Is the Grass Greener at RIAs?

Wirehouse advisers should survey the landscape before making the jump from big brokerage to small shop

You’re a wirehouse adviser, sitting at your desk, digesting the latest pay cut. You won’t starve during 2017, but you’re fed up with your shop. The corporate bureaucrats are either nibbling away at your W-2 income—or mummifying you in red tape. You’re wondering if now is the time to accept that standing offer from “Starchy,” the chief executive at the registered investment adviser that has been recruiting you for the past six months.

Welcome to the new normal.

The wirehouse diaspora will continue to grow as investment professionals join existing RIAs rather than build companies from scratch. Presumably there is less financial risk, an important consideration given the average age of investment professionals is about 51. There’s likely to be “demand” for jobs at RIAs.

There’s definitely a “supply” of job openings. According to Schwab’s 2016 Benchmarking Study, at least 54% of RIAs with over $100 million in assets under management plan to add relationship managers this year. Of the RIAs with over $1 billion in AUM, the percentage is even greater—97%.

Having made this career switch myself, I believe there are advantages to found in small companies in the financial-services industry. “Evolution Revolution,” a publication by the Investment Adviser Association and National Regulatory Services, indicates that 87.8% of RIAs employ 50 people or less.

These organizations can be attractive for their camaraderie, open platforms that make them fierce competitors, and relative freedom from the headline risk that can plague industry behemoths.

But if you think moving to an RIA is nirvana, you might be well served by calling timeout. It could be you’re trading the aggravation you know for the aggravation you don’t, especially if you never make it inside Starchy’s inner circle.

I spoke with George Ball, whose wealth-management career spans five decades, about the different work environments inside large brokerage firms and RIAs.

Mr. Ball became president of E.F. Hutton & Co. in 1977 at age 37 and later the chairman of Prudential Securities. Today, he is the executive chairman of WealthTrust, a holding company for RIAs with $11 billion in assets under management.

“The joy of being in a financial-service business is best extracted when one is in a partnership with a comparatively small number of people who are admired, trusted and enjoyed,” says Mr. Ball. “That’s unlikely to be found in a larger more bureaucratic organization.”

His view is that the wealth-management industry is far more impersonal today, especially inside large organizations, than it was during the 1970s when he was moving up the ranks at E.F. Hutton.

Mr. Ball believes one reason for the impersonal feeling is the sheer size of some organizations. In 1980, for example, E.F. Hutton was generating roughly $1.1 billion in annual revenues, second only to Merrill Lynch among brokerage companies. By comparison Morgan Stanley, which owns what used to be E.F. Hutton, generated $37.9 billion in revenues for the year ending 2015.

There is no doubt that wirehouses are impersonal. Years ago, I was sitting in a meeting during which a senior executive referred to investment professionals as “bums in seats.” He meant bottoms, not vagrants. His point was that wealth management is a numbers game at the wirehouses.

Two weeks later, my team of three advisers and two sales assistants said, “See ya’, and the firm’s new number became “x – 5.”

However impersonal the environments, I would note that career satisfaction is entirely possible at the wirehouses—in part because they’re tribal. Members of their high-functioning teams forge enduring bonds. They watch each other’s backs. Together, they navigate the rules and vicissitudes of life within the mothership. They admire, trust and enjoy each other.

That said, the us-against-them path to career satisfaction is exhausting. Closed-door meetings with the boss take a toll after a while. Moreover, aligning with a tribe fails to address at least one of the more vexing issues at big shops: What do you do if your company isn’t competitive and you’re locked into its proprietary offerings.

During my stint as a bum in a seat, I knew that one bank in particular would always price certain hedging transactions more cheaply. Sure, there are other ways to compete than on price. But when I ran up against this specific competitor in client-hedging situations, it was always an uphill battle.

More importantly, the competitive shortcomings of in-house products (of which hedging is just one example) raise fiduciary issues. If you do the right thing and recommend that a client trade away, your pay suffers. Or you get sacked depending on the specific circumstances. It’s stultifying.

Conversely, it’s invigorating to work in open-platform environments, the province of RIAs. They enable you to shop hedging, banking, or add-your-own transaction to the list on behalf of your clients. In effect, you’re pitting industry Goliaths against each other rather than confronting them directly. As Mr. Ball notes, “Scale in the financial-services industry no longer carries great advantages.”

Historically, one of the greatest advantages of RIAs is that they tend to stay out of the press. All of the big shops, however, inevitably do something monumentally stupid. Or rogue employees generate lurid headlines that make colleagues wince. My personal favorite is the true if somewhat grisly story of a wirehouse executive who bit his subordinate’s ear during a fight following a team dinner.

Maybe there are more horror stories about the wirehouses simply because they have more employees. But whatever the reason, you don’t care if you’re on the front lines trying to build your advisory business. All you know is that prospects aren’t taking your calls.

Unfortunately, the media safe haven for RIAs may be a thing of the past. On this topic, Mr. Ball sounds an ominous note given the sector’s growth. He says, “The regulators will next turn to the RIAs to find real flaws and real shortcomings that can turn into the headlines that make a regulator’s career.”

I buy that. RIAs are one scandal away from industry watchdogs expressing outrage over the current state of regulatory arbitrage. The Financial Industry Regulatory Authority examines broker-dealers once every two years, while the Securities and Exchange Commission examines RIAs once every 11 years. In the end, the markets always force arbitrage spreads to narrow—even if the margins have evolved from the tangle of industry regulation.

On balance, I prefer the RIA model. But let’s return to where we started, your standing offer. You’ve done your homework on the CEO. Starchy is clearly the control person according to Schedule A of the RIA’s Form ADV. Because you’re fed up with the hassles at your existing shop, you’re willing to overlook the French cuffs or the Christian Louboutin heels because he or she says all the right things.

Keep digging anyway.

There are only 121 RIAs with $100 billion or more in Regulatory Assets Under Management (an SEC-defined term which, among other variables, includes assets not subject to fees). These companies might sound huge relative to “typical” RIAs, which the Evolution Revolution study cites as having nine employees and $317 million in AUM.

But even RIAs with $100 billion in assets are still small relative to the wirehouses, which each have about a trillion dollars or more in total assets under custody. Make no mistake. RIAs are small companies. Teams provide less shelter than they do inside the wirehouses, simply because there’s nowhere to hide.

My advice: before you hop on an offer from any RIA, get the names of three former employees, meet with them, and ask why they left. The company is Starchy’s answer to the same aggravation you’re feeling now—and most likely, the lion’s share of his or her net worth. If the two of you don’t see eye to eye, it’s you who gets voted off the island.

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