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.
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