Independence means different things to different people in wealth management

Some define it as starting their own firm, while others insist it means having full control over investment products and client relationships

With the July 4 holiday fresh in our minds, it strikes me that the word “independence” by itself no longer accurately describes the phenomenon that is changing the wealth management industry today.

Back in the 1980s and 1990s, it seemed that the only way to go independent was when wirehouse brokers answered an ad for Robert Thomas or LPL that was in the back of Registered Rep magazine.

Breakaway brokers were mostly struggling wirehouse advisers who sought to increase their payout. Today, of course, some of the largest teams in the industry are departing the big firms to go “independent,” defined as starting their own companies.

More: What does it mean when superstar breakaway brokers bolt again?

But the RIA side of the industry will argue that going to an independent broker-dealer does not truly lead to independence. IBD advisers are restricted to the offerings of their broker-dealers, while theoretically RIAs can offer the entire universe of products to their clients. So RIA breakaways who file their own ADVs can charge what they want and offer the products that they want (because they are responsible for their own compliance).

What has muddied the conversation is that when we discuss the “I” word, we are actually talking about two very different things. From the broker-dealer world, “I” is used most often to describe a business model where the practitioner is employing himself, thereby being independent from a parent company’s policies and procedures, and with clear ownership of the client relationships.

When RIAs refer to the “I” word, they are also describing investment decisions that are made independently without the built-in conflicts of interest that they see in the B-D world.

The challenge for all of us is that business models have evolved to the point where industry pundits use both definitions interchangeably.

For example, most would agree that HighTower was for a time a leader in the breakaway movement. As an RIA, they fit the investment choice definition of independence. Since they mostly hired breakaway brokers who ran their own P&L, they also fit the business model definition, though these breakaway partners were also employees.

More recently, CEO Bob Oros said to Investment News: “The business was originally partnerships who always had the right to get up and leave.”

Before the end of the year, Mr. Oros expects HighTower to own 88% of their revenue. HighTower to own. Not the adviser. HighTower, a pioneer of breakaway independence, was now talking about owning the practices of advisers, who no longer had the right to get up and leave with their clients. Investment choice definition of independence? Check. Business model definition of independence? No longer.

Another transaction that has confused the recruiting marketplace is LPL’s purchase of Allen & Co. LPL is the largest IBD in the country. Its affiliates are business owners. When the deal closes, the Allen advisers who remain will be employees of LPL. Will they retain the rights to their clients if they choose to depart? If not, I fail to understand how this is somehow a “unique employee model for independent-minded advisors” as the official announcement stated.

What is unique or independent about being an employee adviser of a B-D with zero rights to your clients outside the institution? I have no issues with Allen’s right to sell to whom they wish. But just because LPL is labeled an independent broker-dealer does not mean that the employee practitioners within Allen are truly independent.

On the other hand, Steward Partners, a partnership on the Raymond James IBD chassis, puts in writing with all offers that their partner advisers retain ownership of their books while still being employees. Indeed, Raymond James & Associates advisers, the pure employee model of RJF, also retain ownership in writing of their client relationships. (By way of disclosure, Raymond James is one of my clients.)

While RIAs appear to fit both categories of independence, individual non-owner practitioners within these firms are often employees with restrictive covenants that prevent them contacting “their” clients if they depart their company. That is hardly independent.

And when RIAs sell to either an aggregator like HighTower or United Capital, non-solicit covenants are a standard practice, especially for the owners/principals.

Paradoxically, the ultimate payday for the RIA entrepreneur who built a fiercely independent practice, free from big- firm restraints and B-D conflicts of interest, usually comes with different big firm restraints and possibly someone else’s investment policies and practices.

If you are an unhappy employee adviser seeking one or both versions of independence, be honest with yourself about what you are looking to fix. But recognize that not all “independent” models will be your solution. Your decision will have consequences for the rest of your career.