The last decade has been marked by a steady but sure shift by clients away from the wirehouses to independent advisers.
In 2011 alone, some $90.3 billion in client assets left the wirehouses with clients who took their assets with them when their brokers moved. (This figure was double the $50 billion that left the traditional wirehouses the previous year.)
Even more important is the fact that, of growth in the RIA industry in 2011 of $232 billion, some $118.4 billion was accounted for by clients lifting their accounts, without an accompanying broker, and taking them to the world of the independent, according to a Cerulli study. This trend continued in 2012 and 2013.
While the shift remains both steady and sizeable, it is by no means an avalanche. It's more like the movement of tectonic plates. But for the wirehouses, the nature of this shift must make it all the more worrying: Avalanches tend to be short and sharp, the movement of tectonic plates is massive, and it is inexorable.
Between 2011 and 2012, the wirehouses, gave away 0.7% of total market share. Independent RIAs, on the other hand, saw their increase in market share more than double from 0.4% to 0.9% during the same period, according to a study by the Aite Group.
A Broken Bond
It is clear that the bond of trust with the client is broken, but why? Conflicts of interest for a start.
Because of the limitations of the system within which they work, even the best brokers, doing the best they can for their clients, are still frequently obliged by their employers to sell overpriced, underperforming products. The lowest performing funds are usually affiliated with the big brokerage houses. In fixed income, we have seen clients saddled with bonds that are sold with stunning mark ups invisible to them. And these are quite apart from the structured products that are sold to clients, with not only their high loads and management fees, but also their complexity, opacity and liquidity issues.
The root of the problem, though, lies in the different standards of care to which wirehouses and RIAs are held: The suitability standard holds wirehouses to significantly lower standards than independent fiduciaries whom, under the Investment Advisers Act of 1940, are held to the fiduciary standard.
A Call to Action
Clients and brokers usually like each other as individuals, and trust will, necessarily, exist between them. However, for that trust to be maintained and strengthened, clients need to know that their brokers are finding the right solutions to their financial needs, without the conflicts imposed by their employers.
Now is the right time for some hard-hitting questions. Clients should ask their brokers: “What are the obstacles preventing you from doing the right thing for me?” And brokers, just as importantly, should be asking themselves not only “What are the obstacles in the environment in which I am working?”, but also “How much of my time do I really want to spend protecting my clients' from headquarters' interests rather than focusing on what's right for them?”
For brokers standing on the fault lines, obliged to spend the vast majority of their time maneuvering through the system, and protecting their clients against it, is not productive for anyone, not least their clients. It is certainly not anything to inspire that most vital of qualities in their relationship with their clients: Trust. And, should they lose that trust, they can be sure of only one thing, its loss will be a cataclysmic. Plate Tectonics do cause earthquakes!
What do you think? Do you have an opposing perspective? Join the conversation and tell us what you think of the wirehouse model or email our digital editor with your point of view.
Rudy Adolf is founder and chief executive officer of Focus Financial Partners, one of the active acquirers of RIAs nationally. An industry expert, Rudy frequently speaks at industry events and helps partner firms strategically grow their practices.