Sometimes inertia wins the day on issues such as nomenclature. Perhaps one of the most obvious examples of this can be found in how many independent firms across the retail financial advice space continue to describe themselves as an "independent broker-dealer (IBD)," despite growing discomfort among firms and advisers with this term.
Perhaps the time has come to revisit this particular nomenclature issue on an industrywide basis.
Names and labels in this context are significant, as they signal to advisers the kind of approach and support they might reasonably expect from a firm.
Today, continued use of the IBD term potentially does a disservice to our industry, especially when so many independent firms have already embraced fee-based advisory services. The move away from transactional and product-driven business is well advanced, so there is no better time than now for our industry's firms to reflect this in how we refer to ourselves.
What would be the best possible alternative to "IBD"? Based on a cross-section of discussions conducted at Ladenburg Thalmann's recently concluded fee-based advisory conference, ELEVATE, we believe firms across the independent space that have truly embraced the fiduciary era should use the term "IAB" – independent advisory and brokerage – as a much more precise description of who we are and what we do.
Determining whether a firm should call itself an IAB or an IBD can be as simple as looking at the organization's asset mix, solution sets for clients and commitment to supporting financial planning-based, long-term client relationships.
While most independent firms, in an effort to remain as competitive as possible, would like to position themselves as "advisory friendly," not every organization can credibly make this claim on the basis of fee-based advisory asset levels.
A core benchmark to consider is whether at least one-third to half of a firm's client assets are fee-based advisory assets. Less than this range could potentially call into question the firm's real commitment to the fee-based advisory space.
At the same time, having a robust fee-based advisory business should not mean that firms are forced to relinquish the ability to provide advisers and their clients with ready access to any brokerage activities in the future, should such needs arise.
ADVISORY AND BROKERAGE
This, in turn, brings us to a simple but powerful point: The new fiduciary era for our industry does not necessarily need to be defined by a blanket avoidance of all brokerage activities.
Rather, the fiduciary era should be about ensuring advisers have the ability to thoroughly understand and support each client's specific needs. This makes it mission critical for advisers to easily access the widest spectrum of potential solutions for clients, and sometimes this may include brokerage-based investment solutions.
Consider, for example, retirees who face the prospect of outliving their investments, in part due to interest rates that remain at historically low levels. For many of these clients, plain vanilla equity and fixed income investments by themselves may not offer sufficient retirement income, nor adequate protection against longevity risk. Many investment vehicles designed to act as income solutions for retirees, such as annuities, continue to come predominantly from the brokerage space.
The third crucial attribute of an IAB should be whether the firm ultimately recommends that advisers develop and implement a holistic financial plan for each of their clients, articulating this as a high priority service offering that supports the end clients' best interests.
Ideally, each client's financial plan and the goals stipulated by the plan should drive adviser decisions on how to best use advisory solutions, brokerage solutions, or both to deliver what the client needs.
It is remarkable how rapidly and successfully many independent firms and their advisers have adapted to the industry's new normal, particularly with embracing expanded fee-based advisory work while retaining the flexibility to deploy brokerage solutions for advisers and their clients if needed.
Times have changed. The good news is our industry has largely succeeded in changing with the times, and that is why the moment has arrived for us to shed outdated labels and embrace our status as independent advisory and brokerage firms – in fact and in name.
Richard J. Lampen is President and Chief Executive Officer of Ladenburg Thalmann Financial Services Inc.