Updated Thursday, July 31, 2014 as of 5:39 PM ET
Trailblazing Breakaways Challenge Wirehouse Model
It’s a good time to be a successful wirehouse financial advisor. Your clients are happy because they’ve reaped the benefits of a sustained bull market. There are few new advisors being trained, so your established practice is in high demand. And there are more choices than ever to give your “shareholders” the best possible return on your sweat equity.

Yes, I know employee financial advisors don’t have shareholders per se. But I suggest to the advisors I talk to every day that they are the CEOs of their own practices, each a unique profit center within a corporation that is measured and valued daily. And each advisor’s shareholders are the families that have a stake in the relative success or failure of that advisor’s enterprise.

WHAT'S SO SPECIAL ABOUT THIS ENVIRONMENT?

• More advisors are leaving the industry than entering it. Wirehouse training programs, which had supplied the industry with new talent for years, have failed to match the industry’s rate of natural attrition (through retirement, death and so on). Fiercely aware of this trend, the big firms have revamped their training programs, but it will be years before the industry can tell whether these efforts will pay off in “restocking” the pool of big producers. Meantime, existing advisors will be in higher demand than ever as their numbers dwindle.

• Big firms can no longer credibly claim they have more and better tools than smaller competitors, giving sophisticated advisors and their clients more choices of where to do business. There was a time when financial planning was a novel idea. There also was a time when separately managed accounts were an innovation, and a differentiator. Only big firms were able to provide complex reports, because mainframe computers were necessary to crunch the numbers and compile the data. Now, clients check their accounts online in real time, and advisors can produce an up-to-the-minute reports of their holdings on the fly.

• Smaller firms are no longer at a disadvantage in terms of capabilities, while entrepreneurialism is creating models the industry has never seen before. Call it, “Revenge of the Big-Firm Refugees.” Dissatisfaction with career choices (or lack of choices) within the big-firm model has empowered former big-firm product and field leadership to open more new firms than ever. Years ago, the smaller firms and the independent models were capitalizing on the disenfranchised, smaller producers from the wirehouses, who were desperate for a higher payout, which they could only get outside the big-firm environment. Now, the biggest and best producers are populating all types of firms outside the wirehouses, often following expatriated ex-wirehouse managers.

So, just as prospective clients can be confused by the various models (see my column in the previous issue), wirehouse advisors can be surprisingly naďve about the breadth of opportunities available to them. If you’re a successful producer, you can tailor a move to a smaller firm to your relative strengths and weaknesses.

Or you can go to another big firm and collect a big check. First, ask yourself …

WHAT DO YOU WANT TO FIX?

It’s easy to take pot shots at large firms, but many advisors can’t imagine working in any other type of environment. Perhaps it’s the comfort level or clout of having a brand name behind them, or the thrill of being in a large competitive branch. And wirehouse leaders prefer recruiting from other wirehouses (a tactic derided by critics as “hostage swaps”), because historically those transitioning most successfully onto their platforms come from other wirehouses.

Of course, big-firm to big-firm moves are driven by big checks. Wirehouse deals for large producers are upward of 300% of an advisor’s past 12 months’ gross production, when the back-end incentives are hit. And advisors can negotiate special interest rates for clients, raises for assistants and more.

In most cases, though, something equally compelling is also at play. Sometimes it’s dissatisfaction or discomfort with bureaucracy, or a local manager, or the commute, or the headline risk. A different firm offers to fix many if not all of the problems and makes an enticing proposition to sign on.

Still, much of the dissatisfaction among wirehouse advisors is with the wirehouse model itself. Top advisors typically bemoan policies and procedures that factor in all levels of experience and productivity. This “managing to the least common denominator” often fails to respect a top producer’s business acumen. But if you’re a successful adviser and you seek more control, you have choices:

• Big fish/big pond to big fish/small pond. Several years ago, a top wirehouse producer confessed to me that he was tired of being taken for granted. In a big office with many big producers, he felt he was in competition for attention, resources and products. “My office is like a bucket of crabs, climbing over each other to get to the top,” he said. Forgoing the biggest check available, he moved to a smaller firm where senior leaders and branch leaders paid attention to his needs.

Today he says: “Yes, I confess, I wanted to get my butt kissed. But since I’ve moved, I get more marketing dollars, more sales support and my business has grown. My stress level is down and I feel appreciated. I couldn’t be happier.”

• The power of ownership. Before the financial crisis, it was unusual for a substantive wirehouse producer to open his or her own shop. Wirehouse executives and producers scoffed at the independents’ relatively low production numbers. The typical wirehouse advisor who went independent was a $300,000 career producer whose payout was 30%. Once on his own, his payout after expenses would be 60 percent. That difference is lifestyle-changing.

But a big producer with payout and benefits over 50 percent does not get the same giant percentage leap in earnings. When you add what a big firm pays its top producers to the higher payout a big producer gets and compare it with after-expenses/true take-home money the big producer nets running his or her own firm, there’s not a substantive difference. Moreover, going independent usually means forgoing the big upfront check.

Yet more big producers from big firms are considering independence every day!

Scores of ex-wirehouse managers and executives, still in their career primes, have spent years solving the problems of wealth management advisors and their clients. Now, fueled by some combination of desperation, anger, resolve and determination, these new entrepreneurs have created a unique model that appeals to a segment of dissatisfied wirehouse advisors searching for a new way to service their clients without big-firm compromises.

A partial list of success stories — firms that have recruited millions of dollars in production and billions in assets — includes Benjamin Edwards, Dynasty, FieldPoint Private, Focus Financial, HighTower and Steward Partners.

A PATH TO WIREHOUSE SALVATION?

Most top producers at the large firms are well into their 50s, so the collective wirehouse challenge of natural attrition will only accelerate. What’s more, even as the wirehouses recruit from each other, the rest of the industry recruits from them. And every few years the big firms seem to be at the center of some scandal that makes clients and regulators more suspicious of their business practices. The wirehouse model has never been more vulnerable. Unless they change their antiquated attitudes and policies, they will at best fail to grow, and at worst become increasingly less relevant to the industry they once dominated.

Some suggestions for survival:

• Adopt the fiduciary standard. Hasn’t recent history shown that brokerage firms can’t service clients, employees and shareholders equally? Take the high road, tell the world the client comes first. 

• Keep your best performers happy. Defer to them, and give them more leeway than others.

• Take a lesson from your new competitors. Don’t tinker with payouts, and don’t tell advisors they’re owners in the firm unless you mean it. Loyalty works both ways.   more »
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