This past summer was my thirtieth anniversary as a headhunter in the wealth management industry. My job has largely remained the same: matching talent with firms.
However, the industry I cover has evolved greatly. Lets go back to 1984, when wealth management was called Retail Brokerage. And the word retail was often said in a disparaging way, to contrast it with the more prestigious institutional part of the business. Indeed, every week I spoke with stock brokers who longed to be able to talk with institutional accounts because it was so dreary having to explain stocks and bonds to regular people.
Stock brokers were pure salespeople. Their mornings began with sales meetings where management extolled why every account that advisors should own "XYZ" stock. The brokers left the meeting armed with what their leaders told them and called their accounts, one after another, in order to sell them the latest ideas. Brokers were not only ranked by their production, but also by how many trades they had made.
A Merrill thirty year veteran, whose name was withheld because he did not have compliance approval to speak publically, as with others who were interviewed for this column, recalls, Our cards back then said Financial Consultant but we were salesmen, pure and simple.
The wirehouses spent millions in advertising to build their brands, a strong advisor culture, and engender client loyalty. In Merrill Lynch commercials, their iconic bull wandered through a store full of glass without shattering a single piece. Their advisors were called a thundering herd, and referred to their company as Mother Merrill. Smith Barney commercials had John Houseman, oozing with gravitas when he proclaimed, Smith Barney makes money the old fashioned way. They earn it. Their advisors were proud of an advisor-centric culture. Their old branches were led by charismatic branch managers, who ran franchises with a certain level of autonomy.
Firms began to recruit aggressively from each other, wooing competing advisors with upfront money. The wirehouses also went to extraordinary lengths to keep clients after the advisor departed. The big firms attempted to protect their investment in their brands and their advisors by filing temporary restraining orders (TROs) in federal court, which temporarily prevented newly departed advisors from soliciting their clients at their new firm. In preparation for their moves, advisors were going to Kinkos in the dead of night to have clients records copied and delivered to the new firm.
Fast forward to today and the Broker Recruiting Protocol has been the de facto law of the land for ten years. There are no more smarmy trips to all-night copying stores, and very few restraining orders argued before judges. Even the rough and tumble recruiting world within wealth management has become more professional.
Advisors today have evolved into much more than just salespeople. Many will state without hesitation or equivocation that they consider themselves the caretakers of their clients financial lives and see themselves as fiduciaries, putting clients interests ahead of their own.
With firms reputations diminished because of the financial crisis, a more skilled and experienced advisor population has emerged, and the ties between advisors and clients, at the expense of their firms, have never been stronger. A current Morgan Stanley advisor put it this way: Maybe its the bull market or me or my clients frustration with the firm, but I have never felt more confident that my clients are mine, and will move with me when I move.
With advisor confidence at an all-time high, there are those looking to move, usually driven by three primary motivations:
1. They want to take equity out of their practice in the form of upfront money.
In my experience, at least 50% of the moves out of a wirehouse are going to other wirehouses. Though this is down from where it used to be [by my estimate more than 90%], there is no denying that a significant percentage of advisors who move from one firm to another are going primarily for the money.
2. They are seeking a change in culture that resembles what they remember from days of yore.
Legacy Merrill Lynch and Smith Barney advisors are not the only ones who had a strong corporate identity. Veterans of A.G. Edwards, Shearson, E.F. Hutton and many others experienced a similar corporate culture, and are longing for a return to the same. This diaspora is driving the success of HighTower, Steward, Benjamin Edwards and others. Culture seekers are also attracted to strong regional firms, like Raymond James and Janney Montgomery Scott.
3. They are seeking independence.
Wirehouse leaders tell me in private conversations that only a fraction of their top advisors are starting their own companies, and I tell them that virtually every advisor with whom I speak asks about it. Part of their disbelief is based on how an independent large producing team only makes marginally more when independent than what they make at the big firm. For those of you who need further explanation, take this example:
A million dollar producer at a big firm is getting about a 45% payout, or $450,000. Add in benefits, employer paid taxes, rent, technology, and sales support that can easily add up to another $100,000. That makes the advisor payout effectively 55%.
Studies show that an advisor going independent with a 90% payout (10% to the broker/dealer) will end up netting 60%. That difference is insignificant. So if its not about money, why are top advisors still going independent? Many say they seek freedom from a wirehouse structure that is seen too bureaucratic and confining.
Merrill, for example, has strict guidelines for pricing of fee-based business, based upon geography and household size. If the advisor discounts too far outside the guidelines, he is harshly penalized. One former Merrill advisor told me: Im the guy at the point of sale. If I charge less, I make less. I discount when it makes sense. Im tired of policies and procedures that do not account for my own track record, my own specific skills. I know its not practical to have 5,000 policies for 13,000 advisors. Thats why I had to go out on my own.
I believe these motivations for moving will remain constant over the next several years. The winners of the recruiting wars will create the best cultures going forward, give advisors the independence not to feel constrained, and those same advisors the best opportunity to make the most money long term.
THE WORK AHEAD
The entire industry needs to do a better job of regaining the trust of regulators. Advisors tell me that they see two new scandals on the horizon that will threaten public trust, yet again. The first is the proliferation of non-traded REITS which typically charge 10% or more in commissions and fees. The second is the trading of bonds, which also includes points," or mark-ups in price, which are not transparent to the client. It would be a boon to a firms reputation to be out in front of these problems before they reach the stage of crisis or embarrassment.
Regulars also have been revisiting disclosure of advisor transition packages. This exasperates advisors throughout the industry. Regulators should back off and target those brokers who systematically take advantage of clients instead of burdening those who truly serve them.
To the RIAs and the Brokers: The best advisors I know consider themselves fiduciaries for their clients. That means that sometimes commissions are the fairer and cheaper way to pay for services. Clients also want access to IPOs and other principally traded products. Smart and reasonable people should be able to come up with a new, pragmatic fiduciary standard for the industry.
While RIAs still deride brokers as mere salesmen, they fail to recognize that the industry has changed dramatically over the last 30 years from the pure old culture of the 1980s and 1990s. Sales also is not a dirty word. If you could not sell your abilities along with your services to prospective clients, you wouldn't' t have a business.
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