Our Take: Financial Advisors Have Room to Run

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If you're a retail broker, managements at the biggest firms would like you to believe both they and their major rivals are done bidding for your loyalty and client base. Don't believe it.

If your production is above average, or even only average, expect to have the wind at your back for the foreseeable future. In their struggle to maintain sales forces at today's numbers, institutions are fighting not only one another, but the inexorable impact of two secular forces: an aging broker population, and long-term economics that drive many successful advisors to go independent somewhere down the line.

The events of 2008 and early 2009 redrew the personal financial advisor landscape on a massive scale. The mergers that created Morgan Stanley Smith Barney and Bank of America Merrill Lynch and Wells Fargo's acquisition of Wachovia placed placed the entire wirehouse segment of the U.S. sales force in play. Throw UBS Wealth Management Americas and its 7,000-plus advisors into the mix, and that makes 55,000 brokers who might have considered a move at one time or another.

How many actually did jump? In all, 22,000 brokers switched firms last year, recruiter Mindy Diamond writes in a Feb. 16 article in Registered Rep. Discovery Database estimates that 37 percent, or 8,140, came from wirehouses, with roughy half going to another wirehouse. To lure top producers and the fees they generate, firms dangled signing bonuses as high as 280 percent of a year's production. Meanwhile, targeted firms countered with retention packages (cash incentives to stay put). Headhunters had a field day. One recruiting shop even posted a tacky video that spoofed the bidding war it was part of.

Is Peace Breaking Out?

Lately, one top executive after another has been publicly proclaiming a truce. The number of high-producing brokers leaving Morgan Stanley Smith Barney slid beneath 1 percent in last year's fourth quarter, a historic low. "The lower turnover is for real ...(and) should stay low and relatively stable" for the next couple of years, Morgan Stanley CEO James Gorman said. Defections from Bank of America Merrill Lynch likewise plummeted in 2009's final months. And last October, Robert McCann, UBS' new Americas wealth management chief, pledged to stop being "the high bid in the market" in order to entice brokers from rivals.

Contemplating all this, you might get the idea that institutions have stopped paying up to attract advisor talent. That's far from true, according to Diamond, who is president of Diamond Consultants, in Chester, N.J. Transition packages that wirehouses are offering top producers are even bigger than last year, topping at 330 percent of a year's production, her Registered Rep article states.

To be sure, fewer advisors are leaving wirehouses. Among those who do jump, the favored destination is no longer another wirehouse, but going independent. One very recent example: this past week, a team that had managed about $275 million in UBS client assets and generated about $1.7 million of annual revenue formed Pointe Capital Management, in Grosse Pointe, Mich.

Cerulli Associates predicts independent advisors' share of individual investor assets will climb to 23 percent by 2012 from 19 percent in 2008, while wirehouses' share could fall to 41 percent from 48 percent.

A Chronic Shortage of Brokers

To fight the inevitable attrition, some big firms are ramping up efforts to attract and train new entrants to the business. Morgan Stanley Smith Barney, the industry leader with 18,135 reps as of Dec. 31, has said it plans to hire 2,000 trainees this year. BofA Merrill Lynch plans to hire 2,000 brokers, primarily trainees, according to unconfirmed media reports. Wells Fargo has said newcomers will account for 400 of the 1,400 reps it aims to bring aboard during 2010.

Those sound like big numbers. Yet even if each institutions meets its recruiting and training targets, it might end the year with only a few more brokers than it started with. That's because the normal attrition rate for a wirehouse sales force is 10 percent a year. And only one rookie broker enters the business for every three who retire. Throw in competition from independents and the fact it's tougher for new brokers to build a book of business than it was a decade ago, and the case for a chronic shortage of brokers becomes clear. So if you already have an established book, there won't be a shortage of firms poised to bid for your business.

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