Thin edge

Under pressure from a year-long financial crisis and the resultant dislocation and disaffection of clients and advisors alike, the flow of former wirehouse brokers -- like LLBH Group members William Lomus, William Loftus, Kevin Burns and James Pratt-Heaney -- to independent RIA status could go from a trickle to a flood that inundates their former employers.

Early in 2008, Tiburon Strategic Advisors reported that the number of fee-only SEC- and state-registered advisories increased about 15% from about 19,500 in 2002 to 22,400 in 2007. Looking ahead from the vantage point of late 2007, the Tiburon, Calif.-based consultancy saw the number of fee-only advisories increasing 20% to 27,000 with average assets under management of $310 million and a total of about 55,000 advisors by 2012.

Until the extraordinary events of the last 12 or 14 months, a couple of hundred brokers a year left the five wirehouses -- Merrill, Smith Barney, Morgan Stanley, Wachovia Securities and UBS Financial -- to establish RIAs, according to a June 2007 estimate by Echelon Partners, a Los Angeles-based investment banking and consulting firm. A roughly equal number would affiliate with independent broker-dealers.

Acceleration

This suggests that breakaway brokers have accounted for a comparatively small portion of de novo investment advisories in recent years. Now though, breakaway brokers may put the steady-growth RIA space -- already the fastest growing financial-service segment in terms of assets under management -- into hyperdrive.

According to a recent survey by the Boston-based research and consulting firm Aite Group, approximately 16,500 wirehouse advisors - a good 30% of the total headcount -- are thinking of going independent.

That's a significant increase from the acceleration in advisor antsiness identified by Fidelity's National Financial early this year. In a survey 1,201 U.S. brokers and advisors from a sample of independent, wirehouse, insurance, regional, bank and RIA firms, the clearing firm found that 9% of respondents were considering a move to another firm within the year. That was nearly double the number that was eyeing the door a year earlier. The most popular destinations for those considering a change were independent broker-dealers, regional brokerages and RIAs as the most popular destinations.

Though it's far from likely that all 16,500 of Aite Group's independent-minded brokers actually make a break -- to found advisories, join existing firms or hook up with independent broker-dealers -- such an outcome could result in the loss of $2 trillion in client assets and $7.5 billion in annual revenue to the wirehouses.

Enormous problem

But an exodus even one tenth this size could send some of these battered giants straight over the edge.

"The current trend of brokers breaking away from their employers has the potential to become an enormous problem for many retail-brokerage firms," says Aite Group senior analyst Alois Pirker. "Advisors are not only facing tough times due to current market conditions, but many also feel that the difficulties their employers are facing put strain on their relationships with clients."

Meanwhile the acquisitions of Merrill by Bank of America and Wachovia Securities by Wells Fargo has added to the uncertainty -- and raised the distinct possibility that affiliation with a brand-name employer has become a liability rather than an asset.

"Advisors have to explain to their clients what is going on in their firm and if the firm is at risk the way of Bear Stearns or Lehman Brothers," says Pirker.

Last month Fidelity's Institutional Wealth Services unit said it saw more than twice the asset flow from RIAs founded by former brokers in the first six months of this year than it did in all of 2007. In 2008 through the end of June, 55 ex-brokers brought more than $7 billion in client assets to Fidelity. -FWR

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