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California Financial Services Law Report- The Growing Trend: Brokers Moving From Major Wirehouses To Independent Broker-Dealers

By Erwin J. Shustak, Esq. of Shustak Reynolds & Partners, P.C. posted on Wednesday, January 31, 2018.

Erwin J, Shustak, Esq.
619.696.9500 ext. 109
[email protected]

The facts speak for themselves.  There is a steady and growing trend for brokers to leave one of the remaining four wirehouse firms (Merrill, Morgan, Wells Fargo, UBS) and move to one of the independent broker-dealers (IBD’s), RIA firms or smaller, regional firms.  In 2016, the four wirehouses had a net exit of approximately $40 billion of assets leave them for one of the IBD’s and other advisor channels.  In 2017, the movement of assets from the wirehouses to the IBD network accelerated dramatically.  Approximately $75 billion moved from one of the four wirehouses to one of the IBD’s, a regional broker or an RIA firm.

According to a 2017 survey by Cerull Associates, 69% of breakaway advisers who left a major wirehouse, said “a desire for greater independence” was a “major factor” in their decision to change firms.  The same survey indicates that 56% of those breakaway brokers said, “concerns about quality of broker-dealer’s culture” was a “major factor” in deciding to move.

From a purely financial point of view, a broker stands to keep a much higher percentage of their gross revenues from clients at an IBD, RIA or smaller regional firm.  The major wirehouses, generally, give the producing broker approximately 40% of their gross revenues, compared with close to 80% of the gross that IBD’s and many RIA firms pay.  While IBD’s do have some additional charges, and many do not provide office space and cover other overhead, the bottom line at an IBD usually is better than at a wirehouse.

Since this trend has been continuing for several years, we address the typical reasons that brokers have stayed with the wirehouses; how those reasons have changed in the past years and recent developments that are hastening brokers to break away from the wirehouses in increasingly larger numbers.

Technology-

No different than most service businesses, the practice of law included, in the past there was a noticeable gap in the technology and computer support available at an IBD and a wirehouse.  That no longer is the case.  The larger IBD’s, including LPL, Raymond James, Ameriprise, Commonwealth and a host of others have invested substantially in their technology platforms to the point where the technology available to a broker at a wirehouse and an IBD or RIA firm is about the same.  Cost of technology continues to fall allowing the smaller firms to provide the same quality and sophisticated tech support to their brokers as at the wirehouses.

Public “Branding”-

For many years, clients, and their advisors, were drawn to the “brand recognition” of the big players, Merrill, Morgan, UBS, etc.  That no longer is the case.  The larger IBD firms such as LPL, Ameriprise, Raymond James and others have done an excellent job of creating their own “brands” and making those brands household names.  At the same time, since the economic collapse of 2009, many investors who blame the crash and their financial damage from the crash on some of the “big names” in the financial world.  To many investors, bigger no longer equates with better.  Many clients are fine knowing their finances are being handled by a smaller, leaner, more cost efficient IBD.

These two factors- growing brand awareness of the IBDs, and the negative association many investors have with the “big name” wirehouses, has made a switch from wirehouse to IBD or RIA much easier to explain to clients.

Low Recruiting Bonuses-

For many years one of the biggest reasons to stay at, or laterally move from one wirehouse to the other were the extremely tempting and large up-front, forgivable loans the wirehouses were lavishing on their recruits.  Some large producers were asking for, and receiving, multiples of 2X or more of their trailing 12.   Very tempting to get money for making a switch from one firm to the other or to a wirehouse.  But since the Department of Labor rules, and mandated public disclosure about these upfront deals, many of the firms have stopped paying recruiting bonuses at all or have substantially reduced the size of what they offer.

At the same time, many seasoned brokers have realized that what seem like manna from heaven, are nothing more than golden handcuffs intended to keep the broker at his or her firm for many years.  The notes almost always are repayable when a broker leaves the firm- whether by termination of choice- and the money is legally owed no matter what complaints the broker may have against his or her firm.  And those brokers that have arbitrated these note/broken promise cases, have had dismal results at hearings.  In almost 95% of the cases, the broker has been ordered to repay his or her firm the unpaid balance of the note, with interest and legal fees, even if some lesser amount is awarded on their direct claims.  The fear of expensive, unsuccessful litigation and arbitration has kept may brokers at their firms, feeling no option to leave.

Recent Changes in the Broker Protocol Membership-

One of the most compelling, most recent reason for breakaways to leave wirehouses and move to an IBD or RIA is very recent upheavals in the Broker Protocol.  The Protocol was adopted in 2004 by three major wirehouses to allow brokers to move from one-member firm to another and take the key pieces of information needed to move accounts, including client name, contact information and account titles.  Since it was first adopted in 2004, over 1,500 RIA’s, IBD’s, regional firms and other distribution channels have signed on.

It obviously was causing a sufficient enough drain of brokers, clients and assets, that Morgan Stanley and UBS left the Protocol toward the end of 2017.  Morgan then undertook an aggressive campaign of seeking, and obtaining, temporary restraining orders from several state and federal courts across the country effectively preventing the breakaway brokers from contacting or servicing the clients they had serviced at Morgan. 

Morgan’s position is ironic but has been accepted by several courts.  Brokers joined Morgan when it was a party to the Broker Protocol, bringing with them client information and contacts from their prior firms who most likely also were members of the Protocol.  By then quickly pulling up the drawbridge, however, Morgan and the other firms who recently left the Protocol have trapped their brokers in-house, threatening to sue and enjoin them from servicing or even contacting their former clients.  Those brokers then become captive brokers and Morgan, and the other firms no longer must pay them large retention deals to keep them in the firm.  The threat of litigation and financial ruin is all it takes to keep them in line.

We expect the trend of brokers departing from wirehouses to IBD’s, RIA’s and alternative distribution networks will only continue.  We have extensive experience and expertise in the financial services area.  If you have any questions, please contact us.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. For more information, or if you or your company require counsel in these areas, contact us today for a confidential, complimentary consultation.

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