We’re here to debunk a myth that while true for decades, no longer holds. In the past, financial advisors felt that they were captive to their big wirehouse institutions because each held some unique value proposition, or points of differentiation from the other. It was essential to remain at a firm because leaving meant you could lose your clients, at least this was the thinking.
There was considerable prestige for advisors to get hired out of elite business schools and into Goldman Sachs, Bear Stearns, and Robertson Stephens – names that meant the gold standard and something that both clients and advisors could put their faith in. For those in the know, nothing else came close. Today, this maxim no longer holds true. With massive consolidation in the big wirehouse space, only four truly remain with one on its way out – Merrill Lynch. Wirehouses are ubiquitous with not one of them offering anything more unique than the other, when in the past, this wasn’t true. Now boutique outfits are also on the outs as First Republic disintegrated over the last six months.
Advisors have been programmed to believe that they were protected under the big name and power of big firms, and that somehow a name made a difference. The fact is that as banks continue to make headlines with stories of foul play that has been the case for years, clients are becoming wary. 2023 saw the end of some big names with no promise that protective measures have been put in place to prevent such a situation from happening again. Just note as we watch CEOs from the big Wall Street firms lobby in Washington DC for lower cash reserves. Events such as Merrill not paying interest on retirement accounts and not paying cash bonus fees on credit cards as promised don’t instill faith. JPMorgan is involved in a legal case for losing a couple’s $50 million portfolio nearly in totality. Morgan Stanley cannot recuse itself either as the firm is under the lens for their international practices. UBS is attempting to claw back cash from Credit Suisse defectors. The list goes on and on. One of the big realizations for clients is that they might just not want to be linked to this kind of conduct on an ongoing basis. Is a bank too big to fail? Given what we’ve seen in the rear view, we think not, think Lehman Brothers.
Even though a big firm might believe that they own the client relationship, the reality is that the advisor does. In 2018, Charles Schwab & CO, Inc. conducted a study to determine trends amidst the flight of advisors from big wirehouses to the independent RIA space. The study found that 94% of advisors queried left wirehouses because they wanted to “do best for their clients” stating that the move would “help build stronger and deeper meaningful relationships” with clients. Half of advisors reported that the power to act as a fiduciary was a key reason. 87% of clients followed advisors in transition and it is estimated that this percentage is far higher now.
In these statistics, we see the foundational truth that advisors care deeply about their clients and feel bound to do what is best for them beyond just what REG BI states, it is in their hearts to do so beyond bureaucracy. Clients share private details about their lives, their goals, and even their fears which is a hard thing to do. As seasoned advisors know, they become an integral part of a client’s life, advisors learn about intimate details from weddings to funerals, to educational desires, trusts, and estates, to values and philanthropic giving. Advisors are often invited to attend functions with their clients socially and those that mark the important occasions of their life – both when times are good and when hard things happen such as deaths in the family. An advisor is a trusted confidant that in some ways goes beyond the scope of a counselor given the importance of money in the equation. Developing this level of relationship is optimal with one advisor, not in transition to multiple advisors at a firm, increasing the worth of the advisor alone in the client’s eyes.
A recent report by Cerulli noted that younger investors who stand to inherit large sums (trillions) of money in the greatest wealth transfer in history prefer to work with independent advisors, citing this important takeaway, “This generation is used to being able to obtain answers to any question with just a few taps on their smartphone, so the idea of being on hold for minutes—let alone hours—can be off-putting, particularly when dealing with something as important as their finances.”
Many financial advisors see themselves as entrepreneurs at big firms but ultimately come to the realization that they are handcuffed. Going independent allows advisors the space to scratch the itch of becoming an entrepreneur. In the Schwab study, a key reason for departure to go independent was freedom, autonomy, flexibility, and control – the markings of an entrepreneur/owner, not a W2 employee following corporate dictates. Industry experts analyzing trends state that freedom is the number one most vital component for an advisor’s success going into the future.
Advisors nowadays can choose to remain at a big wirehouse or go to supported independent platforms without losing a beat on the investment side. Doing so enables them to do best by their clients, a driving reason for departures. Advisors repeatedly state that they don’t want to peddle firm’s sticky products because they might not be best for the client.