Adviser moves to expect in 2018

Wirehouses' withdrawal from the broker protocol will only boost advisers' interest in the independent space

Citigroup recently announced that it will be following Morgan Stanley and UBS’ lead in exiting the broker protocol. While it’s not a big player in the recruiting wars among wirehouse firms, this move signifies a further trend toward the potential demise of the protocol, and has reignited speculation as to what effect it will have on adviser movement in 2018 and beyond.

Without a doubt, these departures from the protocol will successfully curb the “check hoppers” who bounce from one wirehouse to the next every seven years when their retention packages expire. While a non-protocol transition is far from impossible, it is more difficult than a protocol transition.

First, clients must search out their adviser once they learn they have left the former firm (advisers cannot contact former clients in a non-protocol transition). Second, clients must be willing to endure a more time-consuming paperwork process to move their accounts to the adviser’s new firm (advisers cannot take any client data with them in a non-protocol transition, thus entirely relying on clients to provide all required information).

Advisers making a move in a non-protocol world will need to re-examine the quality of their relationships with clients and will need to confidently answer, “If I leave tomorrow, will my clients seek me out and allow me to explain the nature of my move, and can I easily describe why following me to my new firm will truly be in their best interest?”

By exiting the protocol, these wirehouses have installed a few speed bumps on the highway to lucrative paydays for these opportunistic advisers. This will ultimately be a positive outcome for the industry, as the focus shifts back to “What’s in it for the client?” versus “What’s in it for the adviser?” There has been much speculation in recent years about how the fiduciary rule potentially could dampen an adviser’s ability to “check hop,” from requiring advisers to disclose the size of the check received for moving clients to the new firm, to outright prohibiting advisers from accepting a recruiting check from a new employer. These firms have now achieved the same outcome, with or without the fiduciary rule’s help.

Alienating advisers

These brokerage firms have, however, done the RIA industry a huge favor by exiting the broker protocol. By limiting clients’ and advisers’ choices on where to best be served, they have exposed their true colors yet again. Advisers have always struggled with the bureaucracy, the antiquated technology, and the “management to the lowest common denominator” so prevalent in the wirehouse community. This latest self-serving move by these firms further alienates advisers from feeling loyal to their employer.

For that reason, this defensive strategy will ultimately backfire and the number of advisers exploring the independent space will actually increase with these latest protocol headlines. Whether an adviser needs to cross a protocol bridge or a nonprotocol bridge to independence, all of the reasons to join the RIA ranks are still very much alive and well:

• I want to build true business value;

• I want to have greater access to more products and services for my clients;

• I want to engage my clients in the manner that is best for my clients;

• I want to charge my clients in the manner that is best for my clients;

• I want greater succession planning options, etc.

As advisers plan their move into the RIA channel, they need to perform some self-analysis. There are varying degrees of freedom across the independence spectrum, it’s just a matter of determining what would best suit advisers and the business model they hope to deliver to their clients.

Advisers need to determine how involved they want to be in the running of the business, coupled with how much ownership and control they want to have. Advisers can join an existing RIA either as an employee or partner in the business; they can create their own brand by tapping into the resources of an aggregator or platform provider; or they can start an RIA on their own and attain full control and ownership. There is no right or wrong answer, advisers just need to understand the pros and cons of each path they consider.

As we ponder the future of the industry, we must remember history has shown that open architecture always beats closed, and innovation cannot be contained. What adviser moves should we expect? More of the same trends that we have seen in recent years as the pull toward Independence becomes ever more enticing and the powerful push from the wirehouses continues to accelerate.

Matt Sonnen is founder and CEO of PFI Advisors.