Is the transition to independence worth it?
Dale Cebert has gone from advising as an independent registered investment adviser to a massive wirehouse and back again to the independent world, and he is eager to talk up the virtues of both models.
This is perhaps a little surprising, given that he endured what might be called a bad breakup with Morgan Stanley, with the circumstances surrounding his dismissal becoming the subject of a FINRA arbitration proceeding.
But Cebert, a CFP who is the president of Cebert Wealth Management in The Villages, Florida, says that were it not for a rocky transition to Morgan Stanley -- to understate things considerably -- he could have happily finished out his career at the wirehouse.
“All in all, there’s pros and cons to both platforms,” he says.
But industry-wide, there seems to be little doubt that the traffic is heavier on one side of the street.
In a study published this month, research firm Cerulli Associates reported a 6.2% increase in assets managed by RIAs last year, well ahead of the average growth of 0.9% across all channels considered.
Assets managed by wirehouses shrank by 1.9%, the worst-performing model that Cerulli Associates studied.
Experts point to a variety of factors to explain the breakaway broker trend.
Brian Hamburger, president and chief executive of the Hamburger Law Group and MarketCounsel in Englewood, New Jersey, who assists advisers making the transition to independence, points to friction between the large wirehouses and their in-house advisers and their clients.
“This has been a trend since 2008. These firms have been scratching to increase margins,” Hamburger says.
Often the result is that the firms will reduce adviser compensation or increase fees for clients.
So, for instance, some advisers grow exasperated when, out of the blue, their employer alters the compensation grid or changes the features of its products so that the advisers must explain to their clients why a long-held position suddenly has new fees or higher minimum requirements.
“They feel that they have no control over these changes,” Hamburger says. “Advisers feel that they lose credibility.”
Credibility counts for a lot in a business that runs on client relationships, and in the wirehouse-versus-independent debate, industry insiders argue it both ways.
Cebert recalls coming up in the trade as an independent, forever having to convince clients that his was a legitimate practice, despite having zero name recognition.
“The problem is working for an independent broker-dealer, most of the time they’re not a household name,” he says. “I knew that once I made that jump into the world of the big firm that that conversation was never going to be necessary again.”
Patrick Burns, a Beverly Hills, California, attorney who specializes in helping breakaway brokers transition to independent practice, sees it the other way.
Although Cebert says that many clients worry about falling victim to the next Bernie Madoff, Burns counters that trust in the major Wall Street firms has eroded so much that the specter of a fresh scandal or a major FINRA or Securities and Exchange Commission enforcement action can turn the name recognition of a major wirehouse into a liability.
“Our clients have grown tired of seeing the names of their firms that they work for on the front page of The Wall Street Journal,” Burns says.
Hamburger sees both sides.
“They’re both right,” he says.
Hamburger recalls a client who came up through the ranks working with Merrill Lynch, saying that simply flashing the card emblazoned with the trademark bull would get him into meetings with prospective clients who otherwise never would have given him the time of day.
But over time, that changed, and Hamburger's client found himself relying less and less on the cachet of the brand name on his business card.
“That brand probably has more value than the young professional’s personal brand,” Hamburger says.
“But over time,” as the adviser has built a business and established a stable roster of clients, “the relative value of that [wirehouse] brand has dissipated,” Hamburger says.
Aside from the merit of the brand, there are very significant differences between the two channels.
Burns and Hamburger both say that the typical adviser making the transition is mid-career, having built a successful book of business at the wirehouse but looking for something more.
They aren’t, as Burns puts it, people who are “just so far into their careers that they’re just going to ride it out.”
So what is the draw? Certainly money can be a factor.
At an independent practice, advisers can structure their own compensation grid without the wirehouse imposing its models and taking its cut.
Cebert downplays that, however, noting that an independent’s net compensation is diminished by payroll, rent, third-party vendor fees and all the other expenses that go along with running a business.
“You do net out a bit more on the independent side, but the difference is not as dramatic as most people think,” he says.
By Cebert's calculation, his net compensation might be about 10% to 15% more as an independent than in running a practice within Morgan Stanley.
But for many, the allure is in the opportunity to build and run their own business, offering the products and service models that they feel best suit their unique set of clients, something that isn’t always possible within a large institution such as a wirehouse.
“First and foremost, we’re looking at autonomy,” Hamburger says.
That was certainly a motivating factor for Margaret Dechant, a Morgan Stanley veteran who, along with a team of a dozen colleagues, decamped for the independent world and announced the formation of 6 Meridian this month.
Dechant, chief executive of the $2.2 billion RIA, based in Wichita, Kan., has kind words for her former employer (Morgan Stanley is a “fine firm,” she says) but adds that her team was somewhat constrained in the product selection that they could present to clients and wasn’t always able to capture the best pricing on things such as municipal-bond offerings.
Independence offered a chance to run the practice the way she and her partners thought was best for the firm and its clients.
“The opportunity to grow our own business, to have more control over our own resources, both our financial resources, our human capital, our focus to truly own [the business] is very exciting to this group of people,” Dechant says.
Still, Dechant, who gave an interview within the first week of opening the doors to her new firm, acknowledges that in going independent, her team was giving up all the significant institutional support that comes with working under the aegis of a global financial firm such as Morgan Stanley.
“The things that as an employee at Morgan Stanley that we took somewhat for granted was the ease of the technology that’s provided, the fact that compliance is taken care of, the fact that you don't have vendors to pay,” she says. “We own our own business, and now we’re responsible for all of those things.”
Cebert says that he never faced any restrictions on the products or investment strategies that he was able to offer clients while at Morgan Stanley but he encountered other bureaucratic challenges at the wirehouse.
For instance, as an independent, he can plan a client event or a promotional function in a matter of days. But at the wirehouse, to secure approval for marketing materials, a charitable contribution or to do something like sponsor a client's golf tournament could take three or four months.
“The time delays on relatively simple things that shouldn’t take that long do take an inordinate amount of time,” Cebert says. “All of those things in the independent world happen much more simply and easily than in the wirehouse world.”
So it was with hiring.
Cebert's philosophy on the subject is fairly simple.
“When I find good people, I hire them,” he says. “Regardless of whether I actually need them right then or not, I literally will make a place for them on my team and hire them.”
At the wirehouse, however, hiring capacity was strictly pegged to production numbers. So if Cebert wanted to bring on an additional support employee, he needed to hit a certain revenue mark.
But that is hard to do when the office is under-staffed, so it became a chicken-egg scenario, and a major headache of life at a wirehouse.
“To me, the ability to control the size of your staff and your support model on the independent side is one of the things that I really now cherish,” Cebert says. “As I look back on it now, that was one of the most important elements that helped me with growth as an independent, and that was a frustration on the wirehouse side.”