Other Voices

Why RIAs and wirehouse advisers will never partner

Feb 20, 2011 @ 12:01 am

By Mark Elzweig

Although I would argue that they have a lot more in common than they realize, RIAs and top wirehouse financial advisers like to think of themselves as distinct species, thank you very much.

The mutual animus is so deep that they can't share an office, let alone a business, which is why it is difficult to envision a real blending of the two approaches.

I have yet to see any large wirehouse producers join existing registered investment advisers at the partnership level (RIA firms hire worker bees from wirehouses, but that is about it). And the very notion of a large RIA business merging into a wirehouse is preposterous.

Why is this, and why are two worlds so far apart?

In my view, it isn't money per se; it is culture. To quote the Gershwins, it is po-tay-to versus po-tah-to.

Wirehouse brokers come from an adversarial culture in which they are accustomed to squeezing potential employers for the maximum deal, including assorted perks. This is a sensible strategy because they are negotiating nine- or 10-year contracts with branch managers who are unlikely to be there for entire term of their deal.

Savvy brokers know that key decisions are made increasingly at the corporate level, so the manager's authority is often limited — hence the contentious posture when negotiating a new deal. But that is a big turnoff in the independent and RIA worlds, and an unwise posture for someone who aspires to become a business partner.

Asset management firms think that RIAs and wirehouse advisers are different enough to create separate wholesaling forces for each group.

Although RIAs have convinced clients to entrust them with the management of their assets — in some cases hundreds of millions of dollars — RIAs nonetheless abhor the suggestion that they may be salespeople. Even RIAs who compensate outside marketing firms for raising assets or have their own in-house marketers and funds don't view themselves as salespeople.

RIAs also pride themselves on their client-centric objectivity. As part of that view, they are loath to meet with wholesalers in person, preferring e-mail or telephone contact.

The marketing material aimed at them is different as well; they typically prefer white papers with charts and data to product brochures.

If they agree to meet with wholesalers, RIAs expect one- to two-hour sit-downs and focus on an in-depth analysis of the firm's investment process. They have no interest in fund companies' helping to defray seminar costs.

But they do want advice on how to build their practices and how to run their businesses in a more cost-efficient manner.

As one head of RIA wholesaling explained: “RIAs don't test-drive products.” Once RIAs decide to use a manager for a particular asset class, they tend to give that manager the full allocation.

The quasi-religious fervor driving the RIAs' push for a harmonized fiduciary standard for all advisers makes sense when viewed from their standpoint.

Wirehouse brokers look at the world differently.

Many wirehouse brokers view themselves as fiduciaries already and look forward to the application of that standard to their practices. They can be quite critical of their own wirehouse platforms.

They, too, are totally committed to bringing clients a “best of breed” menu of product offerings.

The cultural wars heat up over compensation.

Many RIAs view commissions as “tainted.” They often grew up bashing wirehouse brokers as product-pushing salesmen, and some are suspicious even of wirehouse advisers who are 100% fee-based, muttering about their being wolves in sheep's clothing.

The truth is that proprietary-product pushing ended at wirehouses years ago. Wirehouses no longer manufacture in-house asset management products for their brokers to sell.

They have recast themselves as distributors of third-party offerings.

A major wirehouse such as Morgan Stanley Smith Barney LLC offers some 1,300 strategies in funds and separately managed accounts. Although that isn't as wide a menu as the open architecture offered in the multicustodial RIA world, it is hard to make the case that a firm that offers that breadth of adviser choice is engaging in product pushing.

Wirehouse advisers are puzzled by the RIAs' claim that they aren't salespeople, and the wirehouse hybrid sales model is somehow not in the client's best interests. They argue that the hybrid model of fees and commissions allows them to serve clients maximally.

After all, aren't there clients who are best-served by owning an annuity, an A-share mutual fund or a commission-based 529 plan?

To the wirehouse top guys, offering clients unfettered access to the totality of investment products is what being a fiduciary is all about.

The cultural divide and misperceptions between RIAs and wirehouse advisers ensure that the two groups will rarely work well as partners. Ironically, it is the person who makes the model, not the other way round.

Character, integrity and an adviser's level of investment skill are what really matters, not necessarily how he or she is paid. As we saw with Bernard Madoff, a fee-based model doesn't automatically qualify an adviser for sainthood.

Similarly, commissions don't constitute a mortal sin.

From what I have observed at the high end of the advice business, both RIAs and wirehouse advisers are independent thinkers with a strong client-centric ethos.

To paraphrase the Gershwins again, rather than call the whole thing off, it may be best if RIAs and the top wirehouse advisers learn from one another or at least appreciate that the marketplace is broad and deep enough to value what each has to offer.

Mark Elzweig heads an eponymous national executive search firm that provides recruiting services to the asset management community.

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