By Edgar Ortega
Oct. 6 (Bloomberg) -- John Krambeer left Merrill Lynch & Co. in 2003 after 16 years to start his own investment advisory firm in El Segundo, California. Now he says the turmoil on Wall Street may bring him $200 million from wealthy clients abandoning top- tier brokerages, including his former employer.
``The past 12 months have been one of the best for referrals in a long time, and I think it'll continue to get better,'' said Krambeer, whose Camden Capital Management LLC oversees $400 million, up from $50 million four years ago. ``The loss of confidence has people looking for an alternative solution to what's worked for them in the past 10 or 15 years, and we're winning business.''
While investment banks still dominate the financial advisory industry, the sale of New York-based Merrill to Bank of America Corp., the bankruptcy of Lehman Brothers Holdings Inc. and the credit-market crisis that sparked a 25 percent drop in the Standard & Poor's 500 Index this year have upended the business of managing money for the wealthy. Takeovers and corporate failures may loosen the grip that the big financial institutions have on the affluent and accelerate a shift away from commissions toward charging clients a fee based on assets.
Almost 90 percent of customers of major brokerages say they plan to withdraw at least some of their money, and 70 percent say they want to fire their brokers, according to a September survey by Prince & Associates Inc., which polled 351 people with more than $1 million of investable assets. In July, about 68 percent said they planned to take money out, and 38 percent had had enough of their current adviser.
`Poor to Indifferent'
Investment banks managed about $5.30 for every $1 handled by independent firms last year, according to consultants at Boston- based Cerulli Associates Inc. That gap may narrow as brokers leave to strike out on their own and investors yank money from firms battered by losses on mortgage-related securities.
``People are assigning a lot of blame to their advisers, in part because of years of poor-to-indifferent service,'' said Hannah Grove, a managing partner at Prince & Associates, a research firm in Redding, Connecticut. ``Independent and boutique firms have a real advantage right now because advisers are more likely to be evaluated on their own expertise rather than the activities of the firms they're employed by.''
The number of registered investment advisers increased 2.9 percent to 16,575 between 2005 and 2007, while the number of brokers at the biggest firms such as Merrill, known as ``wirehouses,'' fell 7.9 percent to 59,020 in the same period, Cerulli data show. Independent advisers managed $1.1 trillion at the end of last year, up from $768.7 billion in 2004, according to Cerulli.
Switching Firms
Brokers collect commissions on trades, while registered investment advisers, regulated as fiduciaries under the 1940 Investment Advisers Act, charge fees based on a percent of assets.
Charles Schwab Corp. in San Francisco and Boston-based Fidelity Investments, the two largest companies that provide custody and brokerage services to independent firms, say they are handling record business. By July, the two companies had transferred more than 169 advisers, totaling $16.2 billion in client assets.
Pershing LLC, the world's biggest processor of trades, is working with 90 groups of advisers to handle the transfer of about $24 billion as they switch firms or start up as independents. That's about three times last year's number.
``Until recently we had been seeing the levee overflowing, but now we're actually seeing a crack because the pressure to leave is so great,'' said Mark Tibergien, head of the division that caters to investment advisers at Pershing, a unit of Bank of New York Mellon Corp.
`Wooing Period'
Some independent firms have grown big enough to vie for clients who were once the captives of large brokerages. Jim Blair, a principal at Clayton, Missouri-based Moneta Group LLC, which he joined in 1987, said his firm has grown to manage $7.9 billion by replacing some $1 million accounts with clients investing $5 million and more.
``With multiple billions under management, we don't give up economies of scale,'' said Blair, 48. ``We can negotiate lower fees, we can buy or do the research, and we have the hands on deck. We can't lend and we don't have proprietary products, so the large firms have some competitive advantages from the perspective of making money. But from an objectivity standpoint, nobody can touch us.''
Silvercrest Asset Management Group LLC, a six-year-old New York-based firm that oversees $9.6 billion, plans to increase its roster of clients who have $30 million of assets on average.
Citigroup, UBS
``People with the kind of money that we typically manage don't change advisers overnight,'' said Managing Director Richard Hough. ``There is a fairly lengthy wooing and due-diligence period, and we're in the midst of that with a number of people. We have definitely seen an increase in the number of business opportunities.''
Jim Tracy, director of business development at Citigroup Inc.'s global wealth management unit, said that fewer than 10 of his New York-based firm's brokers generating more than $1 million in fees and commissions have gone independent this year.
``The numbers just don't bear out all the fanfare about the movement of advisers,'' Tracy said. ``There is a flight to quality, where in this kind of environment the asset flows go to the companies perceived as the strongest and most stable.''
At UBS AG, the European bank with the biggest losses from the credit crisis, the unrest among its 8,090 brokers in the U.S. may be subsiding. The Zurich-based company hired 26 brokers last month with about $10.9 billion, making up for withdrawals of $4.8 billion in the first half when 160 left.
Big Five
``What we put in place is beginning to take hold,'' said Paul Santucci, U.S. head of field development and talent acquisition for wealth management at UBS. ``We're feeling pretty good that we're pretty much through the storm.''
The five biggest publicly traded brokerages generated $23.5 billion of revenue in the U.S. during the first half of 2008, up 10 percent from a year earlier, regulatory filings show.
New York-based Merrill, the largest, had 16,690 brokers as of June 30 -- more than all the registered independent advisers in the U.S. -- followed by Citigroup with 14,983. Wachovia Corp. of Charlotte, North Carolina, which last week received a $15 billion takeover offer from Wells Fargo & Co., ranked third with 12,000 brokers, followed by closely held Edward Jones & Co. in St. Louis with 11,900. New York-based Morgan Stanley ranks fifth with 8,350.
Bank of America, the second-biggest U.S. bank by market value, agreed last month to pay about $45.3 billion for a chance to build on Merrill's lead. The combined company will have almost 20,000 brokers worldwide, assuming Chief Executive Officer Kenneth Lewis and Merrill CEO John Thain succeed in mitigating defections.
`In Play'
Takeovers like the one involving Merrill typically result in 8 percent to 12 percent of brokers changing firms during the first year, according to data compiled by industry consultants TowerGroup Inc. in Needham, Massachusetts. Recruiters say incentives to take new jobs often exceed 200 percent of annual fees and commissions.
``The total might be a little less than average now, given the difficulties in the market,'' said Matthew Bienfang, an analyst at TowerGroup. ``Advisers can't move that quickly. Clients are already scared enough.''
Merrill grew its brokerage ranks by an average of 5.5 percent during the past four years. The New York-based firm attracted $55 billion of net new assets in the past 12 months and recruited 16 brokers from other firms during the week of Sept. 15, when the deal with Bank of America of Charlotte was announced.
Sleepless Nights
``We are very near an historic low in turnover, particularly among our most productive class of advisers,'' said Lyle LaMothe, head of Merrill's U.S. advisory business, which focuses on clients with more than $250,000 to invest. ``A strong platform and leadership team combine to make competitor recruitment packages less of a factor. What advisers are doing is thinking about long-term growth.''
William Gurtin said he planned his departure from Morgan Stanley for almost 18 months, working most weekends and hiring three full-time people, including a former Accenture Ltd. consultant to handle logistics. Gurtin Fixed Income Management LLC in San Diego opened its doors in February, as Bear Stearns Cos. unsuccessfully tried to shore up investor confidence that it could weather the credit crisis.
``Did I have some sleepless nights? Yeah, there is no doubt that I did. But do I have any regrets? Absolutely not,'' said Gurtin, 48, who worked at Morgan Stanley for nine years. He retained almost all of his clients, totaling $5 billion in assets. ``We're a much stronger, better-positioned firm today than we would have been if we had stayed.''
`Personal Attention'
One Merrill broker who got away was Salvadore Vidrio, 35, who joined IFC Advisory in Culver City, California, in May after two and a half years at the firm. For Vidrio, a 42 percent drop in Merrill's shares last year eroded the value of his stock-based compensation and made the decision to leave a little easier. He took about 85 percent of his clients with him and $15 million of assets.
``It had lost a lot of value, so it didn't hurt as much,'' Vidrio said Sept. 24, while attending a conference in Atlanta for financial advisers organized by Charles Schwab. ``Clients are more apt to listen to an adviser when they know they're getting personal attention and that I'm not trying to steer them toward any products.''
To contact the reporter on this story: Edgar Ortega in New York at ebarrales@bloomberg.net.
Posts
No comments:
Post a Comment