A Discussion about Independent vs. Wire House Brokers

As you may have imagined, the past few months have been stressful not just for individual investors but for financial advisors as well. Many advisors get paid a percentage of the assets they manage so when asset prices cheapen, as they have recently, it indicates pay cuts for advisors, portfolio managers, insurance professionals, etc. One change which has been widely commented on in industry publications lately is the movement of assets away from large wire house firms such as Merrill Lynch and Smith Barney into smaller, independently owned advisory firms.* This move is not strictly the result of clients seeking a better relationship with their advisors. It’s also the result of advisors working at firms which have been plagued by the credit crisis looking for a change of scenery.


From my recent discussions with clients and friends who maintain accounts with both wire house brokers and independent firms, a common understanding seems to be that smaller accounts, particularly those valued between $50,000 and $250,000 get very little attention from wire house advisors. This sentiment was confirmed by a friend of mine who recently left his post at a big firm to go out on his own. He explained to me that the majority of sales training he went through was oriented towards going after high net-worth individuals and institutional investors. Along similar lines, I have a client who maintains roughly $200,000 with a wire house broker who told me that he didn’t receive one personal e-mail or mailing from his advisor during 2008; just mass e-mails which provided generic market updates. I would argue these guys aren’t just missing the point about what they actually get paid to do, but they’re also risking an obvious source of future business.
It seems logical that focusing strictly on gathering assets while putting clients into pre-packaged financial products will ultimately alienate them. Time and attention dedicated to client retention undoubtedly leads to better relationships and referrals. Further, smaller accounts, perhaps those worth $100,000-$300,000 have the potential to turn into larger accounts as clients advance in their careers, marry, receive inheritances, etc. Nurturing existing client relationships should be an important (and obvious) tool for growing any money management business. Unfortunately, implementing what could be considered the absolute best idea for a client can often be at odds with generating the most profit for financial firms. As we’ve learned all too well throughout the various Wall Street crises of 2008, many people ultimately focus on their jobs and bonus schedules over their deeper moral beliefs of what is right and what is wrong. The above examples, most of which involve differentiating what is good for a business and what is good for a client, help to explain why some people are seeking out smaller, more client-centered firms at a time when honesty and transparency are lacking.
Some of the same reasons explain why advisors are ditching big firm culture as well. One of the primary reasons for this is that independent firms allow advisors to design their own business models. Advisors can choose an independent firm which offers products and services that complement their style of doing business. They can also focus on getting clients at their own pace and in their own way. Granted many advisors leave big firms and take large books of business with them, but an advisory practice may change and evolve over the years. It’s a breath of fresh air for most advisors when they stop trying to climb the corporate latter and start running their own business.
What’s interesting and somewhat shameful is how difficult it can be for wire house brokers to move their businesses to independent firms. One of the most common methods used by large firms to retain employees are deferred compensation plans. Some of these arrangements go out so many years that advisors risk hundreds of thousands of dollars if they switch firms.** Beyond that, it’s even difficult for smaller producers to move. Some firms now charge transfer fees ranging from $50-$100 per brokerage account transferred out of the firm. Because the charge is actually made against the client’s account, it puts the advisors to the decision of discussing the issue with clients and risking losing the account, or eating the transfer fees themselves, resulting in a major penalty for what could potentially be doing the right thing. Big firms also have the advantage of offering bonuses and commission advances to existing and new advisors. If they sense an advisor is considering a move, especially at times like now when many advisory businesses are failing, the bonuses can be quite generous.
Independent firms cannot compete in the way of offering up-front bonuses to advisors who jump ships. What they can offer, and what I’d argue is far more important if you’re trying to build a long-term successful advisory practice, is the ability to run your own business without product pushing and having to explain the mistakes made by your parent company.
All things considered, I think many clients and advisors prefer to work in an independent setting. It may not be possible for younger people entering the business and less successful advisors to start out at independent firms, but once they learn the business they can certainly make the transition. Speaking as an independent advisor, I can say my practice is centered on my clients and my ability to evolve with the profession has been quite satisfying.
Russell Bailyn

Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.
*Revenge of the Wirehouses – Financial Advisor Magazine: January, 2009
**Golden Handcuffs — http://www.leitnersarch.com/trans/golden.pdf

3 thoughts on “A Discussion about Independent vs. Wire House Brokers”

  1. Ehh… I don’t like those wirehouse guys. Too much sales pressure. At least with indepedents you can ask to pay a flat fee and get professional advice. Whether you use it or not is up to you.

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