In Practice May 5, 2008

FAs Seek Better Culture, More Independence

Advisers are leaving their firms for various reasons, most often citing culture, the desire for more independence, and disagreement with the senior management philosophy.
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Most financial advisers base their decision to leave or go to a new broker/dealer firm on culture (24%) — a broad term that can describe a wide range of factors, from impending mergers to frustration with other business units. It could also have to do with a negative event that caused dissatisfaction, says The Cerulli Edge—Advisor Edition Recruiting Issue.

The importance of culture is increased at independent B/D firms. Large wirehouses must be able to support a wide range of personalities, but at smaller firms it is more crucial for the adviser’s personality to be aligned with the organization.

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Literal location and where an adviser is in his career are two factors in making a firm a cultural fit. Geographic differences include a midwestern adviser liking things more slow-paced, and a northeastern adviser enjoying a faster pace, Cerulli notes.

Mergers and acquisitions are the greatest factor in culture, the report says. Advisers working in small, regional firms do not always look fondly on being merged with a large, multinational firm. The report cites the example of the Merrill Lynch-Advest merger, in which Merrill lost about 400 of Advest’s 500 advisers.

Desire for Independence

 

The Cerulli data show 20% of advisers cite “increased independence’ as a primary reason for switching firms. Overall, increased independence is a long-standing reason to switch B/D firms. Nearly two-thirds of advisers say they want to go to a less restrictive channel, the report says.

However, a “less restrictive channel’ does not necessarily imply leaving a wirehouse to join a registered investment adviser (RIA) firm. In fact, most advisers leaving national full-service firms go to another national full-service firm (48%), followed by an independent firm (24%) or another channel (23%). Only 4% go to an RIA.

The report also says 13% of advisers cite “business support’ as the primary reason for switching firms, and 10% cite “senior management vision.”

The data show that two-thirds of advisers take all or most of their clients with them when switching B/D firms.

In Practice May 5, 2008

Firms Increase Recruiting Efforts for New Advisers

The increased competition for top talent among broker/dealer firms has caused many firms to step up the recruiting initiative, according the latest Cerulli report.
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In response to the competition, B/D firms are restructuring their models to include more than monetary incentives, says The Cerulli Edge—Advisor Edition Recruiting Issue. The report notes a trend toward matching the needs of an adviser’s practice with resources of the firm.

At large wirehouses, monetary “transition assistance” packages of forgivable loans are common, reaching as high as 260% of one year’s gross revenue. If the adviser stays long enough, the loan is forgiven. Recently these packages have been offered to more advisers than before, including third- and fourth-quintile advisers.

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In addition to the classic extension of these packages, more practice management tools have also been implemented, the report finds. For instance, firms might offer a seminar program or investment in technology that is attractive to advisers. Technology is becoming more important to advisers as a tool to running a more profitable and efficient business.

Cerulli says that retention issues might be “felt most acutely in the wirehouses.” Existing advisers at the firm can feel resentful toward the new, experienced advisers entering the firm after accepting a hefty transition package.

While the report notes the need for firms to continue to recruit for topnotch advisers, it also points out that some industry observers question whether firms can remain profitable when doling out so much in order to recruit.

A Referral Business

Referrals are also the most common way advisers build their staff, says Cerulli, noting that it is also the most common way advisers build their clients. The majority of advisers (63%) use family friends and personal contacts to recruit new advisers to their practice. The next most common source is public posting, such as newspapers or job search engines (39%), followed closely by college campuses and new graduates (37%), recruiting service (32%), and client contacts (26%).

Overall, Cerulli says the industry must begin to think more creatively about the development of career paths for new advisers as many continue to retire (See Recruiting Young Advisers Requires Less Traditional Approach).

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