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The 'Break-Back' Broker Phenomenon Continues

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In 2009, the turmoil on Wall Street, the giant mergers of brokerage firms and the lure of entrepreneurship all combined to push thousands of advisors out of wirehouses and into independent firms. Some became RIAs, others affiliated with independent broker/dealers. 

While the longstanding assumption in the industry is that once you go to “RIA or independence land,” you just don’t go back – that’s not always the case.  Over the last few years many advisors have returned to wirehouse firms or joined a wirehouse for the first time. We believe there are three reasons why this migration – which we have termed the “break-back broker phenomenon” has taken place, and is likely to continue.

Deals: The deals offered by the wirehouses were at a record high in 2009-2010, and have only increased since then. Today, for the right advisor (1st quintile, clean compliance record, growth-oriented, and high net worth focused), the deal to incent movement could be as high as 350 percent of trailing twelve month’s production, structured as 120-140 percent in cash upfront plus five back end bonuses.

Business ownership: For many independent advisors, the lure of becoming a business owner and one’s own boss was a primary reason to break away from a traditional firm. But the reality of business ownership does not always match the fantasy, especially in the current economic climate. Having to wear the multiple hats of running a business on a daily basis, as well as managing compliance and other back office functions, are not always what they’re cracked up to be and can sometimes have a negative impact on business growth.

Name recognition: When everything is said and done, the strong, time-honored brands of firms like Morgan Stanley and Wells Fargo have a certain cachet that an advisor hanging out his own shingle may lack.

A Tale of Two Teams

Consider this $3 million team: Ryan and Andrew left Merrill Lynch approximately five years ago and affiliated with a large independent broker dealer because their wirehouse firm did not give them the flexibility to serve their clients the way they wanted. When they left Merrill they had almost $400 million in assets under management and were generating more than $3.4 million in revenue. Their new independent broker/dealer convinced them they would be given significant resources and technology to build their business. Fast forward almost 5 years and their production is right where it was when they left.

“We were sold a bill of goods regarding the b/d’s level of sophistication and technological capabilities,” says Ryan. “We spent the last number of years and many thousands of dollars creating customized systems that worked for us.  Even with all that, we felt that we were still lacking resources and just couldn’t devote any more time away for our clients to sort it all out.” After spending six months on due diligence and taking meetings with two of the wirehouse players and three regional firms in their city, they were pleasantly surprised to find that, unlike five years ago, the wirehouses were open to letting the team function much more independently than in the past, which solved for their biggest objection.  What’s more, instead of several layers of management, they now have a single complex manager who essentially functions as the key leader in the market. And, oh, by the way, the 350 percent deal that they received didn’t hurt. At the start of this year, Ryan and Andrew moved to a wirehouse firm, taking over 95 percent of their business with them in less than 3 months.

Case #2:  For RIA advisor team Derek and Ian, going to a wirehouse seemed an almost foreign concept. The partners, with approximately $200 million under management and generating $2 million in production, had spent their entire professional life (10 years) as employees of an RIA. When we started speaking, they were frustrated that they were not growing fast enough, and they were nervous because the firm was cutting costs to counter the downturn in revenue due to key client defections, increased operating expenses and market conditions. They knew they needed to move, and were grappling with the ideas of either building their own firm, joining another RIA or going to the traditional space.

After assessing their needs and goals for growth, they decided that a wirehouse would provide greater access to a more robust platform including lending, insurance, and alternative investments and allow them to capture greater wallet share from their clients. Additionally, they were offered the opportunity to function with greater independence so they did not feel micro managed. And, best of all, they were freed up to focus on their core competencies of serving existing clients and prospecting for new ones because they now had the back office support they were lacking before. Lastly, they received a recruiting package worth over 300 percent of trailing 12 months production.

Will we continue to see more “break-back brokers” taking the road less traveled from independence to the wirehouse world? Only time will tell.

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