Retention bonuses and other perks are not enough to quiet brokers’ yearning to leave their wirehouse firms for advisory firms or non-wirehouse brokerage firms, according to a recent InvestmentNews article by Hilary Johnson titled “Exodus of brokers still a big threat for wirehouses.” Just 29% of brokers who did not receive a “lock-in” bonus (usually because they do not generate big commissions) said they are “satisfied” with their firm. Tip: As an investor, you should consider it a plus if your broker is not a “big producer.”
A fourth quarter 2009 online survey of 159 financial advisors at wirehouses and other captive brokerage firms revealed that almost 80% are thinking about paying back at least some of their retention bonuses and leaving, and 10% are likely to move in the next two years, according to the survey. Aite Group LLC, which conducted the survey, reported that as many as 11,000 (20%) of all wirehouse brokers (high and low producers alike) may move in the next two years.
“Clearly, while wirehouses were able to reduce the desire to break away through targeted retention payments, the breakaway-broker topic has certainly not been eradicated with it,” Aite analyst Alois Pirker was quoted as writing in her report. “It appears that the retention packages have bought wirehouse firms time but not the undivided loyalty of their most valued brokers.”
When brokers change firms, their moves can have significant ramifications for their existing clients. When a broker moves to a different firm, the client should get answers to some important questions before following, according to Jaime Levy Pessin’s July 6th article in the Wall Street Journal titled “Your Adviser Is Changing Firms. Should You Follow?” Will the fees be commission-based or asset-based? If the former, there is often pressure on new brokers to produce a lot of commissions for the new firm. In a fee-based model, any charge over 1% of assets under management should be questioned. In addition, there may be undue pressure to consolidate most or all of your assets with the new firm. If assets must be sold, there may be a tax hit.
On the other hand, a move from a wirehouse broker dealer to an advisory firm could eliminate a financial incentive for the advisor to recommend or buy proprietary products or “house” securities that the firm is trying to move.
Investors should periodically check out their brokers and brokerage firms on www.finra.org/Investors/ToolsCalculators/BrokerCheck and www.adviserinfo.sec.gov to see if there are any customer complaints or regulatory actions. A call to your securities commissioner’s office would also be a good idea. For further information, see www.nasaa.org/investor_education/11080.cfm.
While a broker’s decision to change firms is undoubtedly an important decision for the broker, it also forces customers to make an important decision. Such decisions should be made carefully and thoughtfully.