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Integrity demands wholeness, which Wall Street can't claim as its sales staff and business model continues to get thrashed in the marketplace
December 1, 2017 — 2:19 AM UTC by Brooke Southall
Brooke's Note: The old aphorism about sticks and stones holds true. Wall Street knows it and celebrates as RIAs break bones over the meaning of words like "financial advisor," "financial advice" and "fiduciary." Now it's time for the RIA business to switch up the game as its market power and moral might gain parity. High moral power plus high power equals high integrity. Its opposite yields desperation and Wall Street could hardly look more desperate today as retention bonuses expire, brokers get legally chained to the company with the withdrawal of Protocols and every method is used to delay a DOL standard that would require putting in writing that they put the client interests first.
The battle between wirehouses and RIAs to establish a single, lofty definition of "fiduciary" is nearing a stalemate.
That hung-up jury means wirehouses have all but won.
In broad strokes, the battle has bogged down. Fiduciary advocates rightly attest that any standard that doesn't definitively put clients first is no standard at all and that everybody should be on one standard.
Wall Street says: Fine, let's put everyone on one standard but that'll require a little creative definition writing. See: LPL Financial's DOL-rule memo to reps implies deeper message: Become an RIA or stand down on giving rollover advice.
RIAs say: It's not about the letter of the law. It's the spirit of the law.
Brokers say: Fine, then let's not put it into the letter of the law. Our brokers are as good-spirited as your advisors.
The question is why RIAs keep mucking in this trench warfare. Recall how the industry suited up to argue the Merrill Lynch rule and all that "solely incidental" stuff with regard to what is "financial advice" versus a transaction and who is a financial advisor and who is a broker. Try defining "solely incidental"! See: Merrill Lynch's second act for RIA reinvention is revealed but may yield 'field day' for classic RIAs in the short term.
The RIA business is never going to win on a technicality. That's fine. Options for changing the rules of engagement without compromising principles are readily at hand.
By the RIABiz definition, registered investment advisors are primarily the 30,000 or more practices registered with the SEC and the states. But RIA more loosely defines a group of vendors, consultants and other ancillary people who are philosophically aligned and share business interests with those classic practices. See: How many RIAs are there? No, seriously, how many?
The presumption has always been that no kite flies higher than the fiduciary standard. I might have agreed five years ago. Now I see it differently.
When an investor goes looking for a financial advisor, it is not enough to have an adult in a suit who does nothing wrong. It is also vital that the advisor do many things very well and to do so with behavior that stays consistent in the brightest and darkest of times. In other words, an advisor needs character. Character in this context means a person not only does the right thing but executes under real world circumstances of difficult personalities and adverse conditions.
Still, character is just a building block for what RIAs can go for in terms of higher kites -- namely integrity. "Integrity," like "fiduciary" is hard to define but easy to spot when we see it and easy to agree on with somebody who has also been in the presence of somebody with integrity. What seven attributes define RIA integrity and why -- unlike standalone 'fiduciary care' -- Wall Street finds it radioactive
When integrity meets success
I can hear you thinking: "Integrity" is a deeper rabbit hole than the "fiduciary" one I am proposing to replace it.
I disagree and for this reason: Inherent in the idea of integrity and the wholeness it connotes is the idea of success. Losers may make a play at being "good" but people and firms whose fortunes are stagnating or shrinking are hard-pressed to say they have integrity. They have little wealth to share in terms of opportunities to pass along to staff, members of their ecosystem or customers.
RIAs have been winning on a micro-basis for decades. RIAs win assets in virtually every head-to-head encounter. RIAs poach wirehouse brokers with virtually no threat of being poached back. See: Why Wall Street's DOL killer threat -- that 'millions' of IRA investors will go unadvised under new rules -- is hogwash
But communal RIA self-esteem has suffered as a unit of the macro-wars fought in Washington and on Madison Avenue. Might is right and the big AUA, the big branding, the big lobbying and the winning attitude still seemed to reside on Wall Street. Wall Street net new asset deficits were made up for where it counts -- asset growth as propelled by market growth.
But RIA winning is now hitting a sweet spot where it wins small but also big. The laws of large numbers -- smaller percentage gains but larger absolute gains -- no longer just accrue to Wall Street benefit. RIAs currently have about 25% of market share to 36% for wirehouses.
The big crossover is expected to happen within five years, probably meeting at about $5.5 trillion. Even by 2020's end, it's expected to narrow to 28% market share for RIAs [hybrids included] and 32% for wirehouses, according to Cerulli Associates of Boston.
How exactly to shift toward an integrity-forward value proposition from a fiduciary-touting one means borrowing a page from the way those of us in the trade have looked at things for decades?
Dangerous when desperate
It's the business model.
E*Trade talks about "big expensive brokers." Charles Schwab & Co. put lipstick on a pig and got smug children to question their dads about why they don't get their fees back upon request. Ken Fisher's ads show that advisors only make more money when the client makes more money.
That's big-dog bark but with ever-diminishing bite considering the stunning loss of integrity that's caused wirehouses to bleed assets to RIAs and not to switch to a model that is devouring them.
Broker integrity diminishes every day as they stay with firms that take the desperate actions of a loser -- cutting payouts, turning brokers into mortgage brokers, inventing new ways to hide fees and more euphemistic things to call products. See: How Wells Fargo is using 'counter-punch' to get unheard-of upper hand in the poaching wars with Morgan, Merrill and UBS.
That's old news -- but this just in: UBS joins Morgan Stanley in erecting razor-wire around its brokers by eliminating the Broker Protocol. See: How UBS exited the Broker Protocol and why the aftereffects may surpass those of Morgan Stanley's earlier departure. The Department of Labor delays implementation of federal laws designed to safeguard retirement asset by nearly two years. See: Pro-DOL rule forces sharpen knives now that DOL rule's 18-month delay is carved in stone
Losing begets desperation and desperadoes are dangerous.
Nothing subtle about that.
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Top Executive: Kurt Cerulli
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