After Morgan Stanley took control of Smith Barney in May 2009 from Citigroup Inc., David Hopkins grew disillusioned with his new bosses.

Hopkins, 50, says he had built a roster of about 150 clients with $38 million of assets in nine years as a stock broker at Smith Barney in Southern California. After the Morgan Stanley deal, the New York bank imposed new maintenance fees on Smith Barney accounts and stripped away some of its brokers' autonomy — moves that Hopkins says hurt his relationships with investors.

In March, Hopkins got a call from a headhunter who urged him to join a small advisory firm that works with TD Ameritrade Holding Corp., a discount brokerage. Though it meant Hopkins would have to return a retention bonus from Morgan Stanley worth a year's earnings, he decided to depart for Beacon Pointe Advisors LLC in Newport Beach, Calif.

"Smith Barney had a very hands-off environment, like you knew what was best for your clients," Hopkins says. "With Morgan Stanley, it just became an unfriendly place. Smith Barney is dying a slow death. It's all about Morgan Stanley."

More than 7,300 brokers have left the four biggest full-service brokerages — Morgan Stanley Smith Barney, Merrill Lynch, Wells Fargo Advisors and UBS Wealth Management Americas — from the beginning of 2009 through June, according to Boston's Aite Group LLC financial services research firm and company filings.

Some brokers have fled internal clashes spawned by mergers during the financial crisis: Bank of America Corp. rescued Merrill Lynch four months before the Smith Barney deal. Others have been recruited by discounters such as Charles Schwab Corp. to join their networks of independent firms.

The big banking companies, which count on their brokerages to generate steady fee income, are losing assets as well as brokers. Assets under management at the four top brokerages fell 16%, to $4.75 trillion, from 2007 through 2009, Aite Group says. During the same period, assets jumped almost 14%, to $1.54 trillion, at independent firms.

"It's hurting the big brokerages," says Alois Pirker, an Aite Group research director. "They have lost assets, advisers and clients."

Morgan Stanley says its loss of brokers and assets has been inconsequential. Spokesman Jim Wiggins said the bank is sorry to see employees depart out of frustration with a lack of success at Morgan Stanley; it does not compete with low-cost brokerages on price.

"Our business model is not for everyone," he said. "We're geared to those advisers and clients who can best benefit from the breadth and resources of a leading global investment bank."

Though lacking the clout of big brokerages, independent firms boast an advantage with clients: no conflicts of interest. Brokers at Merrill Lynch, for instance, are pressured to sell funds managed or approved by the firm because they pay a higher commission than those run by other companies, says Paul De Rosa, who worked at the brokerage for 26 years before co-founding Gateway Advisory LLC in Westfield, N.J., last January.

De Rosa set up Gateway Advisory as a registered investment adviser, giving him a fiduciary duty to put clients' financial interests first when giving advice, according to Securities and Exchange Commission rules. RIA firms must also disclose conflicts. To avoid them, RIAs like Gateway typically shun commissions and charge a flat fee of less than 1% of assets under management regardless of the investments they recommend.

"Our clients know that, when we make a recommendation, we're not getting compensated for that recommendation," says De Rosa, 61, whose firm manages more than $250 million.

Lyle LaMothe, who oversees Merrill Lynch's U.S. wealth management unit, says brokers do not push particular investments that pay more than others. The firm leaves it to the customer to decide whether to buy a product sold on commission or to pay a fee for investment advice.

"That we have both methods is testimony to the fact that we are independent," LaMothe says.

Charles Schwab and TD Ameritrade are capitalizing on the flight of brokers. The discounters are supplying a host of fee-based services to independent firms, ranging from adviser recruitment to supplying trading and custodial assistance. Omaha, Neb.-based TD Ameritrade announced in July that its recruiters had helped bring 212 advisers from big brokerages to independent firms in the first seven months of 2010, a 44% increase from the year earlier.

Schwab's unit that offers services to independent advisers and other institutional businesses is its most profitable. The San Francisco discount brokerage company has about 6,000 independent advisers in its network.

"There has been a bit of a pack mentality with advisers," says Bernie Clark, the head of Schwab Advisor Services. "When people started coming out and fostering growth in this industry, others saw it was possible and followed them."

Independent firms depend on their partnerships with Schwab and TD Ameritrade. Dorie Rosenband says she quit Smith Barney last year because she grew tired of its high-pressure sales culture and preferred to use her training as a certified financial planner to give advice. So she started a business in New York and Baltimore in 2009.

Schwab helped Rosenband, 37, find office space and legal advisers and then hooked her up with Raylor Investments LLC, a Greenwich, Conn., consulting firm that screens investments for her clients. In exchange, Rosenband pays Schwab a fee for the safekeeping of her investors' money, trade execution and other transactions.

"You cannot underestimate the magnitude of setting up a new business," says Rosenband, whose firm oversees $50 million. "You're leaving a turnkey environment where you don't even realize what's being done for you."

Beacon Pointe, which manages $4 billion in assets, owes much of its recent expansion to TD Ameritrade. The two formed an alliance in 2007: Beacon pays a fee for client trades through TD Ameritrade, and the discount brokerage funnels customers seeking advice to the small firm.

This year, the number of TD Ameritrade referrals has soared, supplying 25% of Beacon's new clients through October. And Beacon is planning to buy an independent adviser with $120 million of assets in Scottsdale, Ariz., as a first step in expanding to get more business from TD Ameritrade branches nationwide, says Matthew Cooper, Beacon's managing director.

Hopkins, the Beacon Pointe adviser, works a region from Orange County to Santa Barbara, Calif., talking with TD Ameritrade branch workers to find customers who need advice.

"They went to Ameritrade and thought they could do a self-directed approach but don't have the time or talent to do it," Hopkins says. "So Ameritrade recommends us."

Some advisers return to the comforts of big brokerages after struggling to survive on their own. James Stoker 2nd left Smith Barney in 2004 and co-founded a firm with six brokerage colleagues. He wanted the freedom to place clients in more-exotic investments, such as hedge funds. But Stoker had little time to develop this strategy. Because his firm in Austin, Texas, could only afford a handful of people for investment management and research, he spent most of his time on day-to-day duties such as flying to meet fund executives and plowing through their documents.

After the Bernard Madoff fraud scandal in 2008, investors demanded that Stoker's small staff increase the scrutiny of its investments. During a meeting in early 2009, an institutional client asked how Stoker could verify that outside auditors of managers were doing their job.

"We couldn't answer that question other than to say we couldn't do that," Stoker says. "We were just too thin. We came back from the meeting and said we have to reaffiliate with Morgan Stanley."

Stoker, 54, wound down his company in May and took six of his people back to Smith Barney. Now, at the brokerage's Graystone Consulting unit, which advises institutional investors, Stoker says, he can tap hundreds of research analysts who do much of the groundwork of evaluating money managers.

"A lot of the big independents don't have 200-some people in research and sophisticated risk systems," Stoker says. "Independents can't outspend Morgan Stanley in these markets."

Major brokerages and independent firms are also tussling over regulation. The SEC is to send a report on protecting investors to Congress in January before possibly issuing rules as part of the Dodd-Frank regulatory reform legislation signed into law in July.

Registered investment advisers are urging the SEC to adopt the tough fiduciary standard under the Investment Advisers Act of 1940 that governs their profession.

If advisers get paid more for recommending a particular fund over another, they must fully disclose the arrangement and obtain informed consent from investors every time they sell such a product, says Knut Rostad, the chairman of the Committee for the Fiduciary Standard, a group of financial professionals in Falls Church, Va.

Advisers also must manage conflicts by, for instance, crediting any additional payment to their client's account rather than accepting it themselves, Rostad says.

The Securities Industry and Financial Markets Association, a lobbying and trade group based in New York, says the stringent fiduciary rules of the 1940 act are unnecessary to safeguard investors and would restrict their options. SIFMA supports the idea of more disclosure, however.

"We believe in a robust disclosure regime where the client can make the decision to consent to conflicts," says Andrew DeSouza, a SIFMA spokesman.

No matter what the SEC does, for Hopkins, there is no going back to a big brokerage. He likes the potential payoff of being an entrepreneur.

"I'm working 10 times as hard, but the opportunity is 100 times greater," he says on his cell phone, while slogging through Los Angeles traffic — hoping to find clients who value his independence as much as he does.

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