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.

Wrong battlefield

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.

No people referenced

Mentioned in this article:

Cerulli Associates
Consulting Firm
Top Executive: Kurt Cerulli

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Marcel Dawson said:

December 1, 2017 — 5:53 PM UTC

That's a call to arms if I've ever heard one!

Mr Money said:

December 1, 2017 — 7:21 PM UTC

I don't think so. Fiduciary is a legal term which imparts tremendous protections in court for our fellow citizens. Integrity is not. Fiduciary is worth fighting for, if for nothing else, to draw a bright line between those really willing to look out for folks vs all the rest which is just marketing. Imagine doctors saying, "let's chuck the hypocratic oath and just use integrity". Seems ridiculous but that's just because you're used to your doctor looking out for you. Imagine if your advisor did.

FAA said:

December 1, 2017 — 7:45 PM UTC

I would agree with Mr Money- a couple of additional comments. 1- Fiduciary has been around for a long time...this is not new. It might be new to a confused broker/advisor world but not to those who have been serving in this capacity for a long long time 2- Process and protocol does exist which helps anyone document, demonstrate and defend their fiduciary standing. Again- this is not new. Imagine the doctor mentioned by Mr$$ not following procedure next time you have surgery. God forbid the surgery goes poorly and the doctor's defense is 'I am a MD of Integrity'...if you say so but we were hoping to have a surgeon. 3- Terms like 'trust me', 'I would never...' 'I have integrity' blah blah- make we watch my wallet.

brooke southall said:

December 1, 2017 — 7:47 PM UTC

Mr. Money, I agree that the fiduciary fight should be fought ... legally, legislatively. But rhetorically I think it's a weak hand. The unspoken strength of wirehouses is their sheer and consolidated market power. Might is right. But non-might, logically, is wrong. Might is an aspect of wirehouse "integrity" that is fast withering away and so RIAs can begin to integrate might-is-right into their own broader message of integrity. RIAs are good for consumers and the broader economy. Wirehouses, less so by the day. -Brooke

Ron Rhoades said:

December 1, 2017 — 7:57 PM UTC

I concur with Mr. Money. "Fiduciary" is a legal term with hundreds of years of legal interpretation. Efforts exist to weaken the fiduciary standard. These include ongoing failures by the SEC, by non-enforcement of various provisions of the Advisers Act, including Sect. 2015, and by not adopting a sensible view of what constitutes "solely incidental" advice when applying the broker exclusion from the definition of investment adviser. Even many 12b-1 fees are "special compensation" - i.e., asset-based "advisory fees in drag." Other efforts exist from FINRA and several aspects of the broker-dealer community, in touting a "best interests" standard that is anything but in keeping the best interests of the CLIENT paramount. It would permit brokers to continue to advance their own best interests over those of their clients. The "casual disclosures" of conflicts of interest and lack of an informed consent requirement just cries out: "This is nothing more than suitability, re-casted in a way to mislead broker's customers to believe that they can trust their broker, and that they are not in an arms-length relationship." While efforts have, and continue to seek, a diminution of the fiduciary standard - there are many who are fighting back. I, for one, will oppose weakening and/or redefining of the fiduciary standard, and its obfuscation through deliberate acts by SIFMA, FSI, and others. I agree that integrity is important. Integrity is the blunt refusal to be compromised. It is doing the right thing when no one else is watching. It is a core behavior of one who adheres to the fiduciary standard, but it is not a replacement for the fiduciary standard itself. I would also note that the fiduciary standard is not a battle between RIAs and brokers. Rather, it is a battle for the American consumer of financial and investment services. The pro-fiduciary advocates make arguments that would create many more fiduciaries, thereby weakening their own market position. But they make these arguments to benefit the American consumer, out of the firm conviction that expert, trusted advice is necessary for our fellow Americans to successfully navigate today's complex financial markets. And, the realization that the broad imposition of the fiduciary standard will not only benefit our friends and neighbors directly, but also make more efficient the allocation of capital, lead to increases in capital formation over time, and provide a significant long-term boost to the American economy, jobs, and thereby facilitate the entrepreneurship and innovation that makes our country so great. So, while I appreciate the sentiments expressed in Brooke's article - for without integrity it is often said that a person has nothing - I do not concur that the time has come for us to abandon the fiduciary battles. These battles are important - for the future financial lives of our fellow citizens, and for the economic vitality and advancement of America itself. And for our emerging profession. Let us not abandon these efforts, even in the face of an adverse political climate. Rather, let us continue this advocacy. For what is right will, in the end, prevail, as long as we persevere.

Mr. Money said:

December 1, 2017 — 8:27 PM UTC

Brook, RIA's are eating wirehouses' lunch because people understand that they have higher integrity. You can feel it. I say we just keep kicking their rear ends with our superior business model and ethics.

Mr Money said:

December 1, 2017 — 8:27 PM UTC

Sorry for the name misspelling Brooke.

Stephen Winks said:

December 4, 2017 — 2:21 PM UTC

Fiduciary standing in the context of Wall Street does not exist. It is true Wall Street doesn't care because it is the individual broke'rs reputation and trustworthiness is on line. Wall Street is insular to the best interests of the investing public until it isn't. Thus. at the moment it is up to RIAs to win our case in the free market until it is in the enlightened best interest of Wall Street to afford the same consumer protections and statutory financial services provided by advisors. It simple: the advisor's low cost, high value-added services best the broker's high cost, low value-added services. The investing public want ongoing accountability for recommendations. SCW.

Stephen Winks said:

December 4, 2017 — 2:43 PM UTC

Only when it is in the enlightened best interest of Wall Street to support fiduciary duty and the professional standing of the broker when rendering advice will we see the best interest of the investing public (as defined by statute) will be served. T he regulatory framework is governed by a political process controled by the brokerage industry and will not change regardless of the facts. Thus it is up to the free maket and RIAs make their case based on the overwhelming facts in support of fiduciary duty and the ongoing accountability for recommendations, brokers so fear. SCW

Randy Bullard said:

December 4, 2017 — 2:48 PM UTC

While I like the idea of "integrity", to me it has a moral component that isn't measurable and is simply too aspirational. What I would like to see is for the industry to migrate from fiduciary to measurement of efficacy. Being an RIA requires passing the Series 65. Anybody can pass the Series 65. It's a very very low bar. You can operate as a fiduciary and still be HORRIBLE at what you do and provide awful advice, sell awful products, and do clients enormous harm. There's nothing about the fiduciary standard of care that ensures that the solution/service an individual delivers is actually any good. Designations like CFA and CFP at least ensure a level of education and knowledge, but even those don't actually do anything to ensure that the services/solutions the practitioner delivers are any good. I've had too many conversations with advisors, both wirehouse advisors and RIAs, that I thought were dumber than a bag of rocks and had a practice or investment philosophy that I thought was horribly wrong and destructive to clients. "Fiduciary" does nothing to address that.

Ron Rhoades said:

December 4, 2017 — 3:07 PM UTC

Randy, good comments. I concur with your thoughts, in part. The fiduciary duty of due care actually varies, actually, depending upon the law applied. Under the DOL rule, the Prudent Investor Rule applies. This is about as tough as it gets. It means not wasting the client assets, and minimizing idiosyncratic risk. It's a very, very tough standard of care that, quite frankly, many advisers are not adhering to at present. By contrast, under the Advisers Act, an adviser must possess a "reasonable basis" for an investment strategy and in undertaking due diligence for products. What constitutes a "reasonable basis" is largely subject to interpretation, and is informed by state common law. Other sources of interpretation flow from the rules adopted by (voluntary) professional associations. For example, many (many, many) firms disavow any provision of "tax advice." But can this be done? At least one reported court decision held a CPA liable for providing investment advice that caused a significant tax burden to the client. (And there are not a lot of decisions in the area, given the existence of arbitration.) Additionally, since the Series 65 exam tests knowledge and application of personal income taxes, one might opine that this assists in setting the standard of care. As do the content of the CFP exam, PFS exam, CFA exam, etc. The SEC permits firms to "disclaim" away parts of their duty of due care. In my view, this is not permitted: (1) Under Section 215 of the IAA, which has an anti-waiver clause; and (2) under state common law, under which the principles of waiver and estoppel possess limited application to fiduciary relationships. While the SEC's views (some of which are expressed only by non-enforcement of the IAA's provisions, and not overtly) inform state common law, they don't control it. And the state common law of fiduciary is where claims are brought (outside of ERISA, applicable to ERISA-governed accounts and to IRA rollovers from ERISA-covered accounts), for the Advisers Act does not possess a private right of action. Nor do the current DOL rules provide for a contractual private right of action, as to the ongoing management of IRA accounts. In the end, it is we - as professionals - who need to proscribe for ourselves our fiduciary standard of care. We need to take control of the future of our professional standards of conduct. As experts in financial planning and investment advice, we possess the ability to define our own fiduciary standard of care, at least to a degree. Let's work on that. Through best practices. By illustrating proper cost-benefit analyses in the due diligence processes. Through speaking out about "what should be the standard." And - as you suggest - by raising the standards for exams and admittance to this emerging profession.

Stephen Winks said:

December 6, 2017 — 4:07 PM UTC

Randy, I completely agree thus the challenge of all professions. How do we make that assessment without a definition of advice (financial services) authenticated back to statute. We need a professional standard that goes beyond aspirational financial planning. SCW

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