Searching for more autonomy and concerned with the perceptions of big investment houses, Neal McNeil is part of a growing number of financial advisors leaving behind Wall Street to start his own independent firm.
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After 15 years at Morgan Stanley (NYSE:MS), McNeil resigned earlier this month from Smith Barney, bringing nearly $300 million in client assets and a pair of fellow advisors along for the ride.
“When you’re independent, at the end of the day you’re working for your clients. When you’re working at a major wirehouse, you’re working for the wirehouse,” said McNeil, using the industry term for Wall Street financial advisory firms likes the ones housed inside Bank of America’s (NYSE:BAC) Merrill Lynch and UBS (NYSE:UBS).
McNeil, who will now serve as chief investment officer at La Jolla, Calif.-based Ibis Capital, isn’t alone in leaving Wall Street. According to Cerulli data cited by Envestnet, the number of independent advisors is expected to grow to 164,560 by 2014, up 25% from 2008. By comparison, the number of advisors at wirehouses is set to shrink to 48,919 in 2014, down 10.8% from 2008.
Further, the market share of client assets at wirehouses is expected to fall to 35% by 2013, down from 42.8% in 2010, Cerulli estimates.
“We’re getting a lot of people” from Wall Street firms “bringing their practice over to our independent channel,” said Rebecca Hall, who owns an advisory practice of Ameriprise Financial (NYSE:AMP). “There is a big draw because the reps are losing control.”
McNeil tired of rules that he said limited even senior financial advisors to a select number of investment options, reporting methods and retirement products. He said at times these rules applied to “even something as benign as an exchange-traded fund.”
McNeil added, “It really comes down to the things you can go into, the tools you can use and the asset allocation you can drive.”
Smith Barney representatives disagreed with talk of limiting its financial advisors’ options.
“We have complete open architecture in terms of products and financial advisors are free to pursue a variety of business models,” a spokesperson said.
Of course, even "independent firms" rely on larger financial institutions to conduct business. For example, Ibis Capital selected Fidelity Institutional and LPL Financial (NASDAQ:LPLA) as its investment platform.
Client Interests Debated
Besides the autonomy issues, the influx of independent financial advisors appears to be tied to the decline in the perception of Wall Street firms, which have been hit by questions about whether investors’ best interests are truly their first priority.
The industry suffered a black eye after the bursting of the dotcom bubble, which was partially inflated by analysts publicly promoting technology stocks that they privately trashed.
“That was a first indication where we became a little more concerned about the alignment of our interests,” said McNeil.
The debate was reignited earlier this month by Greg Smith, a former Goldman Sachs (NYSE:GS) employee who released a scathing Op-Ed in The New York Times that blasted the firm as “toxic and destructive.” He said he saw a number of instances of managing directors referring to clients as “Muppets.”
While McNeil said he believes financial advisors as a whole are trying to do what’s best for the clients, he was less sure about corporate interests.
“I think the Wall Street firms, especially if they’re publicly traded, are hyper-focused on quarterly earnings. As such, sometimes the decisions they make aren’t necessarily the best…for the clients,” said McNeil.
“This characterization of our culture is inaccurate and self-serving,” the Smith Barney spokesperson said.
For her part, Hall said she’s under no pressure from Ameriprise to push her clients into certain products.
“Ameriprise is not an investment bank so there’s no inventory. When I decide on an investment portfolio for a client, it’s because this is what I came up with. It has nothing to do with, ‘Well, we just underwrote a $2 billion offer and you need to offer this to your clients,’” said Hall.
To be sure, it’s not exactly easy to shift from Wall Street to an independent firm. Financial advisors, many of whom are locked into seven-to-nine-year retention agreements, aren’t allowed to solicit clients until they have already left their employer and many clients may be hesitant.
“It can be a little scary for the advisor and the client,” said McNeil, who expects to bring over up to 95% of his team’s client assets. “The reason most people don’t leave is because of a certain level of comfort that exists.”
Smith Barney pointed out that most of the financial advisors it loses go to rival large firms, not to independents. According to Envestnet, $16.4 billion in breakaway assets leaving wirehouses in 2010 went to other wirehouses, compared with $4.5 billion to independent firms.
Wells Fargo Advisors (NYSE:WFC), which had 13,342 advisors and $849 billion in assets as of the end of 2010, said it is the only wirehouse that has an independent channel. Launched in 2001, the independent brokerage arm has attracted more than 1,000 financial advisors who average just under $50 million in assets under advisement.
Merrill Lynch and UBS didn’t respond to a request for comment.
It can also difficult to make the transition from an employee to an entrepreneur as independent financial advisors must hire their own staffs and secure office space.
“With investors still very nervous, firms with well-known household names offer a degree of comfort,” Karen Lanzetta of Envestnet wrote in a research note.
The ’08 Crisis Still Looms
The financial crisis marked a turning point for some advisors and clients. During those scary days of 2008, fears swirled about the ability of big Wall Street firms like Merrill Lynch and Morgan Stanley to even stay in business. Ultimately, both firms accepted billions of dollars in government aid.
“Before then, there was the thought that if your money is at a major firm, then it’s safe. I think 2008 challenged that… Even us advisers were nervous,” said McNeil.
Some clients and advisors may now feel more comfortable keeping client assets at custodians that don’t have investment banking or proprietary trading arms such as LPL Financial.
In the wake of the crisis, the industry underwent a crush of consolidation, highlighted by BofA’s 2008 takeover of Merrill Lynch.
“I think there is fatigue in the industry around all of the consolidation and the distractions that have been created over the past three or four years,” said Manish Dave, head of recruiting at Ameriprise. “That wirehouse fatigue has definitely led the way for advisors seeking out alternatives.”