ThinkAdvisor’s Nov. 21 interview with Ken Fisher in which the renowned money manager forecast the demise of the RIA world in 10 years ignited a fire under advisors.
Fisher predicted that, if the fiduciary features of Dodd-Frank are implemented, BDs would absorb and, in essence, exterminate RIAs. He cited the size and wealth of BDs, as well as the Financial Industry Regulatory Authority’s superior lobbying power on the fiduciary issue.
Though his forecast blared a loud Reveille, RIAs have no intention to get ready for Taps, advisors like Harold Evensky told ThinkAdvisor, echoed by several commenters on the article — though others, like Ron Carson, say the famed investor has a valid point.
“Fisher is wrong once again," Joe Gordon said in a comment to the story, "as the RIA industry, with a small budget and little unity in politics and lobbying, can come together [as] David fighting Goliath. What is the true relevance of a BD? Signing leases and buying copiers? … The CFP Board of Standards, et al, needs to [toughen up] rather than tolerate fewer fee renewals if they stand up to Wall Street.”
In an interview with ThinkAdvisor, Harold Evensky, president-principal of the Coral Gables, Fla.-based fee-only firm Evensky & Katz, and a member of the Committee for the Fiduciary Standard, which advocates for an undiluted fiduciary standard for FAs, says: “It’s not going to be as disastrous as Ken suggests. I certainly don’t think the RIAs in general will go out of business.”
And in San Diego, Calif., David Reyes, RIA and founder of Reyes Financial Architecture, told ThinkAdvisor: “I disagree with Ken 150%. He’s obviously coming from the BD point of view. The BD community has no incentive to have the fiduciary standard. The Morgan Stanleys and Merrill Lynches of the world have fought it because with the suitability standard, conflicts of interest don’t have to be disclosed, and they can charge higher fees for their own products, which are highly profitable. Why would they want to be a fiduciary? It doesn’t make sense.”
Merrill Lynch, Morgan Stanley, Wells Fargo, Raymond James and Commonwealth Financial Network declined to comment for this story.
Some advisors think Fisher’s alarm is pitch-perfect.
“Ken has nailed down a very important issue for the industry,” says Clark Blackman, RIA, president and CEO of Alpha Wealth Strategies in Kingwood, Texas. "I agree that [RIAs' demise] certainly can happen and may happen — but it doesn’t have to happen."
RIAs’ savior may be the hybrid model, one that Fisher assails for misrepresenting many BD advisors as fee-only advisors.
In the meantime, says Carol Rogers, president of Rogers & Co. in St. Louis, “the fear of RIAs being gone may push them more into being hybrids in conjunction with some of the BDs. This is becoming a huge, huge trend with independent advisors.”
“I don’t want to be an independent RIA because of the complex compliance demand," Rogers says. "I want that double security of having a broker-dealer behind me as well as an RIA.”
But Evensky worries that, with the hybrid model, “Where does the buck stop? The risk is what we’ve referred to for decades as ‘hat-switching.’ The investor goes into an RIA; and then they pass them off to the brokerage, who does the implementation. If that’s allowed, it becomes a sham. If someone meets with an advisor and a level of trust is established, you can’t change and say, ‘OK, you could trust me when I was a fiduciary, when we started; but now that we’re going to implement, all bets are off. You’re on your own. Caveat emptor.’”
Blackman strongly concurs. With a hybrid, “if the client ends up being sold a product, it has to be done as a fiduciary, not as a salesman on a suitability standard, he said. "But the fiduciary standard is an extremely difficult one to meet when you’re selling a product.”
Most of the advisors agree, however, that smaller RIAs will soon vanish.
“Ken is absolutely right: the little RIAs aren’t going to survive,” Rogers says. “They’ll either join a hybrid firm or go back to a BD because the complexity is just too overwhelming.”
Ron Carson, founder of Carson Wealth Management Group, a hybrid, and Carson Institutional Alliance, in Omaha, Nebraska, disagrees with Fisher’s charge that RIAs are “naïve” to think they aren’t in jeopardy. “The RIA world is very sophisticated and getting more so all the time because the smaller ones are having to merge, consolidate or go out of business,” he says.
Fisher maintains that BDs want FINRA to take over regulating the RIAs. Indeed, FINRA has been lobbying aggressively toward this end.
If they win, what follows seems to be inevitable.
“As Ken Fisher observed, Wall Street does not like to see its market share decline," Ron Rhoades, assistant professor-chairman of Alfred State Financial Planning Program in Rochester, N.Y., and a former chairman of the National Association of Personal Financial Advisors (NAPFA), notes in an article comment. "Hence, FINRA will likely (after gaining oversight of RIAs) issue a host of new regulations, making it difficult for any RIA-only firm to survive.”
Blackman is in accord with that view, and then some. “If FINRA gets its way to be overseer of all advisors, then the fee-only RIA model is in serious trouble," he says. "FINRA would like to reinvent the wheel and have everybody be like them, even though they’re the ones that crept into a different business model and are now trying to usurp it. BDs have moved into the advisory space but without giving up the model of selling product – and the public can’t tell the difference.”
Blackman continues. “It’s getting to the point where it’s now or never. FINRA isn’t backing off. Remember, they’re still the National Association of Securities Dealers (NASD) — because even if they change their name, as they’ve done, it doesn’t change who they are.
Other advisors take issue with Fisher’s contention that the Securities and Exchange Commission “hasn’t thought through the implications” of FINRA’s bid to regulate RIAs.
As Evensky notes, the commission’s hands simply may be tied. “I disagree that the SEC doesn’t have a clue. The SEC understands the issues very well. The problem the SEC has is politics. I don’t think they can do what they perhaps want to do. My concern is that they might not be able to do anything and then the [fiduciary-standard matter] becomes a moot point, kind of frozen. Lobbying is trying to prevent the Department of Labor from taking action.
“There’s a good chance the SEC may never do anything,” Evensky says. “Or if they do, it will be a new universal fiduciary standard — they’ll use the word fiduciary, but it will have no relationship to what the concept of fiduciary has meant for hundreds of years.”
Carson is clearly in favor of all advisors being held to a fiduciary standard. “The marketplace believes that we’re all operating under it, but that is not the case. So if the marketplace believes that, don’t we owe it as an industry to give them what they think we already have?”
The ultimate solution, Evensky conjectures, may be for “investors to give up on Congress and regulators, and protect themselves.” Indeed, this advisor has already started down that path. Evensky’s firm has what he terms a “mom-and-pop commitment,” signed by clients, that doesn’t even mention the word, fiduciary. It states that the client’s interests will be placed first and that conflicts will be eliminated.
“Investors,” Evensky says, “are going to have to look out for themselves.”
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