Squeezed by low-interest rates and high costs, IBD execs at FSI's OneVoice were looking to the RIA model with a little bitterness

February 4, 2011 — 2:11 PM UTC by Elizabeth MacBride


1. IBD execs see RIAs as under-regulated escape artists. This became clear when I heard IBD executives talking about what they believe is the main reason for flight to the RIA world: lower compliance costs. “They just wanted to escape regulation by the Evil Empire,” said one executive, referring to FINRA. From the RIA perspective, the story is more nuanced. RIAs who used to be brokers often say that the main reason they left the brokerage world is that they wanted to establish their own businesses, and, second, that they did not want to be tied to product sales. The third reason on the list is often compliance.

2. IBD executives are under pressure now. Consultant Charles “Chip” Roame, principal of Tiburon Strategic Advisors, identified three powerful factors putting pressure on IBDs, though he said that in the long-term, IBDs are in a good business position. The trend in the advisory business, he said, is toward in independence.

For now, the three factors weighing on executives’ shoulders:

• Margin compression (due to the low interest rate environment and rising technology and compliance costs)
• Difficulty growing the business (the years of easy recruiting from the wirehouse are over, and small IBDs expect to command too much money for easy acquisitions to be made)
• The fast-changing regulatory environment.

One executive told Roame: “For 1-2% margins I might as well run a Safeway store, which has much lower risk.”

3. The hybrid model that’s been much lauded as the future of the business doesn’t work for some IBDs. One executive complained to Roame, saying, “They want 97-100% payout on their fee accounts. All we get is their leftover commission business, and maybe I can charge them a compliance fee.” Another said, “The hybrid model is definitely revenue negative.”

See: 5 Reasons why the hybrid RIA model may be bigger than ever

4. The FSI is increasingly a force to be reckoned with. A spinoff of the Financial Planning Association in 2004, FSI this year opened an office in Washington, D.C., and just hired four more staffers, for a total of 14:

• Keith Kelly, executive vice president and chief operating officer
• Heather Almand, director of communications and media relations
• Jeannine Rhoden, marketing communications manager
• Ryan Caruso, government affairs manager
• Nicole Whatley, office services manager

5. The IBDs are quietly confident that by allying themselves with the right people in Washington, D.C., they will be able to mold the new fiduciary regulations in a direction that’s not too onerous for them. The FSI’s main conduit for influence will be its ties to FINRA. The FSI strongly endorses FINRA as the SRO for advisors. Meanwhile, it was clear from Rick Ketchum’s Q&A session with Dale Brown, the FSI’s CEO, that Ketchum expects to work hand-in-hand with the SEC in creating the new regulatory regime that covers both broker-dealers and advisors.

6. IBDs are waking up to the dangers posed to their business model by the Department of Labor regulation that aims to bring more disclosure of fees to the retirement market. The regulation is expected to out advisors and other service providers selling and marketing high-priced mutual funds and group annuity plans. That regulation goes into effect in July. Another proposed regulation would limit revenue-sharing arrangements to advisors working with retirement plans. Valerie Brown, a board member of FSI and CEO of Cetera Financial Group, said FSI was working to lobby the DOL on the regulations.

7. IBDs are also focusing in on the business opportunities in the retirement market. Retirement was a key theme of the conference, mentioned by incoming chair Bill Dwyer, president, national sales/marketing of LPL Financial, and the subject of a keynote speech by Alicia Munnell, director of the Center for Retirement Research at Boston College. If advisors really want to make a difference for their clients in retirement, however, it seems that they will be playing more the role of counselor than investment advisor. Among the steps she suggests for Baby Boomers: keeping a lid on spending in their 50s, and working more years in their 60s and 70s. See: What LPL’s Bill Dwyer had to say about recruitment, and pressure from custodians.

8. The IBD executives do not see the switch to a fiduciary standard as a wholesale change. Rather, they see it as a compliance problem. I went to one session entitled “Setting RIA Firms Up for Success in a Fiduciary World.” I expected it to be filled with IBD execs considering establishing more RIAs; instead, it was filled with executives who already have RIAs and wanted more information about best compliance practices. Some people were taking detailed notes. The guy behind me was snoring. One substantive question about the fiduciary standard emerged toward the end: “Does the fiduciary standard mean that I have to give the customer not what he wants, but what’s best for him?” The answer from the panelists boiled down to having the client fill out a really, really good risk evaluation form.

(See: Groundbreaking SEC study would smash old regulatory system, creating fiduciary brokers and more regulated advisors)

9. The IBD world is no less male and white than the RIA world … and maybe even a little more so. The FSI presented a lobbying slide show that it offered to its members, one that they in turn could use to inspire the reps to make change in Washington, D.C. I might as well have been watching a Rotary Club slide show from the 1950s.

Mentioned in this article:

Tiburon Strategic Advisors
Consulting Firm
Top Executive: Charles Roame

Cetera Financial Group
RIA-Friendly Broker-Dealer
Top Executive: Larry Roth

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