The coronavirus pandemic may have thrown a curveball into many plans this year, but it hasn’t put a dent in advisor breakaway activity.
Breakaway activity had slowed in the early days of the pandemic, but it’s since picked up and continues gaining momentum, according to industry executives and researchers.
There were 157 breakaways in the third quarter, up 24% from the second quarter and the highest level of activity since the fourth quarter of last year, according to Echelon Partners, an investment bank and consulting firm focused exclusively on the wealth and investment management industries. Last year, breakaway activity increased 22% to a record high of 655 deals, up from 535 in 2018, Echelon found.
Charles Phelan, vice president of practice management and consulting at Fidelity Clearing and Custody Solutions, says he expects numbers to be “very strong,” but doesn’t provide his own estimates.
There are a few factors driving the turnover, according to advisors, recruiters and researchers.
For one, since the global financial financial crisis over a decade ago, large firms have lost some of their reputational cachet, they say. Echelon also notes the impact of the expiration of forgivable loans issued by wirehouses during the height of the financial crisis on advisors’ decision to break away now.
“Before the financial crisis, firms needed a big name to compete,” says Danny Sarch, president of Leitner Sarch Consultants, an executive recruiter. That’s no longer the case as brands have been diminished, he says.
Anywhere from 6% to 9% of advisors will move in any given year, Phelan says, citing Fidelity research. Around two-thirds stay in their current channel — whether that’s a wirehouse, regional brokerage or RIA — while a third make a move to a different channel or become independent, Phelan adds.
More and more advisors seek autonomy, motivated in part by the perceived financial advantages of the RIA model, according to a report published earlier this year by research firm Cerulli Associates. A significant portion, or 43%, of independent broker-dealers interested in the RIA model cite higher payouts as the top reason they’re considering moving to the RIA channel, according to Cerulli. Around 35% want more marketing flexibility, the research firm adds.
It also hasn’t helped that big firms adopted new technology in a way that diminished the role of advisors, Sarch says, leaving it to algorithms and computer programs to do a lot of the supervision.
“It makes advisors think: ‘Why can’t I do this myself? … I’m tired of asking 'May I, may I for pricing or marketing; everything has to go through the mothership,’” he says.
Breaking away amid the pandemic
The pandemic hasn’t eased any of these existing trends, and it’s made one thing much easier: setting the groundwork to break away, according to Sarch and Phelan. With most people working from home, it’s easier than ever to research a firm and have interviews over Zoom during usual business hours, without worrying about hiding your intentions, they say.
“Now it’s easier to do due diligence. When you talk to someone in an office, you can’t be as candid,” Sarch says.
On the other hand, the Covid-19 crisis and the uncertain economic outlook have made advisors more wary about starting their own firm. According to a TD Ameritrade Institutional survey of 450 advisors in April and May, only 25% of the respondents said they were interested in launching their own firm, down from 29% a year ago. Instead, advisors are more open to joining other firms or partnering with a platform.
“If I had known that Covid was going to hit in late February, I probably would have been crazy to take the leap,” says Judith Lu, who started Blue Zone Wealth Advisors at the end of 2019. She says she opened her Los Angeles office earlier this year for only 30 days before having to pivot to remote work, calming panicky clients about turbulent market conditions.
Unlike the global financial crisis of 2007, there hasn’t been a liquidity crunch strangling M&A activity during the pandemic, however. And with so much private equity dry powder on the sidelines, the industry can expect more consolidation and more advisor movement, according to Sarch and Phelan.
“Advisors have more choice than they ever had before,” says Phelan.
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