An Exodus From the Wirehouses?
This past week I spoke at a conference in North Carolina sponsored by fi360, a firm dedicated to serving the fiduciary market, and most of the attendees were registered investment advisors. There were also several brokers present. One particular broker I spoke with was preparing to leave his company and become an RIA. There was a consistent theme echoed from many brokers. They told me about the ridiculous rules and decisions their companies had made and how it’s had a negative effect on their ability to do their job. There seems to be an exodus occurring in the wirehouses.
When I think about it, it reminds me of a liberation movement where people are gaining their freedom. Perhaps one of the biggest hoaxes is that the broker needs the company more than the company needs the broker. Truth is, if the broker is experienced, the company needs them much more.
After the end of my second presentation, during the question and answer portion, a broker came to the microphone and proceeded to tell me how he was proud of his 22 years as a broker and that my presentation made him feel inferior and that it was mediocre at best. Funny thing is, the room was jammed and they had to bring in extra chairs, just to accommodate the overflow. Afterwards, I had no less than 20 people tell me it was the best, or one of the best, presentations they had attended and encouraged me to forget about this upset broker.
Here’s where it gets really interesting. About 30 minutes later I learned that this same broker was rethinking his position, and as I understood it, was wondering if he should become an RIA. Many times we face a “bump” to our way of thinking.
I believe the RIA platform is, without question, a much more client-friendly and flexible platform than that of a wirehouse or bank. Many think the wirehouse model is dead and that it will be split into two components. One will be for commission-based brokers and the other will be for RIAs. Only time will tell, but as long as there are wirehouses and banks, there is great opportunity to capture market share. When clients receive a factual explanation of the differences, their decision is easy. If captive brokers had a clear understanding of the RIA model, I believe the exodus would be even greater.
What do you think?
I believe making the distinction between business models or service models improperly conflates two issues: Independence versus compensation. If wirehouse reps understood the difference between the wirehouse model versus the independent model, there would be a mass exodus. Wirehouses would be left with new brokers, brokers who were not successful or confident enough to open their own businesses, and brokers who were more interested in income than serving their clients needs. The fastest growing segment of the industry is the “hybrid” practice that can work under both compensation systems. I hold both a securities license and an investment advisor registration, and I always explain to my clients how they can pay me for anything we do together. If the client has a large portfolio they want me to manage or needs a financial plan, we almost always do it on a fee basis. If they need a 529 plan or they want me to manage their 403(b) account, we almost always do it on a commission basis. I provide disclosure and allow the client to choose. Restricting the clients choice by forcing them into one compensation system is not necessarily looking out for their best interests. The real distinction is whether I run my own business or am beholden to a corporate sales manager.
The thing that this industry (financial planning) needs is full disclosure. If wirehouses would accept full disclosure requirements the or ask clients to sign away their rights to full disclosure it would be the best for all parties.
It is a shame that the brokers have no idea how much more money they would make by doing the right thing by the client. That is what will lead them out of the wirehouse channel.
Stephen,
Though I did not write the words, I have thought of how successful brokers leave their wirehouse and become independent. Those left behind are often new recruits and brokers who are comfortable with their generous income. It’s hard for them to leave. I agree that some clients prefer the commission system where they hit breakpoints by investing 1 mil (for example) with one mutual fund firm. One key point is “Who pays you?” Is it the client or the company you work for. To me, that affects your allegiance. The key is to work under a platform which has the least potential for conflicts of interest.
Hi Mike:
I wonder why the exodus isn’t faster? I agree with Stephen whose comment reminds us of the hybrid model whereby a wire house rep can leave the nest to an independent BD and also become their own RIA.
I have found two issues that prevent the exodus from moving faster. First is the ridiculous bonus structure that wire houses have created to lure a rep from one firm to another. That perpetuates the greed and sales mentality of these organization. Second is the fact that few of these reps understand what it really means to be in business for themselkves. They have been sheltered from all but the sales and service of client relationships and are generally afraid of stepping into the world of true entrepreneurship. Issues like lease negotiations, payroll and furnishing an office seem like a foreign language to many wire house reps that I have met. To someone who has basically been an employee for their entire career, I can see why these sound so intimidating. It is not, however, rocket science.
Being fiercely independent; no boss, no quotas and reaping a 90% payout and creating value in your practice/business is the future of this profession. Let the flood gates open!
John P. Napolitano CFP(R), CPA, PFS, MST. RLP(R)
U S Wealth Management
Hi All,
The exodus is hampered by a short-term mindset and non-fiduciary status of “brokers”.
Thinking beyond the benefits of receiving “front money” is challenging, and the concept of actually being a fiduciary rather than pretending to be one is equally challenging. Especially when a client is asked to make a lateral move (or sometimes less than lateral move) from one brokerage house to another so the broker can receive a bonus check. In the end, brokerage houses and their brokers don’t offer a significant number of differences to their clients.
When it comes down to it, a broker that moves from one brokerage house to another for money, without improving the client’s situation (cost, service, etc.) is not acting like a fiduciary.
True RIA are like the Marines…we’re looking for a few good men (or women)! That is why the growth of assets for RIA’s is so great and the brokerage houses is so low. Don’t be fooled by a big check, growth rates of assets and revenues for RIA’s tells you where the trend is.
I am considering options and leaving the bank brokerage system. Hoping my manager doesn’t read this post. I have been considering FiNet. My goal is to be independent, use my skills and knowledge. Any input is greatly appreciated.
John, I like your Marines analogy!
Jo, You’ve taken the first step with your desire to be independent. There’s much that could be said but I would try and get a handle on the number of clients that may follow me (and assets), decide on RIA or Broker Dealer, do some due diligence on them, put a plan of action together, and jump. Do you have a non compete? What is your current position, are you managing clients money?
I would like to first start by saying I became an independent fee based advisor this past December. My background comes by way of wirehouse, then small commercial bank, now independent. I do enjoy the open architecture of being independent and that was one of the main reasons I made the switch. I do find it amusing however, the way independent advisors talk about always doing what is right for the client, putting the client first and compensation second and not being a salesman or saleswoman. I would say that is the sales pitch used by independents just like wirehouse brokers have their own sales pitch. As far as putting compensation second I am sure no independents made the switch because of the 90% to 100% payout either. Don’t get me wrong I like the independent way of doing business but I find it funny when I see all the writings about the greed and sales mentality of wirehouse brokers. I think we are all in sales, fee based advisors and wirehouse brokers. One is selling investments one is selling advice but we both are selling ourselves as someone who the client can trust and whomever is better at that will win the relationship.I would argue that the biggest salesman out there is the independent industry. Look at all the literature the independent industry puts out filled with articles why it is some much better on this side of the fence. Just some thoughts take them for what they are worth.
Nathan,
In the strictest sense you are right. Everything is sales. The grocery store bids for my business just as the dry cleaners, phone company, and I even had to sell my wife on marrying me! There is however, a fine line between serving and sales. Serving the client well is the best marketing strategy there is. When you do it well you’ll never hurt for business. If you want to call this a sales mentality then perhaps your mind is made up and we can agree to disagree. I’m not suggesting your wrong, and in your specific experience I sure your feel you’re correct. I am saying there is another paradigm which is not sales oriented and that’s where I choose to remain. I wish you well and thanks for your comments.
Let’s keep the dialog going.
Mike:
Now that you have been at this a while do you have any suggestions for someone looking into RIA from a B/D perspective. Been with my B/D one year, about $7Mil in assets, $3Mil fee… wondering if the jump to RIA would be worth it? Any opinion