Brokers Flee Large Firms, Start Their Own

Independent advisers are gaining ground on Wall Street firms to manage Americans' $5 trillion in savings. Wall Street firms are shrinking in market cap size and in their share of the retail-investing public.

As large firms' reputations are tarnished and some completely vanished, brokers and clients are making the move to independents. Cerulli Associates' research shows that in 2009 $188 billion moved out of large Wall Street firms and into independents, they forecast that in 2010 there will be even more funds transferred.

Having said that, large firms still held a large piece of the pie: 48% at the end of 2008 while independent firms handled 19%. Cerulli now estimates that by 2012, the big-firm share will down to 41% and the independents will be up to 23%. The balance is managed by small investment firms, banks, and insurance companies.

Large firms are fueling this movement by pushing out (making operating expenses higher) brokers, and the brokers are now approaching independent firms they never thought would be worth pursuing. The payout to brokers may be reduced substantially, from 40% of revenue generated to 20%!

These moves have caught the attention of discount brokers like Interactive Brokers, Scottrade, TD Ameritrade, Fidelity, and Charles Schwab. Brokers and advisers need a platform to clear trades through, custody assets, manage client statements, etc, so these discount brokers are picking up the slack. They are wooing brokers in a big way, and clients like the fact that the firm doesn't sell proprietary products or make big bets on structured finance (CDO, CDS, Equity Derivatives).

Source:WSJ