The future of the B-D: Death of a salesman?
If you are an adviser, you are either currently with an RIA, thinking about going RIA or know someone who has left a broker to go RIA.
For this debut of my goRIA column, I want to explore exactly why there seems to be a tidal wave of advisers leaving the broker-dealer world to join or start an RIA. If you are an adviser, you are either currently with an RIA, thinking about going RIA or, at a minimum, know someone who has gone RIA. So what is the future of the B-D?
Based on both my personal experience, as well as an informal poll of other advisers, there are a number of reasons for this exodus, but two reasons keep coming up more than others: cost and compliance.
Brad Wright, Founding Partner of Launch Financial Planning, says he chose to “go RIA” for two primary reasons. “1. Cost – it’s much less expensive than it used to be to launch an independent RIA. Technology, custodians, and even rent (if you need an office) have become more economical. 2. BD compliance was always a hassle. I have a TV/Radio background and participate in a fair amount of traditional and online media. Needing to wait 2+ days for compliance to OK a response for an article caused me to miss numerous deadlines.”
These sentiments were shared by many other advisers in the RIA space I connected with on this topic. In addition to cost and compliance, other factors contributing to the groundswell of new RIAs included having more control over how advisers serve their clients, more (and often better) technology and building more value in one’s business.
What does this mean for the B-D model?
According to Blaine Aikin, founder and principal of Fiduciary Insights, the B-D story will be less like “Death of a Salesman” and more like “Back to the Future.” “Neither broker-dealers nor registered representatives will go away; they will adapt. In a sense, it will be back to the future of the B-D because separation between transactional services versus personalized advice is the concept that was contemplated/intended when the Investment Advisors Act of 1940 went into effect.”
Aikin believes that there will be “retail” brokerage in the future, saying “I believe there is a market for directed brokerage supported by investor services such as trade facilitation, investor education, research, trading tools and technology, etc. Broker-dealer organizations will also generally have both brokerage and advisory operations to serve a spectrum of client needs.”
Aikin’s views were, in part, seconded by Kestra CEO James Poer, who said, “Broker-dealers are simply responsible for executing and supervising transactions, and there will always be a need for that process when serving clients. For example, if an adviser needs a bond ladder or a fixed annuity as part of the broader financial plan, ‘broker-dealers’ are best equipped to execute that component.”
That makes sense to me. I agree that B-Ds are likely here to stay. There will likely always be investors who want to simply enact a transaction — period. These types of investors do not want advice, they do not want a financial plan, they just want to know what products are available, what the terms are for those products and what is the price.
But what about the many investors out there that want advice?
For starters, as of June 2020, the SEC is prohibiting “brokers” from calling themselves “advisers” (unless they also happen to be a fiduciary financial adviser — aka a “hybrid” adviser). The intent of this rule is to make it easier for investors to distinguish between advisers (I mean brokers) selling products and fiduciary advisers offering advice.
This does not mean brokers are doing wrong by their clients. It does, however, mean that investors should be aware when they are or are not receiving advice that is personal and meaningful for them.
In the not-so-distant past, there were several products that were just not widely available for the non-B-D rep, including annuities and private equity funds. However, thanks to firms like DPL Financial Partners (fee-based annuities and insurance) and iCapital (fee-based PE and hedge funds), that is no longer the case. Just about any product available on a B-D platform can now also be found on RIA platforms.
To paraphrase Mark Twain, the rumors of the death of the B-D have been greatly exaggerated. But while the B-D model will most certainly survive and thrive, the question really will be about the future of the B-D reps, formerly known as advisers.
As investors become more and more educated about the difference between a “broker” selling products (sans meaningful advice) and an “adviser” bound to a fiduciary level of care, it seems that more and more “brokers” will go the “adviser” (aka RIA) route to meet the demands of their clients demanding advice.
So while improved economics and less complicated compliance has been fueling the recent RIA stampede it seems that the real, long-term driver of the RIA space will come from clients who will be demanding “fiduciary” advice.
Beginning today, Chuck Failla will write a regular column on the RIA space for InvestmentNews.
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