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In the beginning, the movement towards independent advice was a reaction.
The prevailing wirehouse model was profit-driven and conflict-ridden. As brokers, individual reps were not subject to the fiduciary standard. They were in-house salespeople, subject only to the much looser suitability standard.
Reps were paid when they sold something. The commission system encouraged churning. The client’s best interest often took a backseat to generating high turnover revenue.
Even when fee-based programs eventually emerged in the wirehouses, they were not designed to benefit clients by eliminating the urge to churn. They were developed to make up for commission revenues that had been lost when fixed commissions were eliminated. The asset managers that participated in those programs were required to trade in-house.
Brokers had sales quotas and were encouraged to push proprietary products and securities issued by investment banking clients. House interests prevailed over client interests. The primary function of these firms was to keep the wheels of commerce turning, not to ensure the financial security of individual investors.
Gatekeepers decided what products were available. Pay-to-play was rampant. Shelf space was valuable real estate. Quality alone was not enough to gain access. But if a manager had a large sales force and “invested” in the relationship, gates opened.
Many advisors wanted something different. The main driver was the ability to better serve their clients with open architecture, objective advice and fewer conflicts.
Client-Centered Service
Early advocates for independence were creative, mission-driven entrepreneurs. Sure, they wanted to earn a good living, but they were more motivated by the idea of designing a new order where the client was truly at the center.
They donned the fiduciary mantel and set themselves apart from the old order. They established small, independent firms with no bosses other than their own consciences and the ethical standards to which they aspired. They were rowboats floating on a sea filled with battleships.
To be sure, some of these rowboats affiliated with independent broker-dealers and continued to offer services on a commission basis, usually to complement their fee-based offerings. But gone were the quotas, proprietary products, and tout-lists of securities that needed to be distributed for investment banking clients.
Much has changed since then. Some of the rowboats became schooners, then destroyers, then cruisers. Some even became battleships themselves. Examples include Creative Planning, Carson Group, Mariner Wealth Advisors, and Savant Wealth Management, each of which currently have over $50 billion in AUM
The new order grabbed market share from the old order by the fistful. There was a momentum shift. The old guard was rapidly losing ground to independent firms and was forced to adjust and even emulate the new players. Their battleships were leaking badly.
There was a sense of pride and even jubilation among the independent advisor community. Their client-centric approach to providing advice was not only viable, it shaped the future direction of the industry.
Consolidation’s Growing Dominance
Naturally, as independent firms grew and, in many cases, became highly successful, the industry began to experience consolidation among firms. This consolidation took many forms, but it included transactions driven by firms whose primary goals were growth, scale, and, ultimately, profit. These financially driven aggregators paid lip service to the benefits clients might receive, but money, not client benefits, was their primary motivator.
In 1999 the consolidation trend reached such a frenzy that Mark Hurley predicted, in a headline grabbing paper, that the industry would soon be dominated by a relative handful of large firms. He got the specifics wrong, but he nailed the trend.
Two forces have accelerated the consolidation trend. One is age and the other is money.
The advisors who pioneered the independent model are aging out of the business. They need an exit — a way to monetize the tremendous work they did and risks they took in building their firms. The fact that they have so many cash-out options today is a tribute to their effort, foresight, and boldness.
Money attracts money. As the success of the independent advisor business model became apparent and the first wave of consolidators upped their games, big money got a whiff and was drawn to the consolidation party. Now big money is everywhere.
Private equity firms, large asset management firms, and other capital sources are now funding RIA consolidation, fintech firms, TAMPs, and other industry players. The buzz now is all about scale and growth. Who bought who? It’s all about who’s the biggest, not who’s the best.
In this environment, clients are seen as fish. How do you catch more of them? The focus is more on the efficiency of lead generation than on the quality of service.
Shifting Priorities
To their credit, the big money sources are very transparent about their mission. It is to make money for their investors. It is a very different mission than the client-first mantra of the independent advice pioneers. If serving clients well is perceived as consistent with the make-money mission, clients will be served well. But only if it can be done efficiently, at scale, and for a tidy profit.
The flood of big money into the RIA space is a tribute to what the pioneers created. But it also represents a step backward. The new masters are profit-driven capitalists, not creative, client-focused entrepreneurs.
This is not a call to turn back the clock. In many ways clients can be better served today than ever before. The products and services available today through independent advice firms are broader than ever before. The technology supporting advisors today is also light years ahead of the early days when email and the Internet were just emerging.
But it is a call to stay focused on the heart of the matter. What brought success to the independent advice movement was loyalty and dedication to clients.
Clients were drawn to the new model because they felt the difference — they were at the center. If that feeling is lost in the interest of growth, scale, efficiency, and profit, a new wave of pioneers will emerge to remind us of an immutable truth. Acting in the best interests of clients and focusing on their well-being above all else is how you build a successful financial services firm.
Scott MacKillop is a 49-year veteran of the financial services industry. He is the principal of SMacK Consulting, serves on the Board of Directors of the Institute for the Fiduciary Standard, and is a member of various other advisory boards.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives
