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Why Advisors Left Wirehouses for B-Ds and Independents

February 21, 2019

By Mrinalini Krishna, FinancialAdvisor IQ

Wirehouse advisors were on the move in 2018 and non-wirehouse broker-dealer firms were among the big beneficiaries. While each non-wirehouse broker-dealer offered its own incentives for advisors to come on board, recruiters say it was generally frustration beyond money matters that drove wirehouse advisors towards the non-wirehouse crowd.

Based on advisor headcounts presented in 2018 annual company filings, average wirehouse advisor strength diminished by 1%, whereas, on average, rosters at non-wirehouse, regional, national and independent firms grew by 4.39%.

Stifel Financial ended the year with 57 net new additions to its advisor count in 2018 and the firm’s head of recruiting, John Pierce, told FA-IQ in December that his firm had become “a destination for wirehouse advisors.”

Continuing its previously robust advisor growth, Raymond James saw its advisor ranks swell by 3.6% in 2018. Wells Fargo Advisors was the top recruitment source for Raymond James in 2018, according to Scott Curtis, president of Raymond James Private Client Group, although it’s not the first time that wirehouses have been at the top of its hunting grounds.

“The source of recruits for Raymond James, over a period of years, has been pretty consistent — a much higher percentage from other employee model firms, whether it’s Wells Fargo, Morgan Stanley, Merrill Lynch, UBS, Edward Jones, etc.,” says Curtis.

Edward Jones saw a 9% jump in its total advisors in 2018 compared to 2017, which also saw advisor growth of 7.8%. Of all the new hires in 2018, the firm hired 227 advisors from competing firms, says Katherine Mauzy, principal of Financial Advisor Talent Acquisition at Edward Jones. Many of those recruited advisors came from wirehouses, local banks and the independent channel, Mauzy explained.

“It’s a principle thing. It’s not about the money,” says recruiter Frank LaRosa, founder and CEO of Moorestown, N.J.-based Elite Consulting Partners.

Advisors are tired of having continual changes made to their compensation — especially when they see senior management getting larger compensation bonuses, he says.

“I think sometimes when you’re in a publicly-traded company, the desire for shareholder returns can sometimes make advisors feel a little less certain about where the firm is going,” says Mauzy. Edward Jones is a partnership and rewards advisors if the firm and their practice does well.

“They have the ability to earn a branch profitability bonus, three times a year. It’s paid in cash and it ties back to the core values in the firm — rewarding those who do the work. It’s a partnership model, so it’s sharing the profit,” Mauzy says.

So what do non-wirehouse broker-dealers do differently than their wirehouse counterparts that could convince an advisor to switch?

“Regional firms view their role as they’re there to provide their advisors a platform and support to help them grow their practices. Wirehouse firms view it the other way around — the advisors are there to provide a channel for the firm to push products and services,” says LaRosa.

That opens a window of opportunity for non-wirehouse firms and they’re actively trying to catch advisor attention by offering lucrative transition deals, says LaRosa.

“Regional firms are being more aggressive when it comes to transition deals because they recognize that there’s an opportunity right now to capture some of the larger wirehouse advisors that haven’t necessarily been in play” in previous years, says LaRosa.

The sweeter transition deals are beneficial for wirehouse advisors who could potentially be “strapped” with large deferred comp and have to come up with the money, LaRosa says.

When the Department of Labor’s fiduciary rule was tossed, reservations about potential restrictions on incremental incentive compensation in qualified retirement accounts went with it at Stifel. The firm reinstated its back-end award for recruiting once the DOL rule no longer seemed likely, Stifel’s Pierce told FA-IQ in December. That means at the higher production tiers, Stifel advisors hitting their back-end targets could see awards as high as 15% a year for five years.

“So, when you take our trans comp deal plus our grid, we think we have the best total economic package in the industry,” Pierce said.

“We don’t pay that upfront bonus that other firms pay. Instead, we pay income guarantees,” says Edward Jones’ Mauzy. “And their worry is not about revenue — especially in that first year. Then they get a new asset bonus; rewarding them for doing the work of moving their practice.”

The recruitment success at Raymond James in 2018 is because of conversations that started much earlier, Curtis says. The firm observes an October-September fiscal year, and any changes the firm made in 2018 will bear fruit this year or in 2020, he says.

“We have recruiting guidelines that the branch managers and recruiters need to follow. And if they want to do something different from what the guidelines allow, you have to get permission. So, the environment and the economics provided by some other firms, they certainly made the deals richer than they were previously. But if you look at the Raymond James’ guidelines for the last few years, they haven’t changed,” says Curtis.

While all non-wirehouse broker-dealers have managed to lure advisors from wirehouses, competition is brewing between regional/national firms and independents. In that contest, the independents have an advantage. Infusion of private equity money means some large independent firms can up the ante and offer big payouts.

LPL Financial banked on higher transition incentives to attract talent this past year.

LPL stepped on the gas early last year, offering a limited-time only attractive deal especially to advisors from competitors such as Cetera Financial, Securities America and Kestra Financial. Rather than work off the trailing-12, LPL offered 50 basis points on assets as forgivable loans to advisors who joined its RIA.

That LPL deal was resurrected in September 2018 and was a key driver in advisor growth for the rest of the year.

“The primary drivers of our improved outcomes were enhancing the performance of our business development team, as well as aligning our transition assistance with financial returns. We believe these types of structural changes will drive more sustainable and repeatable results going forward,” LPL president and CEO Dan Arnold said in a recent earnings call.

Though LPL is arguably at the forefront, it’s not the only independent looking to woo advisors with handsome transition incentives.

“LPL been more aggressive with transition money but that seems to be a trend in general in the independent channel,” recruiter Jon Henschen of Henschen & Associates says. “Most of these that offer forgivable note money are in that 10% to 20% of trailing 12 and there’s some that will go into the 20% to 40% range.”

At roughly the same time, some national and regional non-wirehouse firms have changed their compensation structures to make things a little harder for advisors.

In 2017, a little before the start of its 2018 fiscal year in October 2017, Raymond James instituted a 100-basis points pay cut across a number of levels in its grid.

Starting in 2018, Stifel raised its minimum production to $250,000.

Henschen says he has had a couple of conversations with Raymond James advisors that are unhappy with the cutback. Advisors in the $600,000 production range saw their payout drop to 80-81% from 90% previously.

“With that production range they could easily earn a 90% payout elsewhere,” says Henschen. He says that a lower payout could prompt advisors to leave.

“[They’re] going to take from [their] existing reps to help bring in new reps … that could come back to bite you,” Henschen says.

It could also force the economics in favor of the independent platforms over the non-wirehouse regionals and nationals.

“As retail shops cut comps and independent shops essentially increase comp, it’s narrowing the gap in compensation initially for an advisor to go from a retail outfit to an independent platform,” says La Rosa. That could decrease the break-even time for an advisor leaving a retail broker-dealer from five or six years to two or three years, he explains.