Joseph Perella remembers the era on Wall Street in which a $100m bond deal for Gulf Oil commanded the full attention of First Boston, then his employer.

Back in the 1970s, "the firm turned itself inside out for that," says the founder of Perella Weinberg, settling into his chair over dinner at the timeworn Italian cultural club on Manhattan's Upper East Side where he and Peter Weinberg first discussed building a boutique bank. "It's a different world today."

Banks' stock and bond trading businesses swelled so much in recent decades that, by the turn of the millennium, a $100m (€71m, £61m) bond deal would not have lured today's influential "rainmakers" out of bed. As those revenues overpowered fees generated by traditional advisory work, old-school bankers who had to compete harder for their share of the pie grew increasingly focused on mega-deals.

In response, a handful of highprofile bankers who built their reputations at Wall Street's biggest institutions have turned to "boutique banking", based on the belief that big banks are alienating clients who need strategic advice.

And now, as some of the big banks' higher-margin businesses lie in shambles, the boutiques' efforts are bearing fruit - suggesting companies are, indeed, willing to pay for old-fashioned independent advice. Boutiques captured 14 per cent of global merger and acquisition fees so far this year, according to Dealogic - the highest number ever - and are vacuuming up talented staffers at record rates.

Bankers including Mr Perella, Ken Moelis and Blair Effron, former UBS rainmakers, launched independent firms when Wall Street's cracks were only just starting to show in 2006 and 2007, joining a club led by Robert Greenhill, founder of Greenhill & Co, Roger Altman, the founder of Evercore, and Lazard's Bruce Wasserstein.

Opinions are mixed on whether these firms will flourish or whether today's aggressive land-grab mentality will lure some to sow the seeds of their demise through rapid growth.

It would not be the first time. A slew of independent banks has sprouted up over the past century and a half - including Donaldson Lufkin & Jenrette, Kidder Peabody, Dillon Read, Brown Brothers Harriman and Hambrecht & Quist. All but one sold themselves to larger institutions to satiate their rising capital needs and ambitions, and many eventually unravelled - at least in name.

The sector depends on M&A fees, which are notoriously uneven. Those brought in by big deals can be interspersed with dry spells. Evercore, for example, came a formidable second in Dealogic's boutique ranking for the first half of 2009. But of the $77.5bnworth of deals on which it advised, one transaction accounted for $68.1bn - Pfizer's takeover of Wyeth.

Can boutiques compete without compromising their independence and avoid the pitfalls that trapped their predecessors? Or will history repeat itself, forcing some to succumb to the lack of M&A activity, the eventual resurgence of Wall Street, or the sheer force of their own ambitions?

That is likely to depend on what their founders aim to create, and whether there is sufficient demand to support a growing number of boutiques that provide advisory services without the bells and whistles that big banks offer. "I try not to measure this firm against other boutiques because I don't see it as a death match between us," says Mr Moelis. "There's plenty of room."

Boutiques have begun fanning out into different areas - some targeting Fortune 500 clients, others smaller companies or certain industries. However they split the market, though, proliferation will make it harder for each to make an impact. Growth is vital for those seeking longevity.

But there is a catch. Each bank aims to expand while maintaining a small, client-oriented feel, harking back to an era in which conflicts were minimal and bureaucracy did not define the business model, even at larger banks. Peter J. Solomon, founder of his eponymous firm, says: "When I set up this business in 1989, I wanted to create a 1960s Lehman Brothers. I think that's possible. I don't want my reputation, no less my money, to depend on people I don't know well trading securities I really don't understand in time zones I rarely visit."

Tarek Meguid, who runs Perella Weinberg's asset management business, recalls meetings at Morgan Stanley - which had $150m in capital when he joined in 1978 - in which the firm's senior partners even discussed the office supply budget. "We'd all been at really big firms that had changed a lot from the day we joined them," Mr Meguid says in reference to his Perella Weinberg partners. "We wanted to create a culture here that was more like those of the early seventies or even earlier, when banking meant something very different."

Senior bankers at Wall Street's largest firms, however, see boutiques as naive for thinking they can be at once small, independent and powerful without putting their own capital on the line to snare clients. "We'd love to be in that business, where we'd be a top adviser on big deals and capital raisings but never have to commit a dime from our balance sheet," says one high-ranking M&A banker at a large firm. "The only problem is that it doesn't exist."

It may be hard for boutique bankers' romanticised views to translate into growth unless they expand into other lines of business. "The M&A business has been cyclical my whole 34-year career, and I suspect it will be long past my dying day," says Hal Ritch, founder of Sagent Partners. "Diversification is, therefore, a good thing to contemplate."

Yet while many expansion opportunities lie between the plain-vanilla advisory model and the big investment banks, no two boutiques have followed the same path - and nearly every avenue for growth poses a conflict. "I think its hard to build beyond a certain size without corrupting the model, either by hiring people who are less productive or entering product lines that are lower value-added," says Robert Pruzan, a founder of Centerview.

The simplest add-on is to offer other types of advice, on matters such as restructuring, which can offset an M&A slump. But the expansion argument grows significantly more complicated from there.

To some, including Evercore and Perella Weinberg, the next step is adding an asset management arm to handle investment portfolios. Consistent asset management fees can smooth out the peaks and valleys in M&A.

But Mr Greenhill says asset management can compromise the integrity of a boutique. "What happens if you know something about a situation in which you have an advisory role and an investment position?" he says. "The conflicts are inescapable."

Greenhill and Centerview, however, have private equity arms that invest in businesses on their behalf. Greenhill's private equity unit buys small companies that lie beneath the radar of its advisory business, while Centerview's strategy allows it to co-invest in large deals that involve its clients.

Greenhill is also publicly traded, as is Evercore - the division, some bankers say, between true "boutiques" and more complex entities. Public investors provide permanent capital, but they also tend to demand consistent, predictable earnings growth - which does not mesh easily with the cyclical advisory business.

"There's an inevitability about being public," says Mr Solomon. "It means you have to get bigger to build more earnings per share. When you go public, you cross over a line that is antithetical to some of our views. I don't know why anybody would want to be public if they didn't have a need for capital." Few boutique bankers, however, are willing to rule out a public listing, and the model has worked well for Greenhill, whose richly valued shares have stayed strong during the banking crisis.

More controversial still is the idea of building a capital markets business, through which a boutique would not only advise companies on how to raise capital - which many already do - but also underwrite the effort and trade in their clients' securities. Eric Gleacher, founder of Gleacher Partners advisers, recently sold his firm to Broadpoint Securities, merging it with an established capital markets operation. "The M&A boutique - I think that's an idea from the old world," Mr Gleacher says. "They're going to be severely constrained because they're one-product businesses."

Boutiques that lack sales and trading functions can also find it tough to compete against giant banks with access to oceans of data. "Good luck if people want to start it from scratch - it's very difficult," says Mr Gleacher, who says offering capital-raising advice without sales and trading capabilities is "like kissing your sister". "That's the reason I did this deal. Those platforms are hard to find."

Sales, trading and lending represent a bridge too far for some, however. "I think it all changes the day banks put up their balance sheet and bid securities," says Mr Moelis. "All of a sudden, you're conflicted. The minute you make a bid on your clients' securities, you are not totally aligned."

"The question is whether the unconflicted model is going to be successful," says Mr Greenhill. "If you think it is, it is hard to argue that adding trading and proprietary investing capability does anything positive."

Regardless of how they expand, few boutique bankers expect to displace Wall Street's behemoths - or even that their sector will grow to account for more than a quarter of the advisory market. "I'm not sure that the aspiration should be to be the next big firm," said Ralph Schlosstein, the new chief executive of Evercore, in a recent interview. "I really believe it's to be as large as you can be and still be excellent and conflict-free."

If anything, the remaining global banks may grow more powerful, now that corporate loans are tough to get.

"Anyone who thinks boutiques are going to push the big guys out is smoking something," Mr Perella says. "The big banks will always be there because clients need to go to them when they need capital, and they're never going to want to alienate them to the point where they fear a backlash. These firms have leverage."

Recruitment

Touchy-feely independents benefit from hard times

Boutiques tend to attract bankers looking for partnership- oriented cultures - not just outsized pay packages - making them traditionally a good fit for wealthy veteran bankers craving more independence.

However, distress at big banks over the past year has driven a broader swath of professionals towards these independent investment firms, which are now able to afford to recruit the best people without offering hefty salary guarantees.

But once Wall Street's giants get back on to their feet, a key factor in determining each boutique's success will be its ability to retain important staff - and to avoid acting as a way- station where bankers sit out the crisis before returning to big companies. Since most boutiques do not loan money to clients or underwrite debt and equity offerings, their calling card is intellectual strength, discretion and experience. They need to offer better, more independent advice to stay relevant, and a few bad hires at high levels can deplete their value to clients.

Founders say their collegiate cultures will keep the best staff on board when the market improves. To promote transparency, for example, Greenhill tells each of its managing directors how much every other one earns. When Centerview made its first private equity investment, it gave a slice of ownership to every employee - including office assistants.

"A boutique culture first and foremost depends on a spirit of partnership and ownership," said Blair Effron, a founder of Centerview. "Retaining the best talent is always a priority. If you are doing a good job as a senior banker, you will be doing very well at a boutique and you won't want to leave."

But with some young firms hiring rapidly, preserving the boutique culture could be more challenging than usual. And with big banks getting smaller, the boutiques' monopoly on touchy-feeliness may not last.

Still, some boutique chiefs say their large rivals could remain in purgatory for years, too distressed to foment friendly cultures but lacking funds to pay bankers for the stressful atmosphere.

"Nobody is focused on the business model at the big banks and how they can possibly pay for the infrastructure they have," one top boutique banker says. "I don't think they can. Why would you park at a boutique and then go back if there's not going to be a bonus pool? That's going to be a massive awakening."