This is the second in a two-part blog series that uses data from the AdvisorHUB wirehouse comp app to explore which might be more lucrative for an advisor: to take a package from a wirehouse or to sell your RIA firm. In part two below, we look at the implications of that exploration for 'breakaway brokers.'
As we argued in part one of this series, the AdvisorHUB data suggests that the financial gap between RIAs and wirehouses—including the potential to monetize the equity of the practice—may be much narrower than many have implied. In essence, the existence of recruiting and retention deals is forcing the profits of advisors within the two channels to be more aligned; anything less really would drive an exodus of advisors from one channel to the other for sheer monetary reasons. In fact, the financial strength of monetization in the wirehouse channel itself may help clarify why the breakaway broker trend isn't more pronounced: the financial benefits of doing so may not be so great. It also suggests that the deals are a key factor preventing a wirehouse exodus. In Australia such recruiting and retention deals were recently banned as a part of that country's Future of Financial Advice (FOFA) reforms, and there seems to be a significant recent uptick in Australia in the number of advisors breaking away to form their own independent practices.
Despite the financial appeal of the recruiting and retention deals, there's little reason to expect the breakaway broker trend to end anytime soon. For many advisors who break away, finances and profits are only part of the equation; it's also about true control of the business, flexibility of how the practice is structured, a desire to more clearly align advisor and client interests (and perhaps even communicate fiduciary as a part of the firm's marketing) or simply a desire to have more control of how the ultimate equity of the business is structured and how it may be monetized. Accordingly, "mid-point" solutions like Hightower Advisors should continue to grow, and our Pinnacle Advisor Solutions offering continues to receive interest from breakaway brokers looking for assistance in how to structure their independent practices efficiently (even as more and more independent RIAs come on board to the platform as well).
Ironically, perhaps the greatest temptation for the wirehouse broker is that while an independent firm can only be sold once, a wirehouse practice may even be more profitable by remaining in the wirehouse channel where it can be "sold" several times by simply engaging in a new recruiting (or at least, retention) deal every time their prior contract comes up for renewal .That allows the practice to be monetized several times over the span of the advisor's career even while continuing to be paid as an advisor (though jumping firms in such a manner may well result in client attrition and almost certainly is not in a client's best interest).
On the other hand, given questions about the sustainability of wirehouses continuing to pay recruiting bonuses at these levels, it's also possible that the peak of wirehouse recruiting deals may already be passing. That would suggest that while it's an effective current strategy to monetize a practice, it's less clear whether it will still be there in the future for those building a practice today (at least, compared to the greater certainly of having outright ownership of the business).
Is AdvisorHUB an Industry Disruptor?
The dynamics of these recruiting and retention deals for wirehouse advisors have existed for years, though they have been on the rise in recent years. A large burst of deals occurred in the aftermath of the financial crisis in particular, as large firm revenue plunged with the market decline (and the contraction of investment banking activity), leading to a big push for greater "stable" revenue from wealth management. The post-financial-crisis deal activity was likely further accelerated when the value of many brokers' deferred compensation plans filled with the stock of downfallen broker-dealers plummeted, further reducing the incentive to stay put.
