The notion that it's just a layover on the way to to a more exalted state of securities-license-dumping, fee-only purity should be reexamined

December 13, 2012 — 4:29 AM UTC by Guest Columnist Abby Salameh


Brooke’s Note: Abby Salameh works for Fusion Advisor Network, owned by NFP, that is largely building its future on facilitating the hybrid RIA model. See: With Schwab [and maybe Fidelity] as custody partners, NFP is positioned to make a run at the hybrid market. You might expect her to say a few good things about the hybrid model. But she also knows that she is writing to a discerning audience about all matters RIA here at RIABiz and so she can’t exactly pull the wool over anyone’s eyes. In other words, she’s opened herself to some very dissenting comments or counter-columns. Let’s call it even. Aside from Abby’s exposure to both camps, this article benefits from the kind of agitated introspection that can only occur in the human mind when stuck on an extended layover in the Atlanta airport en route to New York.

As I write this, I am in the Atlanta airport. It was not my final destination, but just a layover; a few hours in between where I had just been and my final destination back in New York. I have been out visiting many of our advisors this week and like most of you, when I travel, I get the opportunity to catch up on my reading. On this trip, I brought with me one of our new white papers to read “Multi-Discipline Practices: The Business Model of the Future. Today.”

The white paper’s premise is based on proving that advisors who use multiple asset classes, investment products and investment solutions for their clients are more successful. According to the white paper, these advisors’ clients are more satisfied and the advisors who practice using multi-disciplines attract clients with more complex financial needs. The advisors surveyed for the report derive revenue from investments, insurance products, retirement plans assets and in some cases, benefit plans. They are “hybrid” advisors; mixing fees and commissions depending on the needs of the client. See: Fidelity elevates hybrid offering by giving RIA technology to thousands of IBD reps.

Non-stop flight to RIA-ville

For most of my career, I believed that the fee-based approach to charging for financial advice was the right way to structure an advisory practice. While the fees based on a percentage of assets under management method has its flaws, it always seemed to me to be a bit more honest in its approach to charging for services rendered vs. commissions.

It removes the conflict of interest. When I worked solely with registered investment advisors in my years working for TD Ameritrade, it became even more apparent to me that this was, indeed, the right way to service the investing public. I believed at the time, that advisors should only charge fees; they should give up their licenses if they wanted to be true to the cause. I jumped on the bandwagon of fee-only advisors in their pilgrimage to enforce the fee-based approach as the ethical approach. I carried that flag for many years. See: Should I dump my securities licenses?.

Later on, as a consultant, I helped publications and custodians launch going independent workshops and programs. They all had the same end goal in mind; to take the “captive” advisor to “freedom” by converting them into RIAs. We showed charts and graphs at these workshops showing the spectrum of going from an employee model to an independent advisor and it always ended with the RIA. We always highlighted how an advisor goes from one end of the spectrum as an employee to the absolute other end as an RIA. There was no layover, or may be a small layover, in between.

How pure is 100% pure?

In the midst of this all, I met many advisors who were uncertain about letting go of their licenses. At the time, I still thought they were only holding on to them for commissions or brokerage products they didn’t want to lose income on. I recall one advisor, Greg, who was thinking about leaving his insurance B-D. He told me how he knew he wanted to have greater control over how he invested for his clients and how he ran his business. He just wasn’t sure he was ready to become a pure RIA (pure is often used when referring to RIAs. I am not sure why).

It was around that time I started doing some individual consulting with advisors that my belief system started to change. Most of my clients started their careers in the insurance world or in the wirehouses. They sold insurance or products to their friends, family members and anyone else that would open the door. They worked hard and they succeeded. At some point, they decided they would be able to help their clients better if they could also provide true financial planning and investment services rather than just piecemeal products for a commission.

They earned their designations and eventually left their firm for greener pastures and more options. They were no different than the many RIAs I have worked with in the past. They wanted freedom. They wanted the option to invest for their clients without any conflicts of interest. They wanted a wider selection of investment options, better technology, the ability to create a legacy. But, they did not aim to move to the absolute other end of the spectrum as an RIA. And I now understand and admire why.

A timely move

Let’s use Bill as an example. Bill is an advisor based in the Midwest. He, too, came from an insurance broker-dealer and has many local business owners as clients. Bill has been with Fusion Advisor Network for 10 years. He has never given up his licenses and works under our NFP corporate RIA. He is extremely successful.

Bill believes in a comprehensive approach to financial planning; looking at all the needs of his clients and planning accordingly. Because he still maintains his licenses, Bill has the ability to provide many solutions for his clients. In fact, a few years ago he did a comprehensive plan for one of his clients — also a dear friend — that included life insurance and investments. See: Not without criticism, TD Ameritrade opens an 'insurance agency’ for RIAs that want to provide annuities.

Bill’s client and friend was apprehensive about the life insurance, but Bill showed him why he needed it and how it would help in the event of an unforeseen incident. Lo and behold, not six months after the life insurance policy was implemented, his friend died unexpectedly. It was devastating. Bill had a family with young children. But, what made a huge difference in the lives of the family was the policy that Bill had implemented.

The final destination

There are many advisors like Bill. Advisors I work with predominantly provide asset management and financial planning based on fees but also provide other commissionable products when the shoe fits. It is never with the intention of boosting their commissionable income and always with the intention of doing the right thing for the client.

Of course, clients can achieve this same level of comprehensive services by using an RIA that refers them to another professional to handle the insurance. But, that’s not a one-stop-shop for the client. He or she then has multiple advisors for multiple solutions. In addition, there is the intrinsic satisfaction that hybrid advisors receive from personally handling all of the solutions and truly being holistic.

I used to think the hybrid advisor was a mere stop in the road; a place to rest and figure it out before continuing the journey; and that eventually all advisors would continue along the spectrum to RIA destination. But, I now believe this model is here to stay. It is a final destination. See: 5 Reasons why the hybrid RIA model may be a bigger deal than ever.

Abby Salameh brings to Fusion Advisor Network 20 years of experience working directly with independent advisors. Having started her career at Sanford C. Bernstein & Co. Inc. in 1992, Abby went on to help launch InvestmentNews for Crain Communications Inc. In 2002, she joined TD Ameritrade to head the marketing efforts for its institutional services. More recently, Abby has been providing strategic and tactical marketing consulting for leading industry firms, including large broker-dealers and independent advisors. She joined Fusion Advisor Network in September, 2011. See: What exactly is Fusion Advisor Network and who did it draw to Las Vegas last week.

Share your thoughts and opinions with the author or other readers.


Eric said:

December 13, 2012 — 6:09 PM UTC

We have met and I was an attendee at one of those going independent workshops.

You mention that you are not sure why pure is often used when referring to RIA’s. The reason “pure” is used is because of the hybrid model. It is used to identify advisors that operate as an RIA 100% of the time as opposed to hybrid advisors that may be acting as an IAR or as a Registered Rep.

Your premise that in order to be a one-stop shop, a firm needs to be a hybrid, is false. Your specific example regarding insurance implies that one cannot give insurance advice unless they are in a hybrid model. This again is false. Many “pure” RIA’s have licensed insured professionals on staff that consult with the client on insurance needs, design the policy, and select the carrier. They may then choose to use an unaffiliated insurance agency to “write” the policy but at this point this is an administrative task. The value added service has been provided by the “pure” RIA. The advantage for the client in this model is that the advice to the client is transparent and minimizes the conflicts of interest that insurance policy commissions can introduce.


Mark said:

December 13, 2012 — 7:36 PM UTC

Abby 's perspective and conclusion is based on her experience. Her comments and perspective today are not surprising given her current position at NFP. Abby’s perspective is naive because she has never personally served clients as an investment advisor. She has worked in the industry, but not as an advisor on the front lines serving clients. She is entitled to her opinon, but she has never found herself confronted with the psychological nuances associated with earning a living by selling product for a commission versus charging a fee for service provided. The fee-only model removes the tensions associated with selling product to your clients and earning in many cases substantial income for little effort (let alone with whether the product actually made sense for the client). That’s not to say there are no conflicts for the fee-only advisor, ie., pay off mortgage versus adding money to an investment account for which the advisor charges an annual fee. It’s just that commissioned products are filled with layers of commissions, fee, charges, etc., and ETFs and no-load funds are not. Clearly, the client is better served when there can be no question about whether the investment or insurance recommendation is untainted by a commision to the party making the SALE.

Gravatar said:

December 14, 2012 — 12:45 AM UTC

I find Abby’s argument compelling, but I’m just a CRM salesman, not someone that has ever been an advisor. Nevertheless, I speak with RIAs everyday that used to sell commissioned products, but now only engage in fee-based business, and they sound very much like Mark and Eric — they don’t to want to ever go back to commissions. They have found nirvana.

But I also speak to RIAs that are 80-90 percent fee based, but that still like to offer certain commission-based products. They seem to have found a sweet spot that works for them that will forever keep them in both worlds, although mostly in the fee-world.

Ultimately, it seems to me that a dynamic field like the RIA segment is not going to be defined by any one model. Recently, John Furey told RIAbiz of the “complacency” in the RIA space. I don’t know if that’s the right description, but I do believe that technology, changing demographics, and many other things John suggested, for instance, are quickly resulting in new models in the RIA space and redefining the entire financial landscape.

Consequently, I bet for some, the hybrid model will work best, while for others the pure RIA will always reign supreme. Overall; however, I think the growth of fee-based services is the best thing to happen to the financial services industry in a long time and hybrid advisors are helping with that growth. So I say kudos to both, even if one isn’t as pure as the other.


Kevin said:

December 19, 2012 — 1:39 PM UTC

Ms. Salameh seems to confuse fee-only and fee-based by using them interchangeably in the article. By being a fee-based advisor, she was never “pure” in the first place. Now, her hybrid approach is a second step away from working in the clients’ best interests. Her comments feel like justifications for keeping a client’s money (and commissions) in-house under all circumstances.


Pat said:

December 29, 2012 — 2:28 PM UTC

Talking her book. Fee based IS NOT THE SAME THING AS fee only. Helloooooo.

Hybrid is not pure by definition! What is her educational and business experience to present this as fact? Its ludicrous and everyone has been very polite in responding….

Try being the client ( me!) and comprehending the goobledy gook ADV of one of those hybrid firms. Try honestly telling your client why you chose the Met Life Annuity vs the Vanguard/ Jefferson national one available to them for 200 bp less. Try telling them the truth about what you were paid on the Whole Life you sold them when they really ought to have bought term. Is Ms Salemah aware that the UK has banned commissioned sales of retail investment products? I am tired of hearing how the devoted practitioner ( a CFP even as practice standards allow suitable product ) stands above the sway of commissions. The reality is conflicts of interest are HUGE in a hybrid and the disclosures are inadequate in that consumers cannot comprehend them.

This business is based on TRUST. Trust is founded in transparency and the hybrid model is opaque and conflicted by definition. Yes, it comes in varying degrees, some independent firms at least are not hawking their own platforms funds but there remain serious issues with this model.

The world is shifting and consumers are younger and savvier, they will treat investment products as any other and expect to know PRICE. More than that, in our new world of compressed returns we owe clients the best returns available which means lowest embedded fees, revenue sharing, expenses, soft dollars, turnover etc. The exponential drag of excess cost is now a real threat to retirement success and in the hybrid model, unfortunately, the practitioner is not disincentived to minimize these embedded costs. The “one stop shop” is not pure, but rather its bottom line depends on cross selling commissioned product. This is NOT the final destination. UGH!

PS I love white papers by people who work within industry about why their model is the best. Talk about conflicts of interest.

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