In the last six years, while some full-service national firms have been paring back their staffs of reps, the number of independent brokers has surged 41% to 82,000. While some of these independents may be castoffs from a world that has become notoriously inhospitable to low-end producers, not all of the changes lend themselves to a neat survival-of-the-fittest explanation. If it were as simple as that, we wouldn't see revenues growing so much faster among the big independents than at the wirehouses. Yet they are: Last year, for example, the biggest independent broker-dealers saw their revenues grow an average of 22%--twice the pace of those in the brokerage unit of bellwether Merrill Lynch.
Through a survey of 44 independent advisers and by interviewing dozens of other advisers and executives, On Wall Street identified four main reasons why more advisers are choosing to abandon the wirehouse and go into business for themselves. Those reasons--and profiles of some people who exemplify them--follow.
Reason No. 1:
To Make More Money
You can't tell if you're going to make more money as an independent simply by studying the payout grids. And financial advisers understand this. "When they call, they ask, How much am I going to make?' " says John Simmers, chief executive of ING Advisors Network, which has about 2,500 advisers and is in the top third of all independent broker-dealers. "It's what you net and how you grow."
For those grossing less than $500,000 a year, going independent may make less sense, says Mark Tibergien of Moss Adams, a Seattle-based CPA firm. At that level, "the increased benefit is pretty skinny," Tibergien says. "But if you start breaking that barrier and are on a growth path, economically, going independent is pretty hard to turn down."
Tibergien compares a $1 million producer at a wirehouse who gets a 45% payout with the same producer getting 91% at an independent firm. If careful, the independent adviser should be able to keep his expense ratio between 35% and 42% of revenue, Tibergien says. Hitting the low end of that would leave the adviser with $560,000 in take-home pay versus $450,000 at a wirehouse. In addition, the adviser would get tax benefits from the expenses he incurs.
"Somebody who sets a realistic business plan will end up making significantly more than at the wirehouse," says Shawn Dreffein, president of National Planning Holdings, an affiliate of Jackson National Life and the holding company for four independent broker-dealers.
As in any other business, the broker who hangs his own shingle must be prepared to give up some income in the beginning. "In their first year, they'll lose a third of their production to distraction: Being involved in getting the office set up, people hired, machines running right, getting software, and doing the administrative stuff that the wirehouse does for you," says Patricia Abram, senior managing principal at advisory firm CEG Worldwide. "Over time, they'll earn more money and keep more money.
"Let's not fool ourselves," Abram adds. "There's a fair amount of people leaving because they've been thrown out of the wirehouse or they're just ahead of the pink slip. But they do not represent a majority."
Reason No. 2:
To Build Equity
Equity is a second economic incentive to go independent. Although wirehouse reps have their own forms of non-grid compensation--including deferred income and the occasional incentive bonus--they do not receive equity in the businesses they build.
"When you go independent, you get equity on your balance sheet," says David Grau, president of Portland, Ore.-based Business Transitions, which helps independent advisers buy and sell their practices.
A rep's book can be worth between one and a half and two times his gross production, says Simmers. Although fee-based accounts are worth more than commission-based accounts, the value also depends on the size and loyalty of the client base and where the business is located, experts say.
"After having spent 14, 15 years developing relationships, you would like to have ownership of these clients versus the firm" having it, says Bob O'Braitis, a former Prudential branch manager who is now an independent adviser with ING Financial Partners.
Selling a book of business has become much simpler in recent years. In addition to third-party consultants like Grau, some big broker-dealers now have their own matchmaking mechanisms in place. Raymond James, for instance, has a Web site where advisers can list their practices. While the firm's executives would prefer to see the practices stay at Raymond James, advisers are free to sell to whomever they want.