Breakaway broker signings get off to hot start in 2010 for Fidelity, TD and Schwab

Defying expert predictions that the breakaway movement would whither after the big wirehouses stabilized, the number of brokers shifting to independence is continuing to climb, according to asset custodians who are reporting their first-quarter numbers.

Fidelity, TD Ameritrade and Schwab Advisor Services, the three biggest custodians, all said the number and size of wirehouse brokers choosing to become RIAs increased during the first three months of 2010.

Fidelity Investments attracted nearly 50 broker teams to its custody and clearing platforms in the first quarter of 2010, an increase of 20% compared to the first quarter of 2009, the Boston-based company said.

Most of these breakaways were hybrid RIAs who conduct both fee- and commission-based business. They joined either Fidelity Institutional Wealth Services or a broker-dealer client of National Financial, which is Fidelity’s correspondent clearing business.

Many mid-tier and smaller advisors’ hands were forced last year due to cuts in payout and consolidation.

But there are other factors this year that are keeping the breakaway movement chugging along, according to John Furey, its founder and principal of Advisor Growth Strategies LLC of Phoenix, Ariz. His company becomes a de facto chief operating officer for a breakaway broker during its time of transition.

Cumulative effect

“There is a new, cumulative effect happening,” he says. “Many advisors have seen their colleagues go independent and find out it’s achievable. This feeds on itself, which keeps the trend moving.”

Fidelity also succeeded in luring bigger producers than last year, while the number of advisors coming aboard with $50 million or less tailed off, according to Scott Dell’Orfano, executive vice president of sales for Fidelity Institutional Wealth Services. Most breakaways fall between $75 million and $1 billion of assets under management, he adds. He declind to specify the average size of advisors from last year.

“The average is well up from what we saw at this time last year,” he says. “The small ones we’re not seeing as frequently – given the cost of running a small practice.”

These results are consistent with the activity that Advisor Growth Strategies is experiencing, according to Furey.

Process is slower

“My sales funnel mirrors the asset custodians,” he says. “I have multiple larger teams in my pipeline – several of them $1 billion-plus teams. But the process is slower [for brokers with such large books of business].”

TD Ameritrade is also experiencing an uptick in breakaways to its platform, but continues to attract smaller advisors – in addition to larger ones, according to Tom Nally, managing director of institutional sales for the company.

“We’re having an absolutely fantastic year from a breakaway broker perspective,” Nally says.

He adds that this joy is partly a relief that the forecast of some industry observers didn’t come true. Some opined that the number of breakaways would tail off as wirehouses stabilized after a series of mergers and market drubbings.

Anxious moments

“We were anxious to see how it played out once [turmoil abated] at the wirehouses, but to the contrary [of what some wirehouse executives were saying] our numbers are showing us that the breakaway movement is alive and well,” he says. “Our business has never been healthier or stronger.”

Schwab has yet to tally its results for the first quarter of 2010 – at least publicly – but Bernie Clark, the senior vice president of Schwab Advisor Services who heads the firm’s RIA custody business, says that his company has also gotten off to a very healthy start in 2010.

“We had a very active first quarter both in terms of advisors making the move and in the number of serious conversations our team is having with prospective clients,” he says. “One of the key trends we’re seeing is that the average size of advisors coming to Schwab is significantly larger than in previous quarters. In addition, interest from advisors who want to join existing RIA firms is extremely high.”

Both Fidelity and TD Ameritrade said they are also finding that many breakaways want to land at an existing RIA.

TD has an additional 60 breakaway deals pending with a combined $3 billion of assets. The reason these small RIAs can break away successfully is because so many of them are able to join bigger firms, Nally says.

Side benefit

But the program has an important side benefit for existing clients, he adds.

“It’s an opportunity to help our existing advisors to grow,” he says.

In January, Fidelity also introduced a matching program designed to formally help breakaways easily identify an independent broker-dealer or RIA firm that may be an appropriate fit. It has 80 of its biggest advisors enrolled including those working through both the custody and clearing side of its business. Each of these practices has been handpicked by Fidelity after being certain that the firms were well-prepared to take on new advisors.

“A lot of firms say: I’d love to talk to a breakaway firm,” Dell’Orfano says. The key is to be sure they’re educated on how, for instance, to do an equity earn-in or to have enough capital on hand, he adds.

The TD and Fidelity execs are also confident that the rest of the year looks strong for breakaways:

Half-billion sized practices

“I feel very positive in what I see coming from the second quarter and for the rest of the year,” Dell’Orfano says. “[The pipeline] is bigger and better. It isn’t the number; it’s the size. There are half a billion-sized practices [in it].”

Yet Furey questions whether the forces are in place to sustain a hot breakaway market.

“I don’t see the same sense of urgency as last year,” he says. “One advisor I’m working with understands independence is the best alternative, but there is no catalyst for the change.”

Nally says that TD is seeing plenty of urgency and that its pipeline continues to burgeon.

“We’re seeing it across all fronts,” he says. “It’s not just the big guys. It’s not just the small guys.”