21 July 2019

More Brokers Break Away to Form Independent Firms

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On a Friday in early May, financial adviser Herman Rij put on his Merrill Lynch tie—pink, with light blue bulls—and went to work at the brokerage's third-floor office in Bethlehem, Pa. He met with a client who had flown in from Arizona. Then he went in to see his boss—and resigned.

Merrill Lynch had no advance notice, but there was nothing sudden about the move. Over the past half year, Mr. Rij and his team at Merrill—daughter Kori Lannon, godson Jason Cort and Mr. Cort's brother, Brian—had secretly and painstakingly put together their own advisory firm.

Their new, temporary offices were eight floors up in the same building. The penthouse space was quietly outfitted with desks, computers, phones and potted plants. A day before they moved in, a sign went up in the 11th floor elevator lobby: Quadrant Private Wealth. By 2:30 that afternoon, a half-hour after they resigned, they were open for business. "Now we get to work," Mr. Rij said.

The four each started doing what they couldn't before: telling their 501 clients about the move and asking them to agree to follow. At stake was about $750 million in assets, and a race was on. They knew Merrill Lynch would be making competing calls, trying to keep the clients.

After 40 years with Merrill Lynch, Mr. Rij was joining the legions of advisers who have broken away from the big Wall Street brokerages to join an independent firm or create their own. The trend, which began years ago but gained momentum after the 2008 financial crisis, is slowly reshaping the industry and eroding what had been a dominant position for so-called wirehouse firms like Merrill Lynch, now owned by Bank of America Corp.

The ranks of independent investment advisers have swelled to 47,000 from 36,000 in 2007, according to industry-research firm Cerulli Associates, and may hit 51,000 by 2017. The number of wirehouse advisers, now at about 48,000, is projected to shrink to 41,000 by 2017, Cerulli says.

Advisers say smaller firms allow them to provide clients with more personal service, free of the need to promote certain products and other commercial pressures that big bank-run companies apply. Technology now gives small shops access to trading platforms and many investment options that used to be exclusive to Wall Street.

While autonomy is one factor, another is the money: At the big brokerages like Merrill, advisers give more than half their gross revenue to the firm. In independent operations, they pay all the costs of operating but get to pocket the rest. Companies have sprouted to help high-producing brokers deal with the costs and logistics of going independent. Quadrant teamed up with one such firm, Focus Financial Partners LLC.

Deciding to move wasn't easy for Mr. Rij, 69 years old. He had tears in his eyes after he resigned. "I love Merrill," he said.

Over time, however, he became frustrated with growing red tape at the firm, particularly after it was acquired by Bank of America in 2009.

He was approached by recruiters for Morgan Stanley about two years ago, he said, but decided the big-brokerage model was becoming outdated. He wanted to help build something he could eventually hand over to the next generation.

Jason Cort, 41, also pointed to what he saw as Merrill Lynch's increasing bureaucracy. "It felt like being eaten by a goldfish," one nibble at a time, he said.

Clickhere for the full article in the Wall Street Journal.

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