Brokerages face exodus as advisers get better deal in indie firms

Wed Aug 13, 2014 7:51am EDT
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By Elizabeth Dilts

NEW YORK (Reuters) - The four biggest U.S. brokerage firms are facing an exodus of employees who are finding they can make more money and save on taxes by taking their clients and starting an independent firm before they retire.

Prices are rising for independent brokers because of demand from investors and other firms, while supply is low because advisers have made steady money through a five-year bull market and are waiting to sell. At the same time the major brokerages -- Bank of America's Merrill Lynch, Morgan Stanley, Wells Fargo and UBS -- are fighting to keep their money-making assets from walking out the door.

For Jim Pratt-Heaney and Bill Lomas, two long-time brokers who left Merrill Lynch in 2008 to found Connecticut registered investment advisory group LLBH Private Wealth Management, the financial benefits were key. Both told Reuters they had no doubt they would get more money selling their shares of their independent business than Merrill Lynch would have offered them.

"The idea that we didn't own equity in our business as an adviser with a major wirehouse was concerning to us," said Lomas, 56.

Almost 100,000 brokers – or about one-third of the industry – are expected to reach retirement age over the next ten years, according to research firm Cerulli Associates, and the thoughts of many are turning to how to pay for it.

Big firms usually compensate departing brokers for the book of business they leave behind. Typically, brokerages pay between 0.85 and 1.4 times the annual revenue generated by the adviser, according to Nate Lenz, director of acquisitions for Raymond James Financial Services. The amount is usually paid out over three or four years, as long as the broker's clients stay with the firm, and the money is considered salary and subject to federal, state and local income taxes.

At those rates, a broker bringing in $750,000 a year in fees and commissions could receive $1.05 million at best over four years, which if taxed at the highest federal rate of 39.6 percent would leave the broker with $634,200.

By contrast, surging demand at a time when few wealth management firms are for sale means that a business owner with a high portion of fee-based revenue can now sell for an average of two to 2.25 times annual revenue, Lenz said. So a broker with a $750,000 annual book could sell for at least $1.5 million, using the lower multiple.   Continued...

The corporate logo of financial firm Morgan Stanley is pictured on a building in San Diego, California September 24, 2013. REUTERS/Mike Blake