Financial advice’s shifting landscape

Independent wealth management firms gain ground

In 2016, three New Hampshire financial advisors jumped from Wells Fargo Advisors to stamp the footprint of Washington, D.C-based Steward Partners LLC in Keene. In May, three more teams of advisors and brokers from Wells Fargo — two from Portsmouth and one from Manchester — followed in their footsteps within weeks of one another. 

These moves were a mere trickle in the swelling stream of advisors across the country leaving the major wirehouses to join or start independent wealth management firms, known as Registered Investment Advisors, or RIAs.

Since Investment News began tracking “Advisers on the Move” in April 2009, it has recorded 3,350 entries, 2,500 of them since 2013. And Fidelity Investments reported 23 percent of advisors moved between 2012 and 2017, as the trend gathered momentum with the recovering economy. 

Among the major wirehouses — large integrated brokers with national markets and all part of the nation’s largest banks — Morgan Stanley Wealth Management has lost 570 advisors, Wells Fargo Advisors 476, Bank of America Merrill Lynch 419 and UBS Financial Services 288. Meanwhile, LPL Financial, Ameriprise Financial Inc. and Raymond James Financial Inc., all recruited 83 investment teams from the wirehouses in 2016 and another 118 in 2017.

The commanding market share of the wirehouses is shrinking while the business of wealth management has never been bigger or growing faster as the baby boom generation proceeds toward retirement, their parents ready to bequeath trillions and their offspring enjoy peak prosperity.

Deloitte Consulting estimates that by 2030, when the last boomers reach 65, the value of household assets could reach $140 trillion — including financial assets worth $64 trillion — representing $250 billion in fees and commissions for the industry.

Cerulli Associates reported that from 2010 to 2015, wirehouses grew assets at a compounded annual rate of 4.9 percent, half the 9.9 percent pace of the RIAs, which is projected to increase its market share to 28 percent by 2020.

“While wirehouses still hold a substantial share of assets, RIAs are the growth story, “ the report concluded.

Effects of technology

“It’s all about the protocol,” said Tom Sedoric of The Sedoric Group of Portsmouth, who left Wells Fargo in May, referring to the agreement that has governed the shuffling of advisors among firms since 2004.

Before the protocol, after advisors left firms, their former employers litigated to retain their clients and books of business, saddling all parties with legal costs and stranding clients in the crossfire like children in a nasty divorce. The protocol, to which some 1,750 firms have subscribed, entitles an advisor to leave one firm for another with the name, mailing address, phone number, e-mail address and account type of their clients. 

Late last year, three large firms — Morgan Stanley, UBS and Citibank — withdrew from the protocol. But, despite speculation that Wells Fargo and Merrill Lynch would follow them, so far both have announced they would stay put.

“There is a bona fide business reason firms want to shut that door,” Brian Hamburger, a New York attorney who shepherds advisors switching or opening firms, told The New York Times. “They want to put up impediments for people departing with what they call their trade secrets.”

New York Attorney Brian Hamburger

“Without the protocol the advisor is held hostage and for all intents and purposes, so is the client,” said Sedoric, who has been named a top advisor by both Barron’s and Forbes magazines and is a regular columnist for NH Business Review. He faulted the agreement only for not requiring changes be disclosed to clients. He said that the protocol “opened the door to the growth of independent RIAs, especially after the financial crisis.”

Hamburger said that “technology enabled all this to happen.”

For years, he said, the wirehouses enjoyed a virtual monopoly of the information systems and communications networks required to manage large sums of money and volumes of trading, but the cost of the technological infrastructure has fallen to a point where it has become widely and readily accessible. 

Sedoric agreed that “as the technology spread, the wirehouses’ hold over the top talent, their biggest producers, has been undermined.”

That thought was echoed by Wayne McCormick of Manchester, who left Wells Fargo for Steward Partners several weeks after The Sedoric Group. “Technology expanded exponentially and leveled the playing field,” he said.

Hamburger recalled that once “young brokers started with the bull on their cards,” referring to the Merrill Lynch logo. “It used to open doors, and like the ad said, when E.F. Hutton spoke, people listened.”

But, he added, “there came a crossover moment, when advisors kept the card in their back pocket and formed their own relationships with clients and began working in teams, like The Sedoric Group.”

Independence is paramount

But, Hamburger insisted that “the notion that the failure of the wirehouses pushing advisors out the door doesn’t hold water.”

Instead, he said that “the best producers had an entrepreneurial fire in the belly. They were looking for autonomy, for independence, and opportunities to serve their clients and match their portfolios to their best interests.” 

For Sedoric, independence, which ensures and sustains the duties of a fiduciary, is paramount.

Unlike stockbrokers, registered investment advisors (RIAs) are held to a fiduciary standard, required to always place the interests of their clients above those of their own or their firm and to completely disclose all information relevant to any transaction. Brokers, along with financial and investment advisors, are held to the suitability standard that requires the investments they recommend be appropriate for their clients, but not necessarily in their best interests.

Moreover, while RIAs charge a percentage of assets under management, averaging about 1 percent, brokers are compensated with commissions on transactions.

“There is no substitute for objective advice,” Hamburger said.

Sedoric said that his role as an advisor is to assess the circumstances and needs of clients then prepare and pursue an investment plan to serve their interests and achieve their goals.

As an independent, employee-owned partnership, he said, Steward Partners provides “an institutional structure aligned with common sense and is an advocate for both clients and advisors.” 

McCormick agreed that with advisors working autonomously to the fiduciary standard, each with a stake in the success of the firm, the structure of Steward Partners represented “a huge competitive advantage.”

Both Sedoric and McCormick declined to speak directly about their experience with Wells Fargo. However, in March the U.S. Department of Justice extended the investigation of retail banking division to the wealth management division. And recently The Wall Street Journal reported advisors in the division as saying that control of investment portfolios was transferred from financial advisors to “formulaic models” geared to increasing sales, including sales of proprietary financial products, without the knowledge of clients.

At the same time, they said, incentives and rewards to advisors also reflected a strong emphasis on sales and a corresponding reduction in “customized portfolio management.” 

Sedoric acknowledged “it has become increasingly difficult to act as a fiduciary in a large bank.” He said that the business of banks is to “extract rather than create value” and, with margins squeezed by low interest rates, banks have sought to increase returns by entering unfamiliar lines of business.

At the same time, he said, the largest banks, which own the major wirehouses, “are too big to manage and too big to regulate. Bigger is definitely not better.” 

Likewise, McCormick said flatly that the RIA model “severs those conflicts of interests, real or perceived — and perceived is really important.”

Fiduciary standard

Mark Connolly, former director of the state Securities Regulation Bureau and principal of New Castle Investment Advisors LLC, said that the fiduciary standard distinguishes what he called the RIA model. “In my opinion, the RIA model is superior for the client to the warehouse model,” he said. “The client is better served by the fiduciary standard of conduct.”

Mark Connolly, principal of New Castle Investment Advisors LLC

Noting that wirehouses have significant marketing, operating and compliance overheads, he added, “somebody is paying for all that, and it’s the clients.”

Connolly said that as the wealth management industry undergoes transformation, loose terminology is a big issue.

“People call themselves financial advisors or investment advisors when they may or may not be RIAs,” he said. “It can be very confusing for clients to tell just what certifications and responsibilities an advisor may have.”

For example, he noted that the U.S. Department of Labor recently abandoned an effort to apply the fiduciary standard to those handling retirement accounts while the Securities and Exchange Commission has proposed a rule, stretching hundreds of pages, that would require brokers to act in the “best interest” of clients without defining “best interest.”

“By 2020 non-fiduciary advisors — i.e., brokers — will be on their way to complete extinction,” wrote Larry Miles of Advice Period, an RIA in Los Angeles. “Consumers will have finally rejected advisors who are not legally obligated to do what is in the client’s best interest.”

For his part, Sedoric — long a champion of financial literacy — stressed that as investors are faced with a growing number of sources of financial advice as well as an expanding array of investment opportunities, the importance of understanding the risks and rewards of different cannot be exaggerated.