Breakaway Movement II is kicking in, say Schwab and Fidelity execs

Advisory teams fleeing to the safe havens of independence tapered off in the first half of this 2011, but RIA custodians are finally winning the kinds of big practices that drive profits.

The average team joining Fidelity now has average assets of nearly $100 million, an increase of 38% from last year, says Mike Durbin, president of Fidelity Institutional Wealth Services. The average assets of teams leaving wirehouses last year were around $70 million.

“That’s a huge win for the custodians,” says John Furey, principal of Phoenix-based Advisor Growth Strategies, LLC LLC. “They’d much rather have less and larger teams. Their profitability levels are based on asset levels. They’d much rather set up 10 large shops than 25 small ones. It’s an operating leverage.”

Fidelity brings larger reps

While Durbin declined to say how many teams his firm has brought over this year, he acknowledges that it’s fewer teams compared to 2010.

Mike Durbin: The number of teams
have come down but candidly, we’re
very focused on supporting larger teams
and we feel great helping these
larger teams.

But Durbin is not disappointed because he says the teams the custodian has signed on have been impressive. For instance, so far this year Fidelity has lured 10 teams each of which had at least $250 million in assets. One team moving assets to Fidelity is the Pagnato-Karp Group of Reston, Va. that just left Merrill Lynch Private Banking on July 29 with more than $1 billion of assets. See: Fearless Merrill Lynch team breaks away with $1 billion in broad daylight.

“The number of teams have come down,” he says. “But candidly, we’re very focused on supporting larger teams and we feel great helping these larger teams.”

Slow start for Schwab

Schwab’s first quarter of 2011 was slower compared to last year’s, with fewer and smaller teams signing on, says Schwab Advisor Services Tim Oden, managing director of business development for the West Coast.

However momentum picked up in April, May and June when many larger-than-expected teams moved over to Schwab.

Oden declined to discuss the average assets of the teams, but says that the number of teams the firm has brought over has increased by 8%.

John Furey: They’d much rather set
up 10 large shops than 25
small ones. It’s an operating leverage.

“Our core business hasn’t slowed down,” Oden says, adding that he is expecting major jumps in breakaways in 2012.

“I think you’ll see very large teams in 2012 that would have been off the radar a few years ago all of a sudden [making] moves.
The amount of due diligence they’re conducting is so deep. I just can’t imagine they’d go to that trouble to just kick the tires,” he says.

TD’s favorite year

TD Ameritrade Institutional was the one major custodian that boasted a record number of breakaways this year with 260 teams, up 20% from a year ago, according to Tom Nally, managing director of sales.

The company declined to state the total assets of these teams, but Nally says they have moved both large and small teams alike.

“We’ve seen the size of teams increase as well,” he says. “We cover a broad spectrum.”

TD Ameritrade made news earlier this year because of the generous technology packages it is using to attract breakaways.See: TD Ameritrade uses greater financial incentives to attract custody clients.

Tom Nally: We’ve seen the size
of teams increase as well.

The breakaway trend shows no signs of slowing down, especially as consumers remain skeptical of wirehouse brokers, says Nally.

“We’re continuing to see consumers push for more independent and objective and transparent advice,” he says. “Advisors want to do what’s right for the client.”

Positives at Pershing

The number of new breakaway assets at Pershing LLC has increased 108% from the first half of this year compared to the first half of 2010, says Jim Dario, managing director for business development and relationship management. The average new breakaway firm now has $240 million in assets up from $180 million in the first half of 2010.

Dario says in July the company had three new teams make commitments but these teams aren’t included in the first-half statistics and their assets combined total $900 million.

He sees this as a sign that the breakaway market will be robust for the second half of the year.

But Dario cautions that if the financial markets remain shaky, that could slow down breakaway activity because advisors don’t want to move when the market is so volatile.

“It’s a tough market for the very large teams to have that discussion,” he says. “But the pipeline is getting robust with some really large teams. We’ve got a few opportunities that are well over a couple of billion dollars.”

Jim Dario:We’ve got a few opportunities
that are well over a couple
of billion dollars.

Cracks in the retaining wall

All things being equal, however, industry leaders are looking to the first quarter of 2012 for another spike in breakaway activity as wirehouse retention bonuses start to lose their luster.

Advisors will continue to go independent in large numbers in the first half of 2012 because many are more than halfway through their retention packages, says Aite Group research director Alois Pirker.

Many of these retention bonuses involved five- or seven-year contracts, and by early 2012 many advisors will have just two or three years left on their contracts.

“It seems that once the remaining time on a retention contract is close to three years, financial advisors no longer feel held back by these contracts, and firms have to be prepared to see these producers potentially change employers or go independent,” Pirker says in his report, “Wealth Management on The Move: The Moment of Truth,” released in June.

Alois Pirker: It seems that once
the remaining time on a retention
contract is close to three years,
financial advisors no longer feel held
back by these contracts.

When wirehouses rolled out these retention bonuses in crisis years of 2008 and 2009, many assumed that the economy would have rebounded by now and were likely confident that the wirehouse model would have evolved under new ownership, Pirker said in an interview.

Instead, he says integration has been slow at places like See: Why Smith Barney is now the most target-rich environment for recruiters of breakaways. and the still-volatile markets make it more likely that reps will make a bid for independence.

In fact, Aite’s analysis, based on a survey 159 employed or “captive” advisors in March, shows that one in five wirehouse advisors say there’s more than a 75% chance that they’ll leave their employer in the next 18 to 24 months.

Of those with existing contracts, 22% of these captive brokers have less than two years to go and 44% have less than three years left.

When asked whether retention bonuses are keeping advisors at their current firms, 72% said that they are – for now, but 28% said the bonuses aren’t keeping them tied to the firm.

“The retention bonuses are losing their effectiveness,” Aite says.