Exodus of U.S. investment advisors sparked by mergers and bank turmoil

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A fevered round of job-hopping is underway in the U.S. investment advisor business, with teams switching firms or striking out on their own in response to mergers and turmoil in the banking sector.

More than 26,000 advisors switched firms in 2022, according to Cerulli Associates Inc., representing 9.2 per cent of the U.S. total. Industry executives say they expect the number to grow this year.

Many are leaving advisory groups owned by banks for boutique operations or starting their own firms and taking their books of clients with them. Among those who are jumping ship this year were teams from Silicon Valley Bank and First Republic Bank, which served affluent customers before bank runs forced them to be taken over.

“There’s been a flood of managers leaving the banks,” says Trey Prescott, the head of business development for the Advisory Services Network LLC, a platform for registered investment advisors (RIA). While it has been happening for years, “it’s only now catching fire.”

The moves are shaking up the staid world of investment advisors, which are licensed to provide advice and sometimes manage money directly. Managing US$31-trillion in total retail assets, the firms number more than 16,000 and employ almost 300,000 individual advisors, according to Cerulli.

Mr. Prescott helps advisors at larger firms launch independent operations. While last year he took 185 meetings, he says he had two-thirds of that number in the first quarter of 2023.

“I wouldn’t be surprised if one in four bank advisors was looking at [leaving for] the independent space,” he says.

Financial advisor teams inside large banks typically have some autonomy, operating with access to the bank’s lending capabilities and research.

But the bureaucracy involved in being attached to a heavily regulated bank can at times be a grind, they say. Financial advisors privately gripe about the extra oversight from compliance teams when certain words in emails to clients get flagged, as well as initiatives and pay structures that encourage employees to refer business to other parts of the bank.

According to a Cerulli report, one in four managers working at these large Wall Street banks were unhappy with the way their pay was structured, compared to just 5 per cent at independent firms. Almost half of the advisors who left cited pay as a top reason.

One advisor who works at a big bank says, “They track how many referrals you make [to the investment bank]. You get an e-mail every week about how many you made. When push comes to shove, if they’ve got extra tickets to the Yankee suite, they’ll give it to the guy who makes more referrals.”

Advisors also say the movement is down to a frenetic pace of mergers and acquisitions (M&A) among smaller advisory firms, which turned many boutiques into larger, more institutional operations. Owners of smaller independents – predominantly baby boomers – have been selling out as they reach retirement age. Low interest rates also made acquisitions more attractive, leading small firms to roll up into larger ones.

“There was a time when you weren’t even seeing 50 wealth management [mergers] a year, and last year we saw 250, and this year we are on pace to do something similar, … and the valuations have not come down,” says Steve Levitt, founder of Park Sutton Advisors LLC, an investment bank specializing in financial services.

M&A was quick to build firms’ scale. Firms with more than US$5-billion under management grew assets by an average of 30 per cent a year for the past three years, and half of that growth was down to M&A, according to a 2022 Fidelity Investments study.

“Five years ago, US$15-billion [in assets under management] RIAs just did not exist,” says Lorenzo Esparza, chief executive officer of asset manager Manhattan West LLC. Mergers left many advisors working for large firms or banks with cultures they did not sign up for, looking to find a new firm or set out on their own, he says.

Technology, such as platforms that can provide an outsourced “back office” for financial advisors seeking independence, has accelerated the rate of change. While the largest RIA teams managing billions of dollars would have been hamstrung from leaving their firms in the past, this tide has reversed, and independence becomes attractive the larger teams grow.

Ten years ago, “independence was almost like this weird cult for small practitioners,” says Leo Kelly, chief executive officer of investment advisory Verdence Capital Advisors. “Today, the independent space is so much more sophisticated.”

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