Yes, Wall Street can be Replaced – Independent Brokerage Firms and Investment Advisers are Gaining on Big Wall Street Firms


Independent financial advisers are gaining on Wall Street brokers in the competition to manage more than $5 trillion in Americans’ savings, according to E. S. Browning in his recent Wall Street Journal article, “More Brokers Flee Big Firms, Taking Investors With Them.”

The number of brokers serving individual clients at major firms fell 14% to less than 55,000 in the three years ending in December 2008, while the number of independent financial advisers rose 29% to 33,000, according to Cerulli Associates, a Boston research firm. Last year, Cerulli predicted that brokers at major firms would leave and take $188 billion in client accounts with them in 2009. Cerulli expects the trend to continue this year.

Major Wall Street firms still handled 48% of individual investors’ managed money at the end of 2008, while independent advisers handled 19%, according to Cerulli. But Cerulli forecasts that by 2012, the big-firm share will drop to 41%, while the independent advisers’ rise to more than 23%. Independent brokerage firms say they’re also seeing an uptick in interest from big-firm brokers.

The financial turmoil of the past 18 months is a major reason. Shaken by the collapse of some Wall Street firms and the tarnished reputations of others, more big-firm brokers are leaving to manage money on their own, and taking their clients with them.

One broker says he didn’t like being pressed to boost revenues. He also didn’t like working in a system where he was paid more to put his clients into stocks than into certificates of deposit. At his own firm, he charges clients a flat percentage of money under management, no matter how it’s invested.

Another reason is that brokerage firms are cutting compensation of lower producers, a process known as putting brokers “in the penalty box.” Brokers who had been taking home 40% of their fees and commissions might be told they now will keep only 20%.

Another broker who jumped ship said he hadn’t considered a change until Lehman collapsed. At his new firm, he free of certain constraints. For example, at big brokerage firms, brokers can sell only financial products approved by their firms. Independent advisers face no such restrictions.

Discount brokerage firms are another reason brokers are leaving to start their own advisory firms. Independent advisers need someone to conduct trades, store securities, keep track of client accounts and perform other back-office jobs. The discount-brokerage operations of Charles Schwab Corp., Fidelity Investments and TD Ameritrade Holding Corp., among others, have built big businesses doing those things for independent advisers. As the trend toward independence grows, the discounters are redoubling efforts to persuade brokers to go independent.

Brokers who are thinking of leaving their firms should consult with an attorney with experience in representing registered representatives in employment matters There are usually a number of legal issues that need to be addressed, including compensation issues and questions about the enforceability of restrictive covenants in employment agreements. Brokers also often need assistance in becoming registered as investment advisers, setting up investment advisory firms, and drafting contracts among other things.

Page Perry is an Atlanta-based law firm with years of collective experience representing individuals in employment disputes with brokerage firms. The firm is also active in setting up registered investment advisors, establishing hedge funds and dealing with regulatory matters. For further information, please contact