Independent financial advisers are gaining ground from Wall Street brokers in the competition to manage more than $5 trillion in Americans' savings.

The ranks of brokers at major Wall Street firms have been shrinking, along with those firms' share of the retail-investing market. At the same time, independent advisers are growing in number and market share.

The financial turmoil of the past 18 months is fueling the shift. Shaken by the collapse of some Wall Street firms and the tarnished reputations of others, more big-firm brokers are breaking away to manage money on their own, taking clients with them.

Eric Thurber and two associates, who oversaw $740 million at Morgan Stanley Smith Barney, set up their own business in August. Many clients followed them.

After the collapse of Lehman Brothers in the fall of 2008, Mr. Thurber says, "we realized that we could be at risk" even at a major firm.

Boston research firm Cerulli Associates last year projected that brokers leaving major firms would take $188 billion in client accounts with them in 2009, the first year Cerulli has tried to measure that movement of money. Cerulli expects the trend to continue this year.

Other data suggest that big firms saw money flow out in 2008, too. Financial statements from the biggest brokerage firms, including UBS AG and Bank of America Corp.'s Merrill Lynch Wealth Management, show a collective net outflow in 2008 of about $20 billion in client money, counting both money removed by departing brokers and money withdrawn by clients whose brokers didn't leave. Those figures reflect client actions, not market gains and losses.

The big firms say they are poised to rebound and that they wanted to push out many of the departing brokers because they weren't bringing in as much profit as others. "The majority of departures have been people with below-average revenue production," says a spokeswoman for Morgan Stanley Smith Barney.

Major Wall Street firms still handled 48% of the money from individual investors under management at the end of 2008, while independent advisers handled 19%, according to Cerulli. But Cerulli forecasts that by 2012, the big-firm share will be down to 41%, while the independent advisers' share will be more than 23%. The balance of the money is managed by smaller brokerage firms, insurance companies and banks.

The number of brokers serving individual clients at major firms fell 14% to less than 55,000 in the three years ending in December 2008, while the number of independent financial advisers rose 29% to 33,000, Cerulli Associates says.

Mr. Thurber, the Morgan Stanley Smith Barney broker who jumped ship, says he hadn't considered a change until Lehman collapsed and he saw friends at that firm suffer. His employer then was Smith Barney, which hadn't yet merged with Morgan Stanley and was part of Citigroup Inc., whose stock was plunging. He and his two colleagues, whose brokerage-firm salaries were well into the six figures, manage money for entrepreneurs and venture capitalists in Silicon Valley.

They secretly planned their move for nine months before they left. Mr. Thurber recalls a tense debate in the dining room of one of his partners about whether they could afford to abandon their salaries and bonuses.

"It certainly gave each of us pause about whether it made sense for us to walk away," he says. Initially, the cost of starting and running a business would reduce their incomes, he says. In the longer run, he says, "we did the analysis that, counting equity in our new firm, if we did all the hard work, it would be worth it."

At their new firm, Three Bridge Wealth Advisors in Menlo Park, Calif., they are free of certain constraints, Mr. Thurber says. At big brokerage firms, brokers can sell only financial products approved by their firms. Independent advisers face no such restrictions.

The move is just one example of advisers looking to distance themselves from Wall Street brokerages, which have undergone heavy losses and tarnished reputations during the financial crisis. It isn't a new trend for brokers to set up independent practices, but the number who are choosing that route has increased. Among brokers leaving major firms, also known as wirehouses, the percentage who set up independent businesses climbed to 18% in July, more than tripling from 5% in January, according to Discovery Database, a firm that tracks adviser moves each month.

Discovery also said less than 30% of those brokers who left a wirehouse joined another one in July, compared with nearly 70% in January. Others went to regional firms, changed to an institutional focus, or went to banks, insurers or other types of financial firms.

Grist said the "intangible glue" at major brokerages has softened due to a host a factors, including lack of faith in senior management, management changes, plunging deferred compensation, and bad headlines from the firms.

He said more than 75% of those advisers going independent through Schwab came from wirehouses.

Over the past year, mergers in the industry have created large brokerage forces at Bank of America Corp.'s (BAC) Merrill Lynch, Morgan Stanley Smith Barney, and Wells Fargo & Co. (WFC), which purchased Wachovia Securities.


-Brett Philbin, Dow Jones Newswires; 212-416-2173; brett.philbin@dowjones.com (Kristen McNamara contributed to this report.)


To be sure, the major brokerages are still a dominant force within the industry. According to Cerulli Associates, wirehouses still controlled nearly half of all U.S. adviser-managed assets at the end of 2008 - about $3.9 trillion, Independent broker-dealers and investment advisory firms oversaw about a third of adviser-managed assets - approximately $2.7 trillion.

Barnaby Grist, managing director of Schwab Advisor Services, said the firm had almost no large teams who moved in the first four or five months of the year. However, he said Schwab has seen more interest from $1 million-producing teams since June.

Bob Ellis, principal at research firm Novarica, says broker moves now still reflect the "fallout from the economic crisis" and financial meltdown. Leaving a wirehouse to become independent isn't a quick process, as brokers must settle licensing and compliance issues as well as find office space.

The Three Bridge team said clients didn't mind, or even welcomed, the move. "One of the things we found was that there was a significant lack of confidence in the banks and it goes back to their focus on short term profitability," Thurber said in an interview.

"We have had a resoundingly positive response from our clients in understanding why we decided to (move) and leave fairly significant retention bonuses and offers from other wirehouses on the table to take our practice elsewhere," he said.

A Morgan Stanley Smith Barney spokeswoman confirmed the team had left the
firm, but declined to comment on their production or prior asset figures.

Schwab has attracted many such teams in 2009, who have either chosen to set up their own independent registered investment advisory shops or join an RIA firm. In the first half of 2009 through July, Schwab's Advisor Services segment has helped 86 adviser teams set up independent practices, up from 62, a year ago.

Other companies performing such custodial services for advisers leaving wirehouses include Fidelity Investments, Pershing LLC, and TD Ameritrade Holding Corp. (AMTD).

"What we have seen is a lot of the bonds" connecting advisers to "the wirehouses have just fallen away," Grist said.