Executive Summary
There is a prevailing view in the independent financial planning community that when financial planning is ultimately recognized as a profession, and is regulated on the basis that advice must be delivered in a fiduciary context, that the independent planning community will take the center stage, as big brokerage firms will be afraid of the fiduciary liability.
But what happens if the opposite occurs - if a major firm steps forward to embrace fiduciary financial planning and seeks to pose a credible challenge to the independents? How might big brokerage firms transition in a fiduciary financial planning world, and can them stem - or reverse - the current rising tide of defections out of the brokerage world?
The inspiration for today's blog post comes from a conversation I had this morning over breakfast with Knut Rostad, chair of the steering group of The Committee for the Fiduciary Standard. During our discussion, I raised the question of what happens if the committee, the Financial Planning Coalition, and other supporting groups, "win" the fight for Fiduciary. Do the major brokerage firms - whose business models may be severely disrupted by such a regulatory change - retreat away from financial planning and fiduciary, or might some of them run forward to embrace it?
As I have stated in prior posts on this blog, I strongly believe that at least some major firms will step forward, not back, from fiduciary financial planning. My premise is very straightforward: fiduciary financial planning is very profitable, as one benchmarking study after another points out, and there's simply too much money on the table for all the major firms to back away. Yes, some will look at fiduciary obligation, fear liability, and consolidate into their product-distribution sales-based business model. But someone at a major firm is going to look at the space and see a marketplace fractured into thousands of small businesses (even a "large" financial planning firm is a micro-business by general business standards) that is ripe for a major firm with depth and resources to expand.
So how might the transition work? As many rightly point out, it is virtually impossible to change the sales-based culture that is so deeply embedded in the "advisors" at most of the major firms. As some wirehouses discovered in the past decade, you can even pay huge bonuses to your advisors to seek out CFP certification and many of them still won't go through with it. Decades upon decades of the current business model has self-selected a certain type of sales mentality that it takes to succeed in the traditional brokerage distribution model, and many (most?) of those folks simply aren't going to transition to a fiduciary advice model in the later stages of their already-successful career.
So how do you change an unchangeable culture? Simple. You make a new division, staff it from the outside with people who already embrace fiduciary financial planning, and let them compete in the marketplace. If it works well, some of their prospective clients may even include existing clients in the "old" brokerage division; after all, if some of the clients working with traditional brokers are going to be swayed towards seeking out financial planning services anyway, it may as well be to the subsidiary financial planning offering of your firm, rather than one of your outright competitors!
No, I don't expect this will appeal much to the 50-something year old planners who have already built their firms independently, and have little desire or reason to make a change now. But I see thousands of 30-something year old planners who have learned financial planning in a small independent firm, and not all of them are going to stay with that firm for life, for any number of reasons (relocation, family circumstances, difference in vision with founding partner, unfulfilled promises or an insufficient career track at the existing firm, etc.). Those planners in turn will have to decide where to build their career and practice going forward: join an existing independent firm, start a new one, or go with a "new" major firm's fiduciary financial planning subsidiary.
I'm sure many of you reading this are still thinking "yeah, but what independent would possibly want to pick option #3 and join THEM." Well, if one of THEM provided a world-class investment platform, invested deep resources into tools and technology to deliver your services, invested further deep resources into a robust financial planning support platform including more technology, true in-house experts on any/every issue you needed help with, compliance support so you don't have to be your own Chief Compliance Officer, and put a billion dollars of marketing into the company brand, would a few people consider it?
If a major brokerage firm decided to launch a 'real' fiduciary financial planning division and growth it with focus, as a separately branded standalone subsidiary, it becomes increasingly difficult to see what the difference would be between staying an independent that custodies at Schwab, Fidelity, TD Ameritrade, Pershing Advisor Solutions, etc., or goes with the major firm instead. Except that the latter are generally "just" investment advisor custodians, and firms build the financial planning on their own. What if a new firm offered as much support on the financial planning side as current custodians do on the investment side?
So what do you think? Is the brand of the major brokerage firms just too muddied for independents to ever make a switch TO them? What if they were launched as an independent subsidiary, staffed with people from the independent world and run as a true fiduciary financial planning firm, but with the depth of resources of the parent company? Could the transition happen? Might young planners of the future be willing to build a practice there?
I think the fallacy lies with the belief that a fiduciary standard would cause the majors to behave more like the independents. Or that a fiduciary standard requires financial planning be done. I think the wirehouses could make the transition without too much pain. I actually think the insurance companies are the ones in a tighter spot with this change.
I have seen plenty of bank trust departments, which are held to a fiduciary standard, do things which would make an independent financial planner shudder. For that matter, there are plenty of independent RIAs that probably fall into that category as well.
While fiduciary is a step in the right direction, it is certainly not a panacea. Until there are practice standards that go to a level of detail one finds in mature professions, trying to identify a great planner will remain problematic for people.
David,
Indeed, I think the next step beyond the fiduciary standard is the development of clearer practice standards that provide a more direct accountability for advice that is given.
And I won’t disagree that there are good and bad players within the fiduciary world as well.
But I’m still drawn to the idea put forth by many that no major firm will “do fiduciary” as though it can’t be accomplished profitably in a large firm the way it can in a small independent. Yet I find no basis for that – after all, the banking and trust world has figured out how to do fiduciary on a large scale – and wonder what the world will look like with large, fiduciary players in the financial planning space.
– Michael
Michael,
I agree with you. I think people who believe the major firms can’t do fiduciary are mistaken. The big fear I have is that the major firms will end up defining the practice standards for the profession if the independents don’t get their act together soon enough.
David