But what is best for the clients?

Thousands of brokers at wirehouse firms are about to see their post-crisis retention deals roll off in the near future. Many will be resigned for incredible compensation deals that involve a ransom payment of 300% of their trailing “production” plus all manner of forgivable loans that are the functional equivalent of golden handcuffs. Others will be lured away to the wirehouse down the street for an equally incredible amount of money.

Why are these advisors so valuable?

For starters, they’re not making more of them. Training programs don’t really generate waves of new advisors the way they used to. The producers now are the same as the producers ten years ago, only their books have grown bigger. A Merrill rep from a reasonably large branch on the East Coast I talked to said that he’s been there for a fifteen years and hasn’t seen a single trainee become a producer in all that time.

The other thing is that a lot of the industry’s top talent has already fled the wirehouse model in favor of the independent or the RIA channel. And these people don’t come back once they leave, ask any recruiter.

So you have a finite (shrinking?) pool of old school broker/advisors and a set of firms that will essentially do anything to recruit or retain them. It’s the ultimate seller’s market and the deals are rich.

And when brokers up and leave, there’s often hell to pay. Because it’s the client assets that everyone wants. They are the raw material that brokers produce their, well, wealth widgets out of. So the battle to keep clients when a broker departs is the thing.

Lost in all the wheeling and dealing is the question about “What is best for the clients?”

The firms will make the case that the products and services they offer are incomparable to whatever a rival firm might be able to do. The brokers will argue that the firms are interchangeable and that it’s the relationship that matters more. Clients most frequently agree with the latter argument, not drawing much of a distinction between Merrill and Morgan then their guy or gal tells them he or she is moving on.

Hence the incredibly draconian rules that determine who is allowed to call who and when and what they can bring with them or say to an account. The clients have no say in it. Amazingly, the whole thing is in the hands of the lawyers. Sure, the client can call up and close or open an account at any time – what we’re talking about is controlling who gets to speak with the client to tell their side of the story. And this is a legal matter.

Today, the Wall Street Journal relays:

The firms are also applying greater scrutiny to departing brokers’ client lists and the steps they take to persuade clients to join them when they leave, turning departures into extensive negotiations involving attorneys and debates about which accounts are fair game, some brokers and their business advisers say…

“The brokerages will do anything and everything they can to make your move as difficult as possible—not to get you back, but to scare the next wave of people leaving [the major brokerages],” said Steven Dudash, a former Merrill Lynch broker who left in 2014 and now operates his own firm, IHT Wealth Management in Chicago.

Mr. Dudash said Merrill slowed the account-transfer process for a number of his clients by not taking his calls to complete the moves. “They’d say someone isn’t there,” Mr. Dudash said, “then forward all the calls to management, and then management wouldn’t take the call.”

As a result of this routine, advisors are petrified of walking out the door. This is by design. Attrition would probably be much higher if it wasn’t this difficult to leave the Old World.

As I wrote in my post The Ballad of the Breakaway Broker, not every wirehouse rep wants to leave. For some, it makes more sense to stay. But not for all. Unfortunately, when you owe the firm hundreds of thousands of dollars in forgivable loans you used to buy a house in Gross Pointe or Scarsdale or Bal Harbor, and when you know there’s the potential for a lawsuit, it makes things really difficult – even when you know your future lies elsewhere.

The firm’s argument, and it has some merit, is that the reason you even have a book of business to produce from to begin with is because of the firm’s brand name and capabilities. This was more true in the past than it is today – especially if you work for a wirehouse that was bailed out for making terrible investments of its own and then blowing up. Then there’s the fact that, given the great leap forward in FinTech, a new generation of wealth managers have been enabled to go toe to toe with any legacy firm on software, trading execution, product accessibility, research, data management and user interface.

In the coming year, deals will expire and new contracts will be struck. Enormous checks will be written – with plenty of strings attached. Will the clients themselves, however, see their assets wind up in the situation that’s best for them? In some cases yes, but in others, definitely not. Too bad it’s out of their hands.


Brokerages Brace for a Wave of Departures (Wall Street Journal)

The Ballad of the Breakaway Broker (TRB)


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