Exodus of US investment advisers sparked by mergers and bank turmoil

A fevered round of job-hopping is under way in the US investment adviser 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 advisers switched firms in 2022, according to Cerulli Associates, representing 9.2 per cent of the US 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 jumping ship this year were teams from Silicon Valley Bank and First Republic, which served affluent customers before bank runs forced them to be taken over.

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

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

Prescott helps advisers at larger firms launch independent operations. While last year he took 185 meetings, he said he had two-thirds that number in the first quarter of 2023. “I wouldn’t be surprised if one in four bank advisers was looking at [leaving for] the independent space,” he said.

Financial advisers 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 advisers 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. Nearly half of advisers who left cited pay as a top reason.

One adviser who works at a big bank said “they track how many referrals you make [to the investment bank]. You get an email every week for 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.”

Advisers also say the movement is down to a frenetic pace of mergers and acquisitions 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,” said Steve Levitt, founder of Park Sutton Advisors, an investment bank specialising in financial services.

M&A was quick to build firms’ scale. Firms with more than $5bn 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 study.

“Five years ago, $15bn [in assets under management] RIAs just did not exist,” said Lorenzo Esparza, chief executive of asset manager Manhattan West. Mergers left many advisers 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 said.

Technology, such as platforms that can provide an outsourced “back office” for financial advisers 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”, said Leo Kelly, chief executive of investment advisory Verdence. “Today, the independent space is so much more sophisticated.”