The asset custodians continue to report robust growth in assets from breakaway brokers and none of them expect the rush to stop anytime soon.

Schwab brought aboard 74 breakaway advisory teams during the six months ended June 30, up 54% from the 48 breakaway teams that it recruited in the first half of last year. Schwab nabbed 38 breakaways during the quarter ended March 31, an increase of 65% from the 23 teams that came aboard during the same time period last year.

All 38 financial advisers it recruited last quarter came from wirehouses and they brought about $3 billion of assets with them. Schwab declined to disclose the assets brought along by the 23 teams it recruited in 2008. Schwab also disclosed that 30% of the 36 brokerage teams who became RIA clients this past quarter joined an existing firm rather setting up their own RIA.

“This [breakaway trend] is a secular phenomenon and not a cyclical phenomenon,” says Barnaby Grist of Charles Schwab Advisor Services. “The underlying trends have been favoring RIAs for a couple of decades. The big shift is around brand” as brokers grew eager to turn independent to shed their association with iconic Wall Street names “It was an acceleration of awareness” of independence as an alternative caused by the meltdown on Wall Street, he adds.

This acceleration of awareness is also improving the fortunes of Schwab’s competitors. Fidelity brought 67 breakaway brokers to its RIA custody platform with combined assets of about $5.1 billion during the first six months of 2009. Fidelity brought in $6.1 billion in breakaway assets for all of 2008.

TD Ameritrade reports similar success. It has recruited 37 new breakaway brokers during the six months ended June 30. It declined to offer more details but it said that it had brought aboard 59 breakaway brokers for all of 2008. Pershing Advisor Solutions brought aboard 12 wirehouse teams with a combined $1.2 billion of assets for the first six months of 2009, up from 6 teams with $340 million during the same period in 2008. In other words, Pershing had a 100% jump in teams recruited and about a 250% increase in breakaway assets for 2009’s first half.

Each of the custodians reports that an increasing share of assets from wirehouses. In the case of Schwab, it won 45% of its net new assets from wirehouse brokers during the six months ended on Dec. 31, according to Schwab’s Independent Advisor Outlook Study. The remainder of the assets came from self-directed investors (25 ) and “other financial firms” (30), the study found. The wirehouses consist of the brokerage arms of Merrill Lynch, Smith Barney, UBS, Morgan Stanley and Wachovia Securities.

Barnaby Grist: Complaints about wirehouse fee
structures also drove breakaways

These survey findings help to show that a greater share of the assets won by Schwab’s RIAs come from wirehouse brokers than ever before, according to Bernie Clark, senior vice president of sales and relationship management for Charles Schwab Advisor Services.

The comparison still has an anecdotal component to it because Schwab’s Outlook survey last year tracked client flows rather than asset flows. That study, covering the 12 months ended Dec. 31, 2007, showed that 38% of RIA new clients came from wirehouses and 21% were formerly self-directed investors.

Accounts in name only

As positive as they are, these survey results still understate the migration of assets to RIAs at the expense wirehouse brokers, Clark adds. Many assets remain at wirehouses in name but the clients holding them have assured RIAs that the decision to move them has already been made. “These investors are no longer in a relationship,” he says. “Their account might still be with [their wirehouse broker] but they’ve moved on emotionally.” The accounts in these instances are being held in cash and the investors are riding out the stormy markets, Clark adds.

The need to hold cash and bonds in stormy markets was also a big driver of breakaways during the first half of 2009, Grist says. Brokers holding these stock alternatives don’t get paid much for these holdings under wirehouse compensation systems. This accentuated the advantages of becoming an RIA that gets paid a fee on assets regardless of how they are invested. “We had alot of complaints about fee structures,” at wirehouses, he says.

Schwab’s main rival, Fidelity Investments, declined to provide comparable data about its success in winning assets from wirehouses.

Losing trust

No doubt the turmoil on Wall Street is pushing wirehouse assets into the RIA realm, Clark says. Indeed, 69% of RIA clients in the Outlook survey cited losing trust in their broker as a reason to move assets, up from 57% in a similar survey of sentiment done by Schwab in July.

Clark cited two wirehouse trends as helping account for the spike in brokers turning independent to join Schwab compared with the first quarter of 2008. Wirehouses have an increasing tendency to focus on satisfying the “top quartile” of their brokers. They are using long-term retention agreements as their principal tool in accomplishing this goal.

Glass half full at $500 million of production

Schwab is finding many interesting prospects in lower quartiles, he adds. Though Clark declined to specify how low his company will go in terms of adviser assets, it probably starts at advisers with $50 million of assets under management [which roughly translates to a $500,000 producer in wirehouse terms], says Bill McGovern, CEO of B/D Search, a St. Petersburg, Fla.-based recruiting firm.
“The same level of arrogance continues and the benchmark moves up and wirehouses really don’t care about anyone doing less than $500,000 and there’s a lot of brokers in that category” for Schwab to snap up, he says.

Eight years of your life

The other new impetus for advisers to turn independent, ironically, is the rush by wirehouses to get them to sign retention agreements, Clark says. The duration of the wirehouse retention agreements — as long as nine years in some cases — is so jarring that it makes the prospect of turning independent seem less daunting by comparison, he says. “It’s eight years of your life. I’d be more worried [as a recruiter] if it was two or three years” required by the wirehouse because under that scenario brokers would happily procrastinate making a decision on breaking away.

Note: In part two of this series, read about the big shift in breakaways that has occurred in just the past 45 days. Seriously. To be sure not to miss it, pleasesubscribe here.