Kathleen Hegenbart remembers the moment, five months ago, that proved a turning point for her. As is often the case in real life, it was not a dramatic office showdown. It was lunch. On a Wednesday.
Hegenbart, then a vice president at Morgan Stanley Smith Barney, met a long-time colleague, and when talk turned to the financial world, the word "independent" was spoken. As a 26-year veteran, Hegenbart had never seriously entertained the thought of going independent. But this time, she knew that she wanted to make a change after a mega merger reshaped her employer in 2009.
The deal left her wishing she could offer more service and support to her clients than she was able to. "Even though I was being paid to stay at MSSB, I knew it was time for me to move on," she said.
While contemplating the notion of going independent and hearing about the freedom it brings, Hegenbart did what any good adviser would do: A risk/reward analysis. "I drew up a chart one day," she said, "and looked at the positives and negatives of moving to an independent firm as opposed to another wirehouse." And sure enough, she decided to move — to another wirehouse. She ended up at Bank of America Merrill Lynch with the same title as before.
Hegenbart, who works in Boston, is far from alone in this "wire-to-wire" trade fair. Interviews with advisers, analysts and headhunters show a shift occurring in this labor market. Though the idea of going independent has long been viewed as the ultimate siren song, more are now finding good reasons to stay in the wirehouse channel.
11,000 On The Prowl
UBS AG, by far the smallest of the four wirehouses, has recruited about 75 advisers from the other three so far this year, according to a company spokesman. The other three declined to disclose overall numbers, but roughly 11,000 wirehouse advisers are estimated to be actively looking for a new job, or planning to within the next two years, according to a recent estimate by Aite Group, a research and consulting firm in Boston. And more than one-third of them would prefer another wirehouse, the report said.
This limits their options. But according to advisers who have recalibrated their thinking, the benefits of working at the big companies are too important to give up, and many advisers simply do not want to be their own boss. Many view independence as a drag on their time and energy for doing what they really like — interacting with clients.
And then there is cold, hard cash. Some work in a wirehouse for the same reason that Willie Sutton robbed banks: Because that's where the money is.
Kenneth Roban, a recent wire-to-wire act, personifies these considerations. He joined the White Plains, N.Y., office of UBS in June from Morgan Stanley. He had considered going independent but then realized it did not suit his personality.
'Something Bigger Than Yourself'
"I don't want to feel isolated and be the one turning on the lights and making management decisions," Roban said. Now he is a senior vice president and senior portfolio manager at UBS and believes that sticking to the wirehouse channel is the best choice any adviser can make. "I like waking up and going into a branch every morning. It's important to feel that you are part of something bigger than yourself."
In an effort to keep their best advisers, the wirehouses have begun to adopt a new strategy, but creating more alluring golden handcuffs through sweeter retention packages is not a long-term solution, said Alois Pirker, a senior analyst at Aite. "The retention packages mean a lot to keep advisers, but it buys the wire houses time, not loyalty."
So the wirehouses began structuring incentives to really boost their position. But these changes were far from handouts. "MSSB offers mortgages and loans for five to six years," Pirker said. "But if they leave sooner, they're on the hook to pay it back, [and] this is a way they stay tied to the company."
The meat of the recruiting deal is still money. And lots of it. Recruiting deals now top out at 330% of trailing-12 production for the first and second quintile advisers, said industry recruiter Mindy Diamond. And as a sign of how competitive this industry can be, wire houses are also feeling the intense pressure to play defense and are trying to keep their advisers who are being lured by competitors' recruiting offers. So they are crafting deals for advisers who do not want to sign a nine-year note. Instead, for example, if they are within three years of retirement eligibility, they will be offered a package to stay, Diamond said.
With this kind of high demand for their services, advisers on the move can afford to be picky when looking at a new wire house.
"I need resources that can support myself and my clients," BoA Merrill's Hegenbart says. Indeed, she rejected the idea of independence for the same reason many others are enticed by it: She didn't want to spend energy on being an entrepreneur, to the detriment of serving her clients.
Hegenbart added that she actively searched for collegiality and interaction among advisers and did not think she could find that at an independent firm. "With two people thinking together, we will come up with a better solution," she said.
And segmentation played a key role when she was shopping for the right wirehouse, she said. "Merrill Lynch is segmented, and there's separate management for making decisions," she said. "When you put everyone together as my previous firm did, it takes you away from your clients' needs."
Of course, Morgan Stanley Smith Barney has its fans, too. One new recruit, Sarah Porter, came over 10 weeks ago along with her team from UBS. She said she enjoys all the resources she has at her disposal. "It may sound attractive [to be independent], but I knew that if I started an independent firm, I would be working around the clock," said Porter, who works in Boston. "What's the purpose of reinventing the wheel when you [can] have all the resources in a larger firm?"
Porter has been in the industry for 27 years, and even though the thought of going independent crossed her mind, she felt it would be in the team's best interest to find a more stable and suitable platform.
"We took a lot of time in interviewing firms, and they all eliminated themselves … even the independents," Porter said. "MSSB offered the best platform and local management and the widest range of services. They are doing what we like to do, and that is manage money."
A move to an independent firm would have been a bad call, she said. "We do not want to move again, it's not a fun process," she said. "The main benefit of working at a wirehouse is that they manage the business, and we don't have to worry about management decisions and the liability, among other things." The veteran adviser also said she believes that technology and a sense of feeling connected to others in the firm are major benefits.
Wisdom Before Youth
What about the flip side? What do the wirehouses seek in their new advisers? Some say it is youth, though others still have respect for the veterans. "Hiring younger and newer advisers will allow the company to shape and mold them to fit their culture," said Larry Petrone, research director at Financial Research Corp. in Boston. "There is certainly a massive number of advisers retiring in 10 to 15 years, and the wirehouses' moving to hire younger advisers may be an effort to attract them to a team."
Scott Smith, a senior analyst at the Cerulli Associates consulting firm in Boston, said that companies like MSSB are even able to relax their recruiting standards and still attract the younger, aspiring advisers. "They have growth potential in their careers," he said. "Younger advisers will team up with more experienced ones [that] can grow them into producers."
Wells Fargo Advisors is embracing this idea, to an extent. It is promoting the idea of having a mix of advisers both new and old. "We want experienced advisers and successful individuals who have strong" backgrounds of "professional and sales orientation, with proven experience in a consulting role," said Chip Walker, managing director of FA Integration at Wells Fargo. At the same time, Walker said, he anticipates building up a diverse mix of advisers with the intention of creating a dual track at his firm. "The adviser trainees are needed to grow the business and lead the industry when the older ones leave," he said.
This is the environment that Kevin Whitehead encountered when he moved to Wells Fargo Advisors from Morgan Stanley Smith Barney this year. "At Wells Fargo, financial advisers are at the core of existence," said Whitehead, a branch manager in St. Louis. "And the clients are the whole thing."
Whitehead also felt that Wells Fargo was further along on integrating its recent acquisitions (Wachovia and, by extension, A.G. Edwards) than the environment he came from that was embroiled in combining Morgan Stanley and Smith Barney. "It's the reason why I moved. If you [are in] a culture where you are afraid to make a decision, and people's judgment starts to suffer, it's not a good position to be in. I am being paid for my sound judgment. If I am afraid to make a decision, it created stress and anxiety."
For Wells' new recruits, Whitehead said, the experience gained from having worked in this channel is a big plus. "Typically, wire house training [provides] more education, and it is comprehensive [so that] they fit the platform," he said.
Aggressive Team Players
Lyle LaMothe, head of U.S. wealth management at BoA Merrill Lynch, said he believes that a successful adviser must possess other qualities before being offered a good package to join Merrill. "I need advisers who exhibit collaborative traits and are growth-oriented at the same time," he said.
Paul Santucci, the chief operating officer of the wealth management group at UBS, said that recruiting activity had jumped in the past year. As a result, the company is more selective in seeking the right adviser. "We take a deep look at the adviser's business and [whether] they have the personality that makes sure they are going into the right organization," he said. UBS aims to fill a more specific niche than the other wire houses, looking to reorganize itself as a smaller player in select markets.
Pirker of Aite Group said that the most common reason for brokers to leave is the damage to their firms' brands in the wake of the financial crisis. The Aite study said that about 16% of advisers who left did so because of their firm's tarnished reputation.