More On Legal & Compliancefrom The Advisor's Professional Library
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
Tom Bradley, president of TD Ameritrade Institutional, praised fee-only financial advisors in a keynote address at the National Association of Personal Financial Advisors annual conference Thursday morning in Salt Lake City.
“I have watched your organization and the fee-only movement grow,” Bradley told audience members. “NAPFA is on the forefront of change in the financial services industry, something for which you should be very proud.”
Bradley began by noting that as of May 18, 2011, the S&P 500 had recovered 98% of its losses from its low in March of 2009. While noting how hard it is to attempt to time the market, he said he is “continually amazed at how well investors who moved to cash were able to time the bottom of the market” to applause from the audience.
He then moved to a discussion of the performance of the RIA channel both during, and since, the economic downturn. He reported that 73% of advisors say they are adding clients. At the same time, the same advisors report only a 5% loss rate when it comes to their client retention.
“I like to look at how the independent channel is doing overall, but I also like to see how the RIA channel stacks up against its competitors in other channels,” he continued. “While RIA assets are up 39%, wirehouse assets are only up 4%. This clearly shows investors want a fiduciary advisor as opposed to a salesperson. But just as I get excited about these results, other concerns pop up.”
He noted a recent study from Cerulli Associates that found 63% of investors with regional broker-dealers and wirehouses believe they are in a fiduciary relationship with their advisor. But, conversely, only 13% of broker-dealer and wirehouse reps report having a fiduciary relationship with their clients. Cleary, he said, education on this issue still needs to happen.
He then moved to a discussion of breakaway brokers, and TD Ameritrade’s success in attracting them, which said was indicative of the movement overall.
“We took on 215 so-called breakaway brokers in 2008,” he said. “In 2011, we estimate we will take on 380. What does this mean to you? Increased competition; most advisors want to do the right thing. They are looking at this model and saying, ‘I’m already acting in a fiduciary manner. Why not make it official?’”
In 2008, RIAs firms “battened down the hatches” in their back offices in order to survive the economic crisis. They became much more efficient in that area of their business. This resulted in excess capacity. Bradley said they are now taking on breakaway brokers to fill that capacity. As a result, the breakaway brokers are bringing in new revenue, but expenses aren’t going up, and advisor firms’ margins are widening.
A brief discussion of the coming wealth transfer then followed, in which he said the United States will experience an estimated $18 trillion asset transfer from the baby boomers to Generations X and Y. He implored the audience to realize that most of the younger
generation says they will not work with the same financial advisor as their parents. So advisors must learn to connect with the parents, as well as their kids. How is this done? Through the concept of reverse mentoring.
“I agreed to mentor one of my younger employees,” he explained. “But as part of that agreement, they have to tell me what’s going on in their age demographic. A big part of that demographic is how they send and receive information, and the technology they employ to do so. As an example, I rarely if ever see my children use a phone. It’s all texting now.”
To make the point, he said advisors with integrated technology report 52% of their time is spent with clients. Those that do not have integrated technology in their practice report only 13% of their time is spent with clients.
“It’s clearly important, and we must do all we can to stay out in front of it. I now see more iPads and tablets when I travel than laptop computers.”
He briefly mentioned practice management before wrapping with regulation, in which he said there has to be a focus on making the back office more efficient and effective, but there should also be a focus on growing the back office so they don’t get overwhelmed.
“I saved our favorite topic for last—regulation,” he said to laughter from the audience. “We have the fiduciary issue which involves the SEC. We have the oversight issue which involves FINRA. And we have the DOL’s own proposed advice rule.”
On the issue of a fiduciary standard, his view “is very simple; if a company or advisor provides advice, they must do so in a fiduciary capacity, period” he said to the presentation’s second applause line.
“I hear all of this back and forth about how it will affect the industry," he concluded. “My response is to think of it in reverse. Imagine sitting in a meeting with your client and saying, ‘I’m providing you with advice, but it might not be in your best interest. But I guarantee you it will be in my best interest and the interest of my firm.’ How do you think a client would react to that?”