Last year, over 10,000 wirehouse brokers changed firms, according to a report from Discovery Database, an online provider of intelligence about financial services firms. But, despite all the effort, time and negotiations, very few actually joined existing wealth management firms. Granted, many started independent firms of their own, but somehow even the largest wealth management firms had only sporadic results in convincing wirehouse brokers to join them.
Theoretically, wealth management firms should fare much better and be able to experience significant growth from mergers with practices formerly based in wirehouses. After all, wealth management firms offer all the benefits of independence: they have well established operations that wirehouse converts would otherwise have to build on their own, strong and well established reputations, offer the camaraderie of a partnership and last, but not least, they have talented and motivated staff. Theoretically, this should appeal to all but perhaps the largest of wirehouse teams. Then again, theoretically, the Seahawks should be in the playoffs.
My experience has been that the theoretical benefits of a merger between a wirehouse practice and an independent wealth management firm rarely happen because:
- It is difficult for wirehouse brokers to go independent in the first place.
- The merger requires a match of personalities and an interpersonal relationship that is difficult to establish.
- Often, both sides have very poor negotiation skills.
- Wirehouse recruiting bonuses get in the way and are difficult to refute.
- Joining an existing firm often does not meet the entrepreneurial desires of the advisors in transition–let's face it, a lot of large wealth management firms start to feel like wirehouses.
It is often said about wirehouse brokers that they, "do not understand independence." This comment encompasses a broad array of issues such as the sense of responsibility for every detail of the business and the willingness to get involved in menial operational tasks that independents have. It is a change in mentality that is not easy or natural and wealth management firms simply need to be patient in the process of introducing their colleagues to the joys of managing their own operations.
What is particularly difficult for wirehouse converts to understand are the mechanics of the investment process and the how the firm is managed. Wirehouse brokers have trouble understanding that the advisory fee is separate from the investment management fee that is charged by third party funds or managers, and is separate from the custodian charges, which can be transactional or based on the assets. This results in confusion over how the pricing for the client works and some skepticism about whether this is really better for the client. The mechanism also creates some uneasiness over how clients will view this complex structure of responsibilities.
Owner compensation is another common issue. Years of training have conditioned brokers to think in terms of "payout" and to calculate their income in such terms. The process of base pay plus share of profits is confusing and again makes advisors uneasy over how the numbers work. They struggle to understand why having a salary and a share of the profits is better than having 50% of YOUR business. In particular the transition from MY business to OUR business troubles many.
There is also general confusion during the process of merger discussions about who is supposed to be pleasing whom. Unfortunately, both sides feel like the other side should be "pitching" them about why they should make this move, and both sides feel somewhat indignant that the other guys are expressing skepticism.
The merger of a wirehouse practice into an existing wealth management firm is a negotiation and should be approached as such. My view is that a wealth management firm should approach the wirehouse broker almost as they'd approach a client, putting their best foot forward. Presenting the firm well, impressing the advisor and convincing him or her of the strength of the team are necessary for constructive negotiations to proceed. Expecting the broker to "pitch" the wealth management firm is unrealistic–they see all these other firms give them extensive sales pitches and offer money . Emotion and pride here are counterproductive.
When a broker joins an independent wealth management firm, they are buying into the team of existing owners as much as they are buying into the economics and the operations. Therefore it is crucial that both sides get to know each other personally. Too often, the discussions jump straight to the payout numbers (see above) and it's tougher to sell a broker or team on the independent firm using pure numbers today.
Over the last four years, the amounts offered as recruiting bonuses by wirehouse firms have escalated, from 120% of the trailing 12 months of revenue, to a stunning 300% (not that 120% was not stunning at the time), which was offered towards the end of 2009. Honestly, from a purely financial perspective, I can't find an argument that answers why an advisor would not take such a deal. The sheer amount of money–and the fact that it is all offered up-front–trumps almost all other analysis of how much the equity of an independent firm might be worth. Thankfully it is not all about the money, but then again, money has a lot to do with it–and it has been difficult for wealth management firms to argue with the massive amount of up-front money. As they say in my native Bulgaria: "When you are given–take! When you are chased–run!"