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Cogent study shows one big RIA distinction getting swallowed up -- or not

It'll be a head-turner if, in fact, two-thirds of all retail assets are fee-based in 2015, but there may be more to the story

Author Brooke Southall August 7, 2013 at 6:35 PM
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Meredith Lloyd Rice: [Fee proliferation] is a trend but the RIAs are still very distinctive in their attitudes and preferences.

Timothy Welsh


Michael Kitces


Meredith Rice

Matt Bray

Matt Bray

August 7, 2013 — 7:58 PM

RIA’s lost a big advantage when the industry replaced the term fee-only with fee-based, allowing potential clients to misunderstand the differences between the two. The wire houses came out with the term “Fee-based” primarily to confuse the public. In the late 90’s and early 2000’s, Fee-only advisors were getting great press, as were organizations like NAPFA, which requires member advisors to be fee-only not fee-based. So the fee-based description of compensation was created by insurance companies, investment banks and brokerage firms to confuse prospects regarding the difference and to directly compete with advisors who are fee-only. Fee-based leaves the door open for receiving commissions as well as AUM based fees and that is a big difference between fee-only and fee-based! Some might say it is the primary difference! Those of us that are fee-only find the proliferation and heavy marketing behind fee-based to be a product of big institutional firms (insurance companies, investment banks and brokerage firms) that want to confuse clients into doing business with them instead of a fee-only advisor. I’m not saying that fee-only advisors are better, there are good and bad advisors receiving all methods of compensation but the likelihood increases when you don’t address the conflicts of interest associated with receiving commissions for selling clients investment products. Every prospect our firm has met with in the last few years has misunderstood the difference between fee-based and fee-only. That is until we educate them. Thank you. MTB

Stephen Wnks

Stephen Wnks

August 8, 2013 — 1:32 AM

The metric of fee compensation is certainly indicative of the move from commission sales to advisory services, but has no bearing on the debpth and breadth of counsel provided ,it just establishes how the broker or advisor is compensated.

The story line that is missing is whether expert advice is being rendered and professional standing is achieved, based on objective, non-negotiable fiduciary criteria of statute, case law, regulatory opinion letters. We know the brokerage industry’s internal compliance protocol assures that the broker does not render advice nor has any ongoing fiduciary duties, as its means to mitigate fiduciary liability. This is confirmed by thousands of arbitration proceedings administered under FINRA. Thus, even though brokers at our largest firms may be compensated by fees, they have no control over their value proposition, cost structure or professional standing. Literally IARs can not provisde individualized advice necessary for fiduciary standing. The same is true for RIAs acting as IARs. A small distinct group of RIAs who are actually acting in a fiduciary capacity are building very large RIA businesses. It is from this group that the next generation of fiduciary advisors will emerge, not from our largest broker/dealers ill suited for fiduciary duty.

Brokers simply can not compete based on their broker/dealers inability to provide (a) expert authenticated prudent process necessary to make advice safe to acknowledge and execute, (b) advanced technology which facilitate (i) transaparency, (ii) continuous comprehensive counsel and (iii) more modern less expensive approaches to portfolio construction as required for fiduciary standing, (c) work flow management tied to a functional division of labor (Advisor, CAO, CIO) which makes advice scalable easy to execute and manage as a high margin business at the advisor level while enhancing advisor compensation by as much as 50%, (d) conflict of interest management.

None of the RIA advantages cited above are possible in a brokerage format, thus the next generation of brokers will be advisors not just based on the graying of the broker population but based on the aspirations of a younger advisor demographic who are better educated, more technologically astute and demand a far higher ethical standard of conduct for professional standing in the consumer’s best interest.

If the brokerage industry can not adapt from a high cost low value added market position, it will be easily eclipsed by advisors providing an unprecedented level of investment and administrative counsel at a far lower cost to the consumer with a 50% increase in compensation.

This industry redefining trend toward advisory services is not explained based simply on compensation. Free market forces are literally redefining the industry. There is no question the industry is evolving towards the advisory services business model because it is in the consumer’s best interest.

The unaddressed issue the industry has yet to come to grips with is the realization it is unable to acknowledge or support the fiduciary standing of its broker and its denial of the retail investor of the same consumer protections accorded to all other investrors. RIAs have a far better, less expensive value proposition that pays the RIA 50% more than the broker. This is the free market at work, whether broker/dealers like it or not. It is the brokerage industry’s market leadership to lose and so far it seems the brokerage industry simply does not seem to care as it demonstrates its insularity to free market forces at work.


Jamie McLaughlin

Jamie McLaughlin

August 8, 2013 — 12:50 PM

The Cogent study is elucidative and supports the shift of brokerages to fee-based business, but the difference between RIAs and brokerage platforms remains distinctly cultural. The overarching incentives for client-facing brokers remains largely transactional; as much about gathering assets as serving and advising clients.

Brokerage industry leaders can change this through performance and compensation systems that reward more than simple revenue growth and nurture a culture that rewards truly impartial advice, transparency, and disclosure.

Public ownership of brokerages is another inhibitor as brokerage leaders are too often rewarded for short term results. Consequently, the cultural shift will take time.

Stephen Winks

Stephen Winks

August 8, 2013 — 2:15 PM


Sad but true, public ownership of brokerages is not conducive evolving its business model, thus market share is sure to shrink—the perfect catalyst for growing the emerging advisory services industry built on professional standing.


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