Wirehouses Feel Some Threat of Independents

The latest The Cerulli Edge—Advisor Edition notes that advances in technology have made the breakaway process easier, but it shouldn’t be taken lightly. After the fact, most advisers report satisfaction, but also said it is one of the most difficult points of their careers.

Cerulli has previously reported that more advisers are considering the independent route, but they are still the minority (see “Advisers Move to Independence, but Wirehouses Are Here to Stay”).

Even though most advisers will not move to independence, the trend is still seen as a nuisance for wirehouses, according to the report. The growth of independent registered investment advisers (RIAs) is the second greatest threat to broker/dealers (B/Ds), trumped only by shrinking margins, according to Cerulli data. The report suggests the solution for wirehouses might be to be give their advisers more independence and flexibility, such as open-architecture tools.

Cerulli 2009 data show that wirehouses hold about 55,000 advisers but are losing advisers more than most other channels. Regional broker/dealers are now adding advisers and branches from wirehouses. RIA-only firms, which hold about 18,500 advisers, are gaining the most advisers. Independent broker/dealers hold the largest chunk of advisers in the industry, with almost 99,000 advisers.

Despite the fact that they aren’t rapidly gaining advisers right now, wirehouses are still a stronghold of the advisory industry, representing nearly 20% of the advisers in the industry and holding about half of the market of investable client assets. According to the Cerulli report: “A wirehouse team with $1 billion in assets under management leaving to start their own RIA makes for an interesting headline, but it also represents a minority of adviser transitions, as the majority of wirehouse adviser defections are to other wirehouse firms.” (See “Once a Wirehouse Adviser, Always a Wirehouse Adviser?”).

Independent advisers see higher payouts than wirehouse advisers (RIAs usually around 100%; independent B/Ds around 70%-100%; wirehouse advisers around 20% to 50%). However, Cerulli notes that stepping into independence could be perceived as about a 10% raise for advisers, once the cost of being a small-business owner is factored in. Advisers might like the idea of independence, until they weigh the difference between “walking into an office flipping on a computer and getting to work against the long list of responsibilities that fall directly in the lap of a small-business owner.”

At least advisers don’t have to feel like they are sacrificing their service offering by going independent, the report notes; technological advances have made setting up an advisory practice easier than ever before, and plenty of RIA service providers are ready to help.