Mary Schapiro & broker movement

[mdiamond]

With regard to Mary Schapiro's comments at the recent SIFMA meeting concerning broker transition comp, do you believe that this will impact movement of advisors in the near term?

[Finetooth]

This is a very good topic to discuss. While a decent number of advisors move to enhance their ability to service clients; I still feel strongly that the majority move for the financial gain. Often times, when moving from one wire-house to another; the systems, services and investment vehicles remain the same.

It is important to point out that a large number of advisors moved over the past 18 - 24 months. The irony is that they received record transition packages while their clients were staring at 20 - 40% declines in their investments. This transparency around upfront bonuses is needed to ensure advisors are moving from one firm to another based upon due diligence that is sound and beneficial to the client. Once the playing field has been leveled across the industry, more advisors will evaluate independence in an effort to eliminate proprietary and conflicting interests.

[mdiamond]

Thank you so much for your thoughtful comments. While I agree that some advisors do move for personal financial gain as primary motivation, happily, most advisors I have worked with moved because they no longer had faith that their firm was the best place to service their clients. The personal financial was a nice by product as a result of the move, but not the primary reason for it. I don't believe that forcing advisors to disclose the amount of money they receive as an incentive will do anything to protect clients against rogue advisors that are mvoing for the wrong reasons. Plus, don't forget that the vast majority of wirehouse advisors were paid sizable retention packages as a result of firm mergers, acquisitions, and the like. Will those payments need to be disclosed too? Are clients at risk when their advisor is paid a retention package? I don't think that one necessarily has anything to do with the other.

That said, I do agree with you when you say that "... more advisors will evaluate independence in an effort to eliminate proprietary and conflicting interests." We are seeing this momentum already- advisors who truly want to be buy side advocates for their clients and are willing to look at the long term/big picture economic impacts of their career choices.

[Bradly T.]

Never been a big fish (highest personal GDC is $250k) so no wirehouse has ever offered me any incentives of any kind and I would never work at one anyway. But I have changed BDs 3 times in 23 years and I can say that a comp package would be a great benefit due to the HIGH COST in every transition. You're basically out of production, you've got very nervous clients and you have to run blind for awhile on data and service requests, there's a vertical learning curve for new platforms and integrated software and backoffice/compliance.....it's not easy if you have many clients and accounts despite all the assurances of a smooth and "seamless" transition.


Both of my moves were motivated by product and service spectrum enhancement for my clients benefit. I did not get a bonus and did not get a higher payout....I got more and better stuff. My last move (well I'm hoping) was into total independence - I own the clients and accounts, I'm private labeled, there are no proprietary products or shelf or inventory quotas or restrictions, I'm dually registered with a sophisticated back office with awesome due dilligence and helpful compliance (yes, I said helpful) and great financial planning and major case consulting. Where I am did NOT exist 23 years ago. The indie channel is the smallest still but it is growing.



My only quibble with mdiamond's presentation about broker motives is....if any broker REALLY wants to do what's best for their client they WON"T be in ANY wirehouse. Sorry, but the ability to truly be a client advocate cannot exist in any firm that creates product, sells from an inventory of product, or receives shelf compensation to promote product. That doesn't mean there aren't good reasons for wirehouse transitions or that client interests can't be regarded, protected, or even enhanced by a broker's move. But the indie channel is the ONLY channel that allows an experienced and ethical broker an unencumbered and conflict free platform to act in their clients' best interest without manager, home office, or back office shenanigans.



Perhaps disclosure will actually create competing and rising payoffs (or stop them?). But every professional should be able to receive either a recruiting or retention bonus...it's called free agency.

[mdiamond]

I would agree that in today’s environment, many advisors would prefer to be independent in order to gain complete autonomy, be a buy side advocate for their clients, and truly conflict free. But there are some real positives to working at a wirehouse, other than getting paid a big check. Those positives are: robust platform, excellent technology, plug and play environment, strong capital markets desk, multi currency capabilities, smart leadership, access to investment banking, etc. It’s why Basking Robbins has 31 flavors of ice cream because one size doesn’t always fit all.

[Bradly T.]

Agree, wirehouses offer some services for multi-millionaires and trading based solutions that may be less robust with some indies. However, there will always be an inherent conflict of interest if any broker sells proprietary, inventoried, or shelfed products. The future of the industry is total separation between product manufacturers and product distribution - as it should be. Private banking, trust services, currencies, off-shores, etc. are all coming to the indies and RIAs. The recent collapse of Wall St. (and I don't mean the markets) and the impact on the entire banking institution and world economy has proven that wirehouses cannot be trusted with the public good or even the best interest of their clients (or frankly, even their own best interests). When your personal and business comp is totally dependant on pushing new product and trading frequency and volume, then YOUR best interest is, by definition, contrary to the clients (not specifically, but generally).


I certainly don't intend to indict wirehouse brokers in any way. There's some damn smart and highly ethical brokers on the Street, making their clients oodles of money and managing wealth in sophisticated fashion. But their employers make money manufacturing and peddling product with trading frequency/volume required for profit; and profit based bonuses make the world go round on the Street. Conflict, conflict, conflict. We've seen the results and the cause of those results is no mystery to anyone. Of course, if I was making 7 figures I wouldn't exactly abandon the methodology either. Just my opinion.

[Finetooth]

In my opinion, the largest reason an advisor should stay in the captive channel (wire-house, bank, regional brokerage) is because they don't have the desire or capability to operate and run a business. Far too many advisors have been encouraged to go independent without proper guidance and counseling. It takes a lot to start up a business and to maintain it.

The majority of advisors I have surveyed seem committed to servicing their clients and putting the needs of the client first. The problem is that they don't know what they don't know. They have been trained in a system that trends toward corporate profits versus client satisfaction. W2 = no control and 1099 = total control. Which side of the fence do you want to be on when it comes to providing the best client experience.

[Jeff Spears]

I have been a retail broker and a senior manager for a high net worth group on Wall Street.

My experience with recruiting checks is that they are designed to attract the best advisors and to lock them up with their new firm.

You don't have to look very hard to see Wall Street's desire to lock up advisors. Recruiting deal terms have extended from 5 years to 9 or more years currently. A 9 year lock up is a very long time and will not be in the best interest of the advisor or more importantly their clients.

Think about how much has changed over the last nine years.

The good advisors are worth the money in my opinion, but the new 9 year + deal terms are in Wall Street's best interest not the clients or advisors.

Disclosure of the length of the contract will be more important that disclosure of the $. Most clients don't begrudge their advisor's ability to earn money, but they might begrudge the thought of having to work with a certain firm for 9 years!

[jdstockman1]

As an advisor considering moving, let me say that what began this whole process was a problem with service, and also some sifnificant problems with systems capabilities and how I manage my clients assets, too. (the integration with the Client Relationship Management software and the back office processing). So with those inherent problems at my current firm I am only considering offers from firms with better solutions, which will benefit my clients and my ability to serve them.


The payouts and incentives at the end of the day for me are not incentive alone to move. In my particular case they just keep me "even" over the 9 years with where I am now. They work well for a little bit but if you aren't at a place you can give good client service and performance, you aren't ultimately happy. So as long as your advisor is at least 40 years old and has lived long enough to understand that, you are fine working with one who moves firms. His/her motivation likely is good.