Schwab and Fidelity experience seasonal slowing of breakaway activity

Brooke’s Note: Deals are harder to get done in the summer and breaking away to become an RIA is a big deal. For brokers it can seem like taking on a second job and it’s not all in their control. The family wants to get away and so does their lawyer, accountant and all the other parties to the transaction. Still, it’s a little unsettling when a powerful trend takes a rest — even for a deserved break at the beach. This article mulls it over.

Fidelity Investments and Schwab Advisor Services both experienced a slowdown in breakaway activity this summer from the brisker pace of winter and spring.

The slowdown likely signals a return to the seasonal patterns evident before the market turmoil of 2008-09.

Still, researchers at Aite Group of Boston and Cogent Research of Cambridge, Mass. have both published reports suggesting that the stabilizing wirehouses and the big retention bonuses paid could have a deeper effect.

See: Study: Breakaway trend may slow as wirehouse mergers start to click

Finding greater advisor satisfaction at the wirehouses, Cogent study concludes the breakaway surge is over

Executives at both companies say they continue to be buoyed by the size and quality of the advisors making the leap to independence. One of the firms that broke away this summer to Fidelity was Eugene, Ore.-based Sapient Private Wealth Management, which has $500 million in AUM. At Morgan Stanley Smithh Barney it operated as the Erwin Martin Rexius Group. See: Independent-within-Smith Barney breaks away after hitting wall

Schwab doesn’t release quarterly results but shared its experience through a spokeswoman.

IBD pipeline?

The number of teams is pretty similar to last year and average asset size is still larger; though nine months, says Bernie Clark, president of Schwab Advisor Services. “The one [difference] we’re seeing is a definite increase in the number of people coming from the independent broker-dealers. The wirehouse channel is still the biggest but the IBD channel is definitely picking up.”

Mike Durbin, president of Fidelity Institutional Wealth Services, said the company has decided to release detailed breakaway statistics quarterly. This makes it the most transparent custodian in this category of data.

The company’s haul between July 1 and Sept. 30 was about $1 billion of assets from about 25 advisors.

In the first nine months of 2010, Fidelity brought aboard 120 individual brokers and teams with $8 billion transition to independence. Compared to the same period last year, this represents a 26% increase of average assets per breakaway but a decline in the number of breakaways and the total assets.

Of the nearly 120 individual brokers and teams that transitioned to independence, five had assets in excess of $500 million. “We like the qualitative results of our breakaway activity,” Durbin says.

Mike Durbin: We like the qualitative
results of our breakaway activity.

Fidelity has put a greater emphasis on larger advisors in its custody business. Fidelity will soon charge a big fee to small advisors

Seasonal affective disorder

The results show that Fidelity had a seasonal decline that custodians traditionally experience in the summer. In July it reported that for the first six months it had already gathered $7 billion of assets from 95 breakaways teams or brokers. [See info about breakdown between brokers using National Financial Services and RIAs using Fidelity Institutional wealth Services below.]

San Francisco-based Schwab reported flat results for the first six months of the year in terms of the number of breakaways, and a jump of 70% in net new breakaway assets. That was before the summer slowdown.

Custodians didn’t experience this slowdown in the summer of 2009 because the market of large breakaways was in the process of returning to health with the rebound in the stock market.

Many breakaway prospects didn’t want to broach the subject of moving client assets to a new custodian at a time of such turmoil. See: “Breakaway signing rocket ahead in July”: https://www.riabiz.com/a/16005

Belated breakaway

Greg Erwin, 50, co-founder and partner of Sapient, says his firm is an example of a suspended breakaway. He began exploring the breakaway possibilities nearly three years ago and decided later in 2008 to make the move.

Sapient comprises nine people who broke away from Morgan Stanley Smith Barney including four advisors and five staff. See: Why Smith Barney is now the most target-rich environment for recruiters of breakaways

The reason it took another two years is that the credit crisis put our plans on hold until the market calmed down, he says.

Sapient was launched with the support of Focus Connections, a consulting service that is part of the big aggregator, Focus Financial of New York. It provided Sapient with an interim chief operating officer to help smooth the process.

Other Sapient partners include: Alan Rexius, 57, co-founder of the firm and wealth manager, and King Martin, 65.

Minting RIAs

Confirming the trend toward larger breakaways, Fidelity reported that nearly 45% of its breakaways over the year’s first nine months started their own registered investment advisor (RIA) firms. Their average asset level was 57% greater than those who started an RIA during the same period last year.

The remaining breakaways (more than 55%), either joined a broker-dealer client of National Financial, Fidelity’s correspondent clearing business, or joined an existing RIA on Fidelity’s platform.