July 5, 2012 / 6:44 PM / in 5 years

Exclusive: Defecting U.S. brokers bring along $59 billion assets

NEW YORK (Reuters) - More than $59 billion in assets switched hands within the U.S. brokerage industry this year, as veteran financial advisers managing large pools of client assets left their firms in the wake of growing frustrations about their parent banks.

Bank of America’s Merrill Lynch (BAC.N) and Morgan Stanley Smith Barney (MS.N) saw some of the biggest defections, with more than half of those total assets managed by advisers who left those two firms. Wells Fargo and UBS, the other top U.S. brokerages, had more success in retaining top talent, based on moves tracked by Reuters.

“We’re seeing bigger teams now making bold moves and moving to another wirehouse or out of the space completely,” said Alois Pirker, research director at the Boston-based Aite Group, which studies wealth management trends.

Across the U.S. brokerage industry, at least 26 adviser teams each managing more than $500 million in client assets changed firms in the first six months of 2012. While there is no official record of such moves from prior years, industry experts say the size of the moves in 2012, by client assets managed, have been larger than those historically seen.

Of those teams, seven managed more than $1 billion in client assets - comparable to the size of some entire office branches. Reuters tracks the movement of individual advisers and teams managing about $100 million or more in client assets, which typically equals about $1 million or more in annual production.

Many of those big team departures - and the roughly 280 other teams among those Reuters tracked - were driven by increased concerns over raised account fees, the pressure to cross-sell their bank’s products, and worries about the health of their parent companies, according to advisers interviewed about their decision to move.

For some brokers, particularly those at Merrill Lynch, the winding down or ending of payback periods for retention bonuses helped pave the way for some departures.

“It’s not necessarily one thing, but one thing that breaks the camel’s back,” Pirker said, referring to the multitude of factors that can impact an adviser’s decision to move.

Departures can mean a significant loss of assets under management for the brokerage an adviser leaves. A top adviser will usually be able to transfer about 75 percent of client assets to the new firm after moving. And when longtime advisers who bring in big bucks for a firm head for the exits, others may follow.

MERRILL, MORGAN STANLEY LEAD DEPARTURES

Frustration with issues surrounding big brokerages was a driving force behind New Jersey-based adviser Walter Urban’s decision to leave Morgan Stanley Smith Barney in May to join Raymond James Financial Inc (RJF.N).

“We were looking for a change from the Wall Street culture,” said Urban, who has been in the industry for nearly two decades and managed $187 million with his two partners. Urban said he wanted to avoid big banks that were exposed to negative headline risk. “It was time to make a move away from that,” he said.

Urban also said new fees on smaller accounts would have affected some of his clients if he had stayed at the firm. While he and his team were still in the process of transferring client accounts to his new firm, he said “the overall client reaction has been fairly positive.”

“It’s still a people business, as much as firms try to make assets seem sticky,” said New York-based financial services recruiter Danny Sarch, who said that veteran advisers who have long-standing client relationships are more likely to be able to shift their clients.

A “broker” traditionally refers to someone who manages a client’s assets by selling securities - such as stocks, bonds or mutual funds - and earning commission on those sales. An “adviser” encompasses the broader role of providing financial planning advice, sometimes fee-based, and often with the fiduciary duty of acting in a client’s best interest.

So far this year, Morgan Stanley Smith Barney has lost at least 128 veteran advisers who managed more than $11 billion in client assets. The brokerage, which resulted from the merger of Morgan Stanley’s (MS.N) wealth unit and Citigroup’s (C.N) Smith Barney in 2009, has just over 17,000 advisers managing about $1.7 trillion in client assets. The firm is often neck-and-neck with Merrill for the spot as the biggest U.S. brokerage, by client assets.

Merrill Lynch fared worse. At least 108 veteran advisers who managed more than $20 billion in client assets - or about 1.1 percent of its total under management - at Merrill Lynch have left. Roughly two-thirds of those assets were managed by advisers who left to join a rival wirehouse brokerage like Morgan Stanley Smith Barney or UBS Wealth Management Americas. The rest was managed by advisers who opened independent firms or joined a smaller, regional firm.

Wells Fargo Advisors (WFC.N) and UBS Wealth Management Americas UBSN.VX(UBS.N), the third- and fourth-largest brokerages respectively, fared better in the first half of the year. The 52 veteran advisers leaving Wells managed just under $2 billion, while the 41 veteran advisers who left UBS managed about $4.7 billion.

While Merrill recruited almost no top brokers into the company, Wells and UBS had the largest net flow of advisers as measured by client assets managed, roughly $6.4 billion and $3.1 billion. To calculate net flow, Reuters subtracted client assets managed by departing advisers from client assets managed by advisers joining the firm.

By that same calculation, Morgan Stanley Smith Barney was net positive $1.5 billion, while Merrill was net negative almost $20 billion.

Despite the tallied losses, a Bank of America spokeswoman pointed to consistent growth of the firm’s adviser force for the past nine quarters through recruiting, retention and its training program.

It can take a trainee about a decade to build a book of business of $100 million in assets, according to recruiters.

A Morgan Stanley Smith Barney spokeswoman said the firm continues to recruit “high quality financial advisers, including several marquee names from our competitors.”

TURNING TO INDEPENDENCE

While many defecting advisers jumped to another big brokerage, some of the biggest teams, fed up with the bank brokerage model entirely, went independent - including three teams each managing at least $1 billion in assets.

While a subset of advisers have always left big brokerages to go independent, it has been rare for mega-producers to do so.

“Years ago, it would have been rare to see a substantive, $750,000 or above producer go independent,” Sarch said. “It’s an ever-increasing trend.”

Wells Fargo, the only top U.S. brokerage with a separate unit for independent advisers, has benefited from that increased interest in brokers looking to go into business for themselves but who want to maintain ties to a big company.

Wells Fargo picked up at least 17 teams that each managed more than $200 million in client assets at their old firms in the first six months of the year. Many joined the company’s independent brokerage, Wells Fargo Advisors Financial Network, which allows advisers to open their own independently run practice with the support of the company.

Among them was Florida-based adviser Michael Landsberg, who left Merrill Lynch after 18 years at the firm, and two partners. Landsberg, who managed $493 million in client assets with his partners, said that the defection of other senior teams at Merrill spurred the idea of his own departure.

“The quality of the folks that were leaving” was an eye-opener, he said.

Regional firms like Raymond James and Ameriprise (AMP.N), which have traditional employee brokerage divisions and separate independent broker-dealer units, also benefited from the 2012 departures, as did wealth management start-ups like HighTower Advisors LLC and Focus Financial Partners LLC.

Focus Financial scored one of the biggest teams this year, with veteran Connecticut-based adviser John Beirne, whose team managed $2 billion in client assets at Merrill. Focus Financial has more than $50 billion in assets.

Beirne, who had been at the same desk for 45 years, said he finally decided to go independent after Merrill Lynch placed limits on his ability to open new public pension funds last April. Beirne and his team had many client accounts in municipal pension funds and estimated about 60 percent of their revenue stream came from those funds.

“When ... they didn’t want to grow out their assets in this area anymore, it left us no choice,” Beirne said.

Reporting By Ashley Lau; Editing by Jennifer Merritt, Walden Siew and Phil Berlowitz

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