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 It is a risky enterprise. If the brokerage learns that someone
intends to leave, it often dismisses the broker so the bank can try
to retain clients.
The Botkin Group, a team of brokers in Pittsburgh who produced $1.6
million in revenue last year for Morgan Stanley, went so far as to
require non-disclosure agreements from contractors who made new
signs, installed phones and delivered furniture to their new office.
They never visited the building during daylight, always staggered
their arrival times and parked in the back.
"We felt like we worked for the CIA," said Lester H. Botkin, 35, the
youngest of the group, which also includes his father, Lester P.
Botkin, 63, sister, Sara Botkin, 37, and one client service
associate.
They represent growing numbers of brokers who are leaving big bank
brokerages, such as Morgan Stanley, Bank of America's Merrill Lynch,
Wells Fargo Advisors and UBS Group AG to branch out on their own.
The big four brokerages lost nearly 7 percent of their market share
to independent firms between 2008 and 2013, according to
Boston-based research firm Cerulli Associates, a leading global
analytics firm. In the next five years, Cerulli expects independent
advisory firms to surpass the big brokerages in their control of the
market, according to a survey of 7,000 brokers working at firms
across the industry.
Most departures so far have concerned brokers who managed relatively
few assets. Analysts and industry sources say they expect 2015 to be
a turning point for financial advisers who manage more than $200
million in assets at the four big Wall Street brokerages
collectively referred to as wirehouses.
The reason is that many of the retention bonuses those firms gave
employees during the 2008 financial crisis will reach their final
installments this year. At the same time, several brokerages have
started deferring more of advisers' current pay.
Cerulli estimates 30 percent of wirehouse advisers are considering
going independent.
LOWER FEES, MORE INCOME
Historically, best-performing brokers have hopped from one of the
big four to another at least once in their career, collecting
multi-million-dollar sign-on bonuses in the process.
Some recent high-profile moves followed such a pattern: a team of
Merrill Lynch advisers who managed $6.5 billion in assets left for
Morgan Stanley while a group of Morgan Stanley brokers with $1.6
billion under management switched to Merrill Lynch.
The Botkins also considered leaving Morgan Stanley for another big
bank that offered them $5 million over 9 years, including a $1.6
million up-front payment.
But more brokers are opting to go independent because many
brokerages have raised clients' fees and minimum balances, and
pressured brokers to lend more.
"If you're a big team and banking is an important part of your
business, then a wire can be a wonderful place," said Sara Botkin.
"But if you're more focused on financial planning and investment
strategy, it can be a harder place to run your business."
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Lester P. Botkin said that in recent years, Morgan Stanley had
pressured brokers to charge typical clients more than 1.25 percent.
If he, in a mid-size market like Pittsburgh, wanted to charge
clients less, it came out of his paycheck.
Morgan Stanley said advisers were allowed to negotiate fees with
clients and were under no obligation to charge the 1.25 percent
rate. It declined to comment on any further aspects of the article.
The Botkins estimate they will nearly double their annual take-home
pay by running their own business, despite higher expenses. Their
new business, Botkin Family Wealth Management, pays LPL Financial
Holdings Inc, a leading provider for independent wealth management
business, for technology, compliance and trading services.
CLIENT LIST AND A PICTURE
All the Botkins took from Morgan Stanley's office the day they left
was a framed painting of a section of the Augusta National Golf
Club's course called "Amen Corner," and contact information for
about 400 clients. All the clients they contacted agreed to join the
new firm, they said.
Typically, advisers who move keep 80-90 percent of their clients.
Client surveys find that those who move with advisers usually do so
because they value personal relationships they develop with brokers
and do not want to be assigned to someone new.
Publicly, bank executives play down broker departures, but they have
been taking steps to blunt their impact wealth management, which has
been playing a growing role in generating banks' profits.
For example, wealth management accounted for 49 percent of Morgan's
net revenue in 2014, up from about 40 percent in 2010, the year
after it expanded the business by buying Smith Barney.
As Reuters reported in February, Bank of America has been making it
harder for brokers to take clients with them when they leave,
modifying an industry-wide agreement on what client information
advisers can take with them.
Mindful how much is at stake, brokers are taking no chances. The
Botkins kept a sign outside of their new office that said "fabulous
building for sale" as a decoy until after they moved in.
(Reporting By Elizabeth Dilts; Editing by Lauren Tara LaCapra and
Tomasz Janowski)
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