UBS adviser Chuck Huebner knew he was done with big brokerages when some supervisors questioned a stock he had purchased for one of his clients. The offending equity? Berkshire Hathaway.
Huebner thought Berkshire was a good bargain early last year, when markets were still struggling, so he snapped it up. The problem was that the stock was not covered by UBS' equity analysts, which prompted some queries from the compliance department.
They wanted us to justify why we were buying it, he said. You mean investing with Warren Buffett isn't good enough?
By February, Huebner, a 36-year industry veteran, joined the growing ranks of advisers breaking away from the big brokerages when he launched Pointe Capital Management LLC in the Detroit suburb of Grosse Pointe, Michigan.
Between November 2008 and last month, some 1,500 brokers fled wirehouse brokerages, as the big financial institutions are known, to work for boutique independent firms, according to data from industry tracker Discovery.
For now, the departures are just a blip for the four largest firms: Morgan Stanley Smith Barney, jointly owned by Morgan Stanley
Whether the breakaway movement peaked last year or will grab market share from big firms for years to come is the subject of heated debate in the wealth management industry. For their part, independents say the trend will continue as more advisers get fed up with Wall Street conflicts and the big banks' bureaucracy.
We were finding it hard to represent our clients in a wholesome way, said Huebner, who had a series of investment ideas questioned in addition to his Berkshire purchase. The market is about to bottom, and we saw all kinds of issues in the industry we didn't like.
BROKEN BUSINESS MODEL?
Traditional brokerages earn money when clients make trades -- the more the better -- boosting income from commissions and fees. Critics have long complained that a broker's interests, particularly the sales of in-house investment products, were not always aligned with the customer's.
Like Huebner, many advisers complain that they are hemmed in by the bureaucracy at big banks. Independents, they say, can treat clients better. Registered investment advisers are by law beholden to higher fiduciary standards, which discourages recommending risky or overpriced investments.
Advisers do not charge commissions, so they are not motivated by the need to make trades. Nor are they constantly under the gun to enlist new clients and boost a firm's assets.
Many brokerage firms have asset-based bonuses, so you're not always focused 100 percent on clients, said David Honigstock, who bolted from Morgan Stanley in December to form Honigstock Group based in Syosset, New York.
There is not a thing I miss about a big firm, he added. Breaking away was the greatest thing I ever did. I felt I could do things better and I wanted to have that autonomy.
That decision is a lot easier these days, Honigstock said, as custody providers like Charles Schwab, Fidelity and Pershing help small shops offer big-firm trading, technology and products. Operating costs also are lower, which can be passed along to clients in the form of lower fees.
Legions of brokers, and the cottage industry of firms to support them, contend traditional brokers may have survived the financial crisis but that their fundamental business model is under assault. With commission rates under constant pressure, brokerages are retooling to charge fees based on total assets, and justify that partly by calling their brokers advisers.
Wall Street's big boys also have been forced to offer open architecture, which means a client can buy investments and funds developed by other firms, potentially diluting profits.
Several forces have come together to convince growing numbers of investment advisers to conclude they could do better on their own. When the 2008 meltdown slammed bank stocks, years of deferred pay vanished -- and with it, a firm's hold on brokers. At the same time, the sinking value of stock issued as bonuses weakened the golden handcuffs that kept brokers from straying.
Then there is the latest blow to Wall Street's reputation. Affiliation with big banks like Morgan Stanley, Merrill Lynch, Wachovia or Citigroup Inc -- long a selling point for brokers -- turned into a weakness when these firms needed taxpayer bailouts to survive.
At the same time, the financial crisis and a burst of mergers fueled a recruiting war. A record 8,667 wirehouse brokers jumped to new jobs last year, according to Discovery. A growing number of them are passing up huge signing bonuses to strike out on their own.
IS BIGGER BETTER?
It's true that independent advisers have been around for nearly as long as Wall Street itself, and that brokers have always jumped jobs. What is new, recruiters said, is that some of those who are leaving now include the desirable $1 million-plus brokers.
Huebner's team managed $275 million of assets and generated about $1.7 million a year in fees and commissions for UBS. He passed up recruiting bonuses that would have been worth three times that annual production from rival brokerages and instead chose to be his own boss.
Indeed Huebner and his partners are digging into their own pockets to launch and expand their new firm, and the big payout may be years down the road.
This take a lot of work. Not just days and weeks but month after month, said Huebner, who is 64. The easy thing is to walk across the street, but what good is that for the client?
Executives at the big banks argue that all the attention lavished on independents is overdone. Bank of America's Sallie Krawcheck last month told Reuters that the pace has already slowed, and that attrition among her top producers sank to all-time lows in the fourth quarter.
Most clients and assets also tend to stay behind when brokers go independent. The reason, said Morgan Stanley Smith Barney head Charlie Johnston, is that big firms can offer their clients superior capabilities.
THE PRICE OF FREEDOM
Still, the exodus continues. According to Discovery's February report, 28 percent of the wirehouse advisers who left their jobs opted to go independent, while 23 percent joined a rival wirehouse. A year ago, 7 percent of jumping wirehouse brokers moved to an independent.
Broker recruiters like Mindy Diamond of Diamond Consultants say the breakaway trend has legs.
There is not an adviser we work with who is not considering independence when they're considering changing firms, she said. Those who do break away want to be in control of their own destiny. They're tired of being embarrassed by their firms.
Independence has its costs. Top producers who go this route often pass up lofty bonuses -- as much as 330 percent of their annual revenues. Up to 140 percent of that is paid up front, with the rest earned through performance over three or even five years.
For many defectors, money is not the issue. Andrew Bodner, an 18-year veteran of UBS and PaineWebber who along with his father Martin formed Double Diamond Investment Group in January, said a long and fruitful relationship soured when the firm questioned his courting contractors as clients.
It had been a very substantial business, it never caused problems and suddenly the firm had objections, Bodner said.
Bodner said launching the Parsippany, New Jersey, firm means better service, lower costs and more product choice for his clients. I could go somewhere else, but I'd only be changing the name on the door and I didn't want to go that route, he said.
Ralph Courage, a top-producing 30-year veteran who in August 2008 formed Courage Miller Partners in Norfolk, Virginia, said he believed clients benefit from working with investment advisers who are by law required to act in their best interests.
When you work for a brokerage firm, there can be conflicts of interest which are not acceptable, said Courage. These big investment firms are interested in themselves first. They are sales organizations.
Courage, whose firm manages more than $200 million in assets, notes that he secured several advanced professional designations. He spent a year investigating his options before making the move.
It is not an easy switch since brokers cannot alert clients or take records out the door when they quit, and can only hope clients follow them to the new firm. A number of big brokers, also are trying to block these breakaway moves in court.
Courage said both he and his clients are glad he moved. We work for our clients and not for a brokerage. Now, even the coffee smells better in the morning.
(Editing by Jim Impoco and Claudia Parsons)