani says. “People in this business don’t make a move until they get everyone in the family to make a sale. It’s really important for recruiters to forge relationships with the whole family.”

While the perception is people stay at wirehouses because they’re given hefty checks, the reality is there are more personal reasons that people decide not to make a move, Mirchandani says.

“It’s not just about compensation. It’s equally weighted between compensation, control and culture. Advisors want to make sure they’re comfortable with the firm they’re going to as well as the ability to pick and choose the products they want to sell.” See: Wall Street’s big retention problem: RIA compensation is nearing parity with wirehouse brokers.

Mirchandani points out that the fence-sitters are attractive advisors. They tend to be younger and have assets of $155 million, higher than the other two groups of advisors in the survey. The information about fence-sitters is important from a recruiting standpoint and from a retention standpoint. Firm leaders who want to keep these attractive advisors should be aware that they’re likely getting offers and try to retain them rather than lose them, he adds.

Meet the family

Tom Valverde: A lot of times
we’re meeting in the advisor’s house.

But from a recruiting standpoint, too often recruiters don’t include the family when they try to lure over advisors, Mirchandani says.

“If you’re trying to recruit someone, it’s very important to establish relationships with the spouse. For those who moved, spouses were a big ally. It’s a family affair. It’s not an individual sale. It’s a family affair. I think it would be very helpful to have a spouse on board. These advisors are running practices and businesses and personal lives are very personally intertwined.” See: She’s the boss: Keeping assets means keeping the power of the family matriarch fully in focus.

Getting the family’s support can in fact help win business, agrees Tom Valverde, director of business development for Pershing Advisor Solutions. More often than not his firm does in fact meet with advisors and their spouses.

While many firms struggled in the first quarter with the breakaway movement, his firm had a busy first quarter. The company brought over nine breakaway teams with a total of $3.3 billion — about 20% ahead of last year in terms of teams signed. But the firm is $200 million behind last year’s total new breakaway assets of $3.5 billion. See: LPL, Raymond James and TD data — and Walt Bettinger, Mike Durbin comments — reveal rotten first quarter for breakaways.

“A lot of times we’re meeting in the advisor’s house. You can’t meet at their Merrill Lynch office. In corporate America, you think about people making big lifestyle changes and I think you should meet with spouses to make sure they’re on board with this too.”

Tyler Cloherty predicts 8,500 advisors will
leave the industry each year and
while there are some 13,000 in
wiehouse training programs the success rate
is still only about 25%.

Wirehouse drought

Cerulli associate research director Tyler Cloherty says he feels a deal-breaker keeping people from moving has often been the concern about setting up shop and starting their own RIA.

“The legacy of the RIA business has always been those who are dead-set on starting their own businesses, and people are on the fence saying I’m great at being an advisor, but I don’t want to pick out a server. I’d rather join an existing practice.”

His firm released new data on Tuesday showing that the total advisor head count in all channels has been reduced by 1.3% from 2010 to 2011 due to terminations, retirements and advisors leaving the industry. The overall headcount in 2011 was 316,109 while the previous year was 323,556. The company estimates the 2012 advisory numbers were down to 308,656.

Cloherty feels a huge challenge for the industry and among RIAs is to bolster recruiting and training.

His firm predicts 8,500 advisors will leave the industry each year and while there are some 13,000 in wiehouse training programs the success rate is still only about 25% — meaning there’s still a short-fall of advisors.

“It remains to be seen if RIAs can be successful hiring and training people on their own rather than relying on the wirehouse training model,” Cloherty says. See: United Capital’s Joe Duran throttles back on deals as he opens an RIA version of Hamburger University.

Movers are happy

Fidelity’s study showed that advisors who made a move away from their present firm they were happiest. Mirchandani says that nine out of every 10 advisors who made a move were happy with their decision.

“Nine out of 10 is a very good outcome because you would think it might be lower, but people are very happy when they make the move.”

In general, movers received 22% increase in compensation since 2008 compared to those who stayed on the fence and got 17% additional for staying. Those advisors who made the move to an independent channel received 36% more in income since 2008. See: How I advise advisors to run an advisory business from my pulpit.

Litigation on the radar

But the Fidelity study showed that advisors still face a number of challenges when they moved from their current firm to another firm, including lawsuits. See: Why you may not be adequately covered against lawsuits.

“Some advisors did get involved in litigation,” Mirchandani says. “Often times, advisors were attracted to firms that didn’t make them sign non-competes.” See: An ex-wirehouse broker and a regulatory lawyer divulge breakaway insights at TD Ameritrade conference.

But other moving challenges include the obvious one making sure that clients agree to move with the advisor. A third challenge was learning the new technology. See: How I picked technology — from Black Diamond-in-SSG to Dudamobile — to use in my startup RIA.

“The bottom line is it’s 12 months of really hard work and it’s really important to make that transition work, but once they jump, the satisfaction levels are really high,” he says.

The 2013 Fidelity Insights on Independence study was conducted in collaboration with Bellomy Research, Inc. between Nov. 7 and Dec. 11, 2012 among 783 advisors, whose assets under management are more than $10 million assets managed individually or as a part of a team. The study did not identify Fidelity Investments as a sponsor.