RIAs have long been able to portray themselves as consultative fiduciaries in contrast to product-pushing, sales guys at wirehouses and other large brokerages.
Now, ironically thanks to their own lobbying efforts, RIAs can’t wave the fiduciary flag and say, “We are different,” anymore.
The Department of Labor's new rule requires all investment advisers to work as fiduciaries on retirement accounts. There aren’t many industry groups who celebrate losing their marketing edge.
But that’s just what some RIA's are doing. Here's why they should probably think again: It makes sense for all advisers to be under the same regulatory regime because they are all in the end salespeople -- including RIA’s. After all, how else do they raise assets?
And in my view, soon enough, wirehouse advisers will be recognized as fiduciaries on all their accounts. If that's the eventual outcome, it leaves one to wonder how are RIAs going to distinguish themselves from the wirehouse guys?
WHAT'S THE DIFFERENCE?
Until the DoL ruling, RIAs suggested they were the only advisers who could be relied on to service client accounts properly. Suitable advice, on the other hand, merely had to broadly meet client needs. The implication made commissions and other fees seem outdated and potentially improper.
The DoL's new fiduciary standard just upended all of that.
Labor laid out a road map for advisers to qualify as fiduciaries on retirement accounts. But sooner or later, it's likely that wirehouse advisers and their counterparts at other large firms will have to pass muster as fiduciaries on all their investment accounts. That's because it's not feasible for wirehouse advisers to service retirement and regular accounts under two different sets of standards.
Once wirehouse advisers are recognized as full-fledged fiduciaries, just like their RIA counterparts, clients will view the two groups as identical twins. RIAs may end up having a more difficult time disparaging the wirehouse business model.
The DoL's fiduciary standard represents a major piece of collateral damage to the unique RIA business model. That's good news for wirehouse advisers who are planning to remain within the wirehouse fold.
To be sure, there will remain some differences between the business models. RIAs have access to a broader range of investment choices through their custodians and do not accept compensation from product manufacturers. But once both groups are equally enshrined as fiduciaries, clients are not likely to care much about these distinctions.
"We're both fiduciaries but I'm more of a fiduciary than the other guy" is a weak value proposition.
A spirited debate about which business model is superior may become the fodder for adviser discussions for years to come, while clients view this as mere insider baseball.
Who will be the winner? Well, the winning approach has always gone to those advisers with an ability to forge relationships with clients who like and trust them based on their investment and financial planning skills. So, the business model going forward may end up less of a factor in adviser selection than it is now.
There are even RIA's who would have preferred an earlier, more stringent version of the DoL's fiduciary rule. These advisers and RIA advocates can't see the forest for the trees. They fail to see the big picture that the DOL ruling has forever diluted the unique value proposition of their business model.
Now, the RIA model does continue to attract both wirehouse and independent advisers. Research firm Cerulli Associates reports that RIA assets have grown an average of 11% a year over the past five years, compared with 8.6% across all wealth management channels.
But is it only because they feel they can serve clients better this way? Advisers recognize that regulators prefer fee-based businesses and that it may be a wise move to make the switch.
There are other reasons too. RIAs typically boost their payout to 100% and enjoy lower ticket charges than advisers at independent broker dealers. Advisers also preparing to sell their practices may decide to convert to the RIA model for tax reasons. If you sell under the broker-dealer model, you pay income taxes. For an RIA, the sale triggers the much lower tax base of a capital gains event.
And advisers are no less likely than anyone else on Wall Street to shop for the best regulator. Many advisers relish the prospect of ditching the heavy-handed folks at FINRA and trading up to the more benign SEC.
There are some advisers who tell me they were so alarmed by the ferocity of the DoL's assault on the wirehouse business model that they now view the RIA world as the safest refuge. The RIA channel will continue to grow for all these reasons, until a fiduciary standard is applied across all investment accounts, either by regulators or more likely by the firms themselves.
Meanwhile, SEC chairwoman Mary Jo White continues saying that her agency is working on its own fiduciary standard that will govern both independent investment advisers and wirehouse advisers. It appears likely that all advisers will eventually operate under a very similar if not identical set of rules and business models will serve less as competitive differentiators among in the future.
The good news is many advisers will continue to vie for clients based on their perceived likability and trustworthiness and their investment/financial planning skills. Competition will be increasingly be about adviser capabilities.
Honestly, that's the way it should be. There are skilled practitioners with high integrity who employ all business models.