PhillyDeals: Snagging big firms' clients

One in 10 Americans is out of work. But James Wiley says this is a good time to quit corporate America and set up your own investment firm.

Wiley left Morgan Stanley's West Conshohocken office last month with eight colleagues to set up Wiley Group as an independent investment-advisory shop, with $200 million in money from clients who followed them.

"They didn't want us to go," said Edward Lambert III, Wiley's retirement planner. "They were obviously upset."

Charles Koontz, Wiley's most recent boss at Morgan Stanley, declined to comment, citing legal concerns.

It has been a tough year for big investment firms, with the economy's collapse, the embarrassing government interventions, and distracting mergers such as Morgan's combination with Smith Barney after it was partly spun off by troubled Citigroup Inc.

No wonder people have been taking their chances outside. Colm Kelleher, chief financial officer at Morgan Stanley, told investors in a conference call last month that financial advisers are still quitting, though the rate "has substantially declined" since earlier in the year.

The firm's "wealth management" unit was losing nearly $3 billion a month this summer in "outflows" as investors took their money elsewhere.

Why leave now? "Wall Street brands are tainted now," Lambert said, but that isn't the only reason.

New technology has made it easy for small firms to provide a lot of the services big firms used to dominate:

Charles Schwab Corp.'s institutional business takes "custody" of clients' funds for Wiley. "Independent advisers based in the Philadelphia area who used to work at the big firms, but have started their own," are a growth business for Schwab, said Thomas Intoccia, a managing director at Schwab's Radnor office. He said Schwab had signed up 25  advisers, with $2 billion in client assets, just in September.

Instead of relying on a parent company's Web site and account services, "we can have our own Web site, and fill it with our own [investment research] papers, and we can offer day-to-day online performance reporting and quarterly reports," Wiley said.

Instead of developing its own products, as Morgan Stanley and other big firms do, Wiley sells exchange-traded funds, which are basically index mutual funds that trade like stocks and can be bought and sold with minimum hassle. "We use Vanguard, Barclays, State Street, a lot of Wisdom Tree," Wiley said.

Philadelphia mutual fund consultant Burt Greenwalt told me Vanguard Group Inc. has kept expanding while rivals like Fidelity Investments cut jobs in the last year, in part because Vanguard has been successful getting independent advisers to sell its exchange-traded funds.

Vanguard spokeswoman Linda Wolahan told me ETFs account for nearly a quarter of the mutual fund giant's $84 billion in new business this year. The company's low-fee index and bond funds are also big sellers.

Wiley said outsourcing allowed his staffers to concentrate on their main expertise of reviewing clients' retirement goals, setting targets, and picking funds most likely to reach them.

"I have one client who's a senior manager at Merck. When he's 55, he wants to run a bike shop," Wiley told me. Reaching goals often means saying "No," cutting back on fancy restaurant meals, and scaling down Shore homes. "So you don't find you're 75 and out of money," Wiley said.

What does it cost to invest with Wiley? About 1.75 percent of assets annually, or 0.25 percent less than you'd pay a major-firm broker with mutual funds in its account, Wiley said.

Is that a bargain? Not to Robert Costello, another newly independent adviser, who left Boenning & Scattergood Inc. to start his own $35-million-asset firm, Costello Asset Management Inc., of Huntingdon Valley.

To Costello, mutual funds - ETFs, too - aren't what you hire an adviser to own. Costello avoids funds and buys stocks for his clients - buys them and holds them, for a fee he says is closer to 1 percent. Currently, he's investing in "industrial stocks, which are cyclically what you buy when the economy starts coming out" of a recession, he contends.

"That's what customers are looking for," Costello told me. "They aren't betting on home runs these days. They want a lot of singles."