The financial adviser business model has evolved numerous times over the past 40-plus years. In the 1970s and '80s, for instance, mutual fund commissions were as high as 8%. When those rates eventually came down, advisers adjusted.
More recently, after regulators began to focus on pricing, believing (incorrectly, in my view) that lowest cost equaled best, advisers adjusted again, opting to change their pricing model by charging clients based on managed assets. That helped spur the growth of the advisory business.
In between, many other developments also impacted the industry, and each time advisers confronted them and found a new way to stay in business and continue to serve clients.
While all this has happened, another area of the industry has not undergone similar evolution: wholesaling.
At one time, wholesalers of investment products were among the most highly compensated professionals in our space, raking in more money each year than most advisers and home office staff, not to mention many firm leaders.
Product sponsors did not quibble with this arrangement because it allowed them to saturate the market. However, in part because of the changing competitive environment, which includes new products and revamped service offerings, there are perhaps fewer wholesaling positions today than at any time over the past decade.
Though many may say that's a good thing, the industry needs wholesalers because of the role they play in giving investors access to a wide variety of financial products — including alternatives, which continue to benefit countless clients. Still, the wholesaling model, as it exists today, is not indispensable.
Aside from the cost structure being too high, wholesalers are typically not the primary reason a product succeeds or fails. Almost invariably, that comes down to how well the product itself was conceived or whether it can withstand shifting market conditions.
Accordingly, one good way for wholesalers to evolve (and thereby continue to add value to the process of making available investment vehicles to the end clients) is to focus more on product education. The industry doesn't need order takers, and that's precisely what wholesalers have become in some instances, especially when it comes to a hot, much-publicized product that could sell itself.
What we do need, however, are professionals who not only have a keen eye for spotting well-designed products but who are also knowledgeable, meticulous and able to educate advisers about how to deploy certain products appropriately. Wholesalers operating this way will be rewarded, and those choosing to stand pat will have to answer to a market that will become increasingly wary of what they have to offer.
Don't eliminate wholesalers. Just make their responsibilities and related compensation reflect the value they bring — just like everyone else. That means education, conducting research and raising capital in ways that increase the likelihood of quality outcomes.
Getting products from a sponsor to a broker-dealer is vital. But addressing the wholesaler compensation model to establish better balance in our system would provide everyone a chance to thrive — from wholesalers to firms, advisers and, importantly, investors.
Clive Slovin is president and CEO of Atlanta-based SFA Partners.