For Some Financial Advisers, Independence is the Key to Survival

After the turmoil that Wall Street's bulge bracket endured last year, a growing number of brokers at top-ranked firms are flying the coop and going independent, taking their best clients with them.

While today's large Wall Street shops survived record losses, staff cutbacks and government bailouts, their survival came at the expense of their reputations, steep declines in 2008 compensation, and restrictions on cash they can pay out for 2009 and future years. It's been enough to drive even established Wall Street veterans to head out on their own, The Wall Street Journal says.

For example, Morgan Stanley Smith Barney last August lost Brett Sharkey, Eric Thurber and Fred Molfino, who'd managed $740 million of the firm's business. The trio founded Three Bridge Wealth Advisors in Menlo Park, Calif. Thurber told the Journal he decided to go independent after watching colleagues at Lehman Brothers endure that firm's collapse. The subsequent troubles of his own shop's owner Citigroup gave him further impetus.

Reasons to Stay

Of course, bolting from a bulge-bracket isn't for everyone. Going it alone can be costly in the short term, as newly independent brokers face higher operating expenses and some client losses. The big shops offer valuable services like back-office support. And top earners remain welcome on Wall Street.

While top-tier global banks are still the top managers of individual investors' portfolios, more departures like Thurber's could greatly alter the balance. Boston-based research firm Cerulli Associates predicted the percentage of individual investor portfolios handled by Wall Street firms could fall to 41 percent by 2012, down from 48 percent in 2008. By 2012, independent advisers are projected to have a 23 percent market share or greater, versus 19 percent in 2008.

That means big asset declines for top-ranked banks. Cerulli estimates brokers leaving bulge-bracket firms took $188 billion in accounts with them last year. Wall Street firms naturally say they're taking departures in stride, noting that many vacating brokers had below-average production.

With top firms gutting compensation and pushing out lower earners, lower-volume brokers are discovering that becoming independent may be their only viable option. For example, many lower-volume brokers at bulge-bracket firms now can only keep 20 percent of their fees, compared with 40 percent in the past, the Journal says. This reportedly prompted Tim Noonan to leave Merrill Lynch's Atlanta office (where his compensation was cut) to found Noonan Capital Management, where he now manages $40 million of former Merrill clients' investments.