At the PLANADVISER National Conference, advisers on the “Buyinig In or Selling Out” panel discussed the pros and cons of the different business models, including wirehouse, independent broker/dealer (B/D) or registered investment adviser (RIA). Finding the right model depends on several factors, the panelists agreed, including economics and the culture of the adviser or team.

A quick poll of the audience found there was quite a mix: 33% in the wirehouse channel; 24% in the independent B/D channel; 13% in the registered investment adviser channel; and 30% dually registered. One-fifth reported that they have changed broker/dealers or business models in the last 12 months; furthermore, of those who haven’t changed, 16% said they are planning to.

For most (42%) of the advisers interested in making a change, money is the main reason, followed by freedom (30%) and the ability to be a fiduciary (25%), according to the poll. For Mark D. Temple, managing director—Institutional Retirement Plans at O’Hanlon Michener & Douglas, a National Retirement Partners (NRP) member firm, money was in fact the main reason to make the transaction to leave a broker/dealer and go independent (see “Mark Temple”).

Many broker/dealers have seen changes lately amid the economic downturn; Temple implied that he wanted to do business without worrying about the effect of the changes on his business. “If we’re going to acquire or sell or merge, it’s going to be on our own terms,” he said. While Temple’s shop isn’t large (25 plans with about $400 million under management), he said he doesn’t have to worry about size because he can lean on NRP. However, on the flip-side, moving toward independence is still a wake-up call. “Becoming the chief bottle-washer has become an enlightening experience over the last two years,” he said.

Costs versus Benefits

Independent advisers have to worry about being business owners, and there might not be big rewards in the beginning. While the payout is much higher, so are the costs. “If you want a big signing bonus, don’t become an RIA,” said Michael E. Goss, executive vice president at Fiduciary Investment Advisors, LLC, a completely independent RIA (see "2009 Retirement Plan Adviser Team of the Year"). As someone who also previously worked at a wirehouse, he noted that the payouts seem pretty fair, but that being a business owner also hopefully has long-term gains. “I would say that wirehouses have a fair payout … Our margins are higher but not significantly.”

As Goss put it, there’s a lot more “feeding the meter” instead of parking in a garage. Temple agreed that he pays a lot more attention to expenses, and as a small-business owner, there is a tendency to hold on to money.

Those high costs are why, despite the economic downturn and shakeups at wirehouses motivating more advisers to go  independent, it’s still a slim minority (see “Wirehouses Feel Some Threat of Independents” and “Once a Wirehouse Adviser, Always a Wirehouse Adviser?”).

That small-business owner aspect might also attract advisers to independence. The positive side is that if you want to make a decision, you just do it, Goss noted. Advisers in the independent channel have to have an entrepreneurial drive and want to take control of the client message, he said. “In our case, with our clients, it just made sense to do it ourselves,” he said. While some clients didn’t like it, most clients came over when his firm went independent. The biggest surprise for Goss was that the large Fortune 500 plans all liked the independent model.

Goff noted that wirehouses have a “rah-rah” spirit and pat their reps on the back; when you go independent, you have to pat yourself on the back. “You get a lot of ego boost at a broker/dealer. The day you step out and start your own firm, guess what? No one’s going to do that,” he said.

A lot of it really comes down to culture, the panelists asserted. For Matthew P. McLaughlin, senior institutional consultant at Morgan Stanley Smith Barney, the comradery of the wirehouse fit his team. “At the end of the day, a lot of it just comes down to the personality of your team,” he said. McLaughlin also enjoys the flexibility to act as an RIA and charge fees through the recently formed Graystone Consulting (see "Morgan Stanley Smith Barney Unveils Institutional Consultancy"). "If you're in a wirehouse, having that ability is important," he said.

Wirehouses are also attractive to advisers for their branding power—although all the panelists said their clients found their brand attractive, whether it was a big name or not. While McLaughlin said the brand really resonates with people, a brand can also be baggage. “It’s only a matter of time before your firm ends up negatively in the news,” he said.

The panelists agreed that there are basically ups and downs to all models. Regardless of the model you choose, advisers can play it up. Goss’ firm has the control to do what they want. McLaughlin’s team enjoys the culture of the wirehouse. And Temple said he has “the best of both worlds,” leaning aggressively on the NRP brand but still enjoying independence. To each his own.