Wirehouses need an RIA protection strategy

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It seems that every week there’s another multi-million dollar wirehouse team that jumps ship and sets up shop in the RIA world. As the appeal of the independent model gains ever more traction, wirehouses are losing some of their most talented, high-end teams.

Wirehouse breakaways were up by 20% in 2017 from the previous year and by 59% since 2013 , according to a Charles Schwab report. And at least 30% of new RIA breakaways from broker-dealers or IBDs had assets in excess of $300 million.

So, it’s not an exaggeration to say that this trend poses a serious dilemma for employee model broker-dealers of all stripes.

It’s easy to understand the allure of the RIA model. RIAs can present themselves to clients as full-fledged fiduciaries. They have maximum control over the ultimate sale price of their practice and the profits from the sale are taxed at the more favorable capital gains rate. Moreover, many advisors feel that RIA practices are worth more because of the broader base of potential buyers. These include independent firm aggregators, banks and other RIAs.

To mitigate this threat, wirehouses have been making use of several strategies.

1. If you can’t beat ‘em, join ‘em.

An RIA business is far less profitable to a broker-dealer than business generated by employee advisors. That’s because instead of the 38% to 45% payout typically received by most wirehouse advisors, RIAs are typically at 100% payouts minus a basis points formulation charged by their custodian. Any wirehouse that opens an RIA division must be prepared to slash their profits on this cohort of advisors.

Wells Fargo, which recently opened an RIA channel, already offers advisors the option of multiple channels, including bank branches, a wirehouse and its IBD option, FiNet. Opening up an RIA channel could fit nicely with their corporate culture. It is highly unlikely that other wirehouses will follow suit. Neither Morgan Stanley nor UBS has displayed any interest in any offering their advisors an independent, non-employee business model. Andy Sieg, wealth management chief at Merrill Lynch has made it clear that he has no intention of launching an RIA business. His firm’s focus is on deepening the penetration of existing client assets at it’s Bank of America, Merrill Edge and Merrill Lynch divisions.

Regional broker-dealers are perhaps less vulnerable to the emerging RIA trend.

That’s because the combination of their payouts and deferred compensation programs bring their advisors much closer to the 60% to 65% net after expenses enjoyed by independent advisors. Also, their advisors are likely to feel a greater sense of autonomy and connectedness to their firms.

2. Boost deferred compensation programs

This has long been a time-honored strategy to slow advisor movement. Advisors with meaningful amounts of unvested deferred compensation often favor other wirehouses or regional firms that have programs to address this issue. Although partnership opportunities exist, advisors who want to go RIA must be willing to walk away from unvested compensation.

It’s worth noting that while Wells Fargo will permit its existing advisors to transfer to its RIA channel, those advisors will have to give up any deferred compensation they are due, according to the company.

The following 17 teams oversaw about $75 billion in assets. The firms ending the year with prize recruits include a diverse cast: regional BDs, wirehouses, boutiques and RIAs.
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3. Beef up advisor succession planning awards

In recent years, major wirehouses have been hiking incentives for their advisors to hand off their client accounts to younger advisors at their firms. UBS was a trailblazer with it’s accelerated Aspiring Legacy Financial Advisor program or ALFA program. It offers UBS advisors a bonus of up to 300% of their production on assets transitioned to other UBS advisors. Part of the payment is in the form of up-front money. Other wirehouses have their own versions of this type succession planning program.

4. Make your wirehouse a terrific place to work

This is, of course, the most reliable strategy and wirehouse have made moves in this direction. For starters, some firms have stopped monkeying with their grids — a smart idea given that compensation changes can rub advisors the wrong way. UBS debuted out a simpler, more understandable grid in 2016. Most notably, UBS backed off on plans to insert a draconian non-solicit into advisor agreements after it provoked widespread dissention within the firm. And wirehouses are also upgrading their technology and figuring out how to expand their social media prowess. Morgan Stanley, for example, recently rolled out a more advanced advisor dashboard with predictive analytics capabilities.

It’s a good start. But the growing movement of advisors to the RIA world poses a real challenge for major wirehouses. One way or another, they’ll need to adopt a cogent game plan.

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Going independent RIAs Wirehouses Compensation Succession planning Morgan Stanley Wealth Management UBS Wealth Management Merrill Lynch Wells Fargo Advisors