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Asset Management

12:55 PM
Becca Lipman
Becca Lipman
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Wirehouses May See More Independent BDs as Retention Packages Expire

Retention bonuses are expiring, leaving brokerages vulnerable to attrition. Is access to technology making it easier for brokers to go independent?

Wirehouse retention bonuses are set to expire starting next year, removing incentive for thousands of brokers to stay with their firm. Recent commentary has suggested that the ending of contracts will be met with a notable but manageable reshuffling among competitive firms, rather than a mass exodus of brokers. But very little has been said about brokers jumping to open independent shops, according to Craig Stuvland, CEO of Tru Independence. He expects a significant increase of this movement.

It was once believed that brokers needed access to the technology, research, and other assets that only a large broker dealer could offer. Perhaps that was true for a time, but a wealth of new vendors and scalable infrastructure have changed the tune, making the independent model more viable.

Stuvland told us the increased availability of technology systems has removed one of the most substantial barriers of transition to independence. Tru Independence is one of a small pool of vendors offering out-of-the-box and highly customizable platforms for independent brokers to set up shop. Robust offerings in reporting, billing, consulting services, CRM, financial planning tools, and even web design are all part of the package.

Easy access to technology likely won't damage the overall churn of brokers, especially as wirehouses issue another round of aggressive retention bonus contracts and conduct further recruiting. But Stuvland said certain groups with "entrepreneurial spirit" have been watching the vendor space for some time, feeling out what is necessary to make the leap when contracts are ended. Business and interest have been greater than his team expected.

For Tru Independence, the average size of teams transplanted from big firms to independent warehouses is six, with a support staff of four or more. "When transitioning to independence, there are many challenges, from division of labor in setting up the business, rent, registering with SEC, operating agreements, even building succession plans," he said. "Vendors and technology are making that process easier, and the potential upside of running your own business is enticing." Wirehouse teams are keeping about 35 cents to the dollar on their services, but in the independent world, those economics flip flop.

The retention bonuses, issued at a time of unease following 2008, were used to stem the outflow of talent. They are structured by the wirehouse, typically for eight- or nine-year commitments, and amortized over the lifespan of the contract. According to a Cerulli Associates study, these contracts are set to expire at a rate of 12-20% per year between 2015 and 2019.

Cultural divide
Perhaps one of the biggest things to have changed since the contracts were signed is the place of employment. Brokers who signed retention deals with A.G. Edwards didn't foresee acquisition by Wachovia and then Wells Fargo. Merrill Lynch brokers are now folded in with Bank of America, and so on. These organizations publicly boast of the business synergies of their mergers, including expanded geographic footprint, trade in new asset markets, experienced staff, and an expanded salesforce. But the corporate, cultural, and organizational differences cannot be downplayed.

Buttoned-down big-bank businesses were a bit hard to handle for brokers coming from small wirehouses. Besides complying with regulatory guidelines, brokers now find themselves complying with even more involved internal regulations, which can impact the way they want to interact with clients.

Understandably, cultural divide is more manageable when the monetary compensation is high. And according to InvestmentNews (registration required), quitting before the retention contract ends may cost the adviser more than $100,000 to the firm.

When the role of money is downplayed, many brokers are sticking around out of loyalty to their firm and to their clients. But not being able to serve clients in a way brokers feel best is a reason to move elsewhere. "Big firms have so many registered reps, so you really are managing to the lowest common denominator," Stuvland said. "Bigger teams have formulated their own investment process, even away from their own wirehouses, but in an independent state, brokers have resources they can control. They can choose where they want to spend money for the client -- on portfolio management systems or trading tools, whatever it is they think can help run a business better. They can hire people they want to hire and grow the practice the way they want to."

The teams Stuvland has lifted out of wirehouses into independent setups has been diverse, though he said they are typically in tune with the aging population of brokers, where mid- and late 50s is the norm. "There are a lot of individuals in the last stage of their career thinking about how they are going to exit and where they are going to leave the clients they have built long-term relationships with. I credit the majority of financial advisers out there. They care about their clients. Invariably, all independent shops are client centric. They're concerned about service."

As for escaping the unfavorable business cultures spawned by the M&A frenzy, Stuvland said he has seen an "absolute relaxing" of the brokers, even a few reintroductions of "Casual Friday" wardrobes. "Brokers are wanting to work into their 70s and 80s and maybe want to only work Tuesdays and Thursdays. An independent environment lends itself to that."

Becca Lipman is Senior Editor for Wall Street & Technology. She writes in-depth news articles with a focus on big data and compliance in the capital markets. She regularly meets with information technology leaders and innovators and writes about cloud computing, datacenters, ... View Full Bio
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