Independent broker/dealers have always posed a conundrum for me. In my past life as editor of this magazine, I’ve given many awards for excellence to B/Ds and brokerage executives, and over the years I’ve written a number of pieces extolling the contributions made to the financial planning movement by independent B/Ds. It’s certainly not hyperbole to say that financial planning wouldn’t be where it is today without the independent broker/dealers that provided a home for independently owned advisory practices–pioneers like FSC, Integrated Resources (now Royal Alliance), Private Ledger (now LPL), and perennial stalwarts of integrity such as Financial Network and Raymond James Financial Services, to name just a few.

At the same time, though, I’ve never forgotten that however enlightened some of them may be, at their heart independent broker/dealers are sales organizations. It’s certainly true that they offer services to independent financial planners, and some are very good at that. The bottom line, however, is that the vast majority of all B/Ds’ revenues–both historically and today–come from the sale of financial products. There’s just no getting around it. Independent B/Ds are part of the financial services distribution system. It shows in their culture. The biggest B/Ds are those that move the most product; they refer to their affiliates as “reps” and the planners who make their “advisory” councils or are otherwise singled out for acclaim are invariably their biggest producers. Enough said?

Financial planning, on the other hand, isn’t about sales, or, at least, isn’t so at its highest level. I’ve said it many times before, but it’s worth repeating: Virtually every planner I know could make more money selling something. They have chosen instead to offer up advice because they can better serve their clients. While broker/dealers have learned to give lip service to this distinction, I have met very few B/D execs who really understand it. Instead, when I’m with them I usually get the feeling of a good ol’ boy club whose members believe that, wink-wink-nudge-nudge, all this high-minded hooey about client service is only a rationalization for the fact that financial planning is really just a powerful marketing tool.

Divergent Agendas

That’s why, two years ago, when the Financial Planning Association asked its broker/dealer division to hit the road, I publicly applauded. After 30 years of cohabitation (including its predecessor, the IAFP), it appeared the FPA had finally realized that B/Ds and financial planners have divergent agendas–that both parties would be better off pursuing their own interests. So the broker/dealers left, taking long-time FPA B/D program director Dale Brown with them. At the beginning of 2004, they set up their own organization, the aptly named Financial Services Institute, to represent their own interests in Washington and at the state level, which as it turns out are quite different from the large brokerage firms (who dominate the Securities Industry Association).

The split seemed to go well, in the ensuing year. The FPA, freed from conflicting interests, aggressively pursued a strategy to challenge the SEC’s “Merrill Lynch” rule, including filing a lawsuit against the Commission to force its hand. This is possibly the first step in a long-overdue challenge to the omnibus brokerage exemption to the 1940 Advisers Act, which allows brokers to act like investment advisors, but without the same duties to clients. For its part, the FSI attracted some 104 independent broker/dealers, which is a few more than the FPA had been able to sign up. Things seemed to be going swimmingly.

Until now. At its second annual meeting held in February, 2005 (at the fabulous Greg Norman golf resort, Champion’s Gate, in Orlando which I had to pass on, due to other commitments. How’s that for maturity?), the FSI dropped a bombshell. It started offering memberships to independent financial advisors themselves, and not just affiliates of its member firms (dues are $99 if their B/D is a member of the FSI, and $125 if it’s not). I’ll bet the FPA didn’t see that coming. I didn’t.

What’s behind the FSI’s surprise? It’s possible there’s nothing more than economics. With the stated mission of serving as an advocate for independent B/Ds (and the financial advisors they serve) with the NASD, the SEC, and state and federal legislatures, the power of its lobbying efforts are in large part dependent on the size of its war chest. Since the FSI’s B/D members don’t have anywhere near the deep pockets of the Wall Street wirehouses, broadening its membership, and its revenue base, seems an obvious solution.

Competing or Coexisting?

There may be a bit of spite involved for the way the FPA ushered the B/Ds out the door–probably not the driving factor, but perhaps the FSI wouldn’t be overly saddened if it took members away from its former parent. In fact, intentional or not, the FSI’s membership drive creates a de facto referendum on the FPA. Consider that one of the continuing frustrations for the FPA, and its predecessor the IAFP, was that its member broker/dealers had approximately 110,000 registered reps; FPA membership has never topped 28,500. Despite all its conferences, programs, publications, Washington presence, local chapters, and a very considerable recruiting effort, the FPA was never able to penetrate very deeply into the ranks of independent registered reps.

Now along comes the FSI, offering essentially one service: regulatory and legislative advocacy for independent advisors and their B/Ds. Certainly, some folks will join both organizations. But is it possible that financial planners will feel they can be better represented by independent broker/dealers than by the FPA? If at any point in the future, the FSI advisor membership comes anywhere near that of the FPA, it will be an unmistakable signal that whatever they’re selling in Denver, independent financial planners aren’t buying.

More interestingly, and more importantly, the FSI also is offering a referendum on the true nature of financial planning itself. What will it mean if significant numbers of financial planners vote with their Amex cards that their interests are the same as their broker/dealers’–indeed that they can be represented by their broker/dealers? Is this as incomprehensible to you as it is to me?

As I said, I have great respect for many broker/dealer execs, and the contribution they have made, and continue to make to financial planning. But I don’t for an instance believe their interests are the same as financial planners. Is it possible that I’m wrong about that? That whether or not they believe in financial planning, independent B/Ds have come to realize that their futures–and profits–are so inextricably tied to financial planning that what’s good for financial planners is good for them? It would be a paradigm shift unprecedented in financial services (where the mantra of what’s good for the brokerage-firm-insurance-company-bank is good for the advisor goes as unquestioned as the missing weapons of mass destruction in a Michael Moore movie).

Still, there is some evidence for this. For instance, the FSI has come out against the Merrill Lynch rule. In its comment letter to the SEC, the Institute wrote: “…We believe that anyone who provides investment advice tailored to an investor’s overall personal and financial needs and objectives and risk tolerance should register as an investment adviser. Alternatively, someone who offers advice only with respect to one security or trading strategy … should not be permitted to hold themselves out as providing services traditionally provided by investment advisers merely because they charge an asset-based fee.”

No kidding? Perhaps the FSI is bolstered by the knowledge that virtually all the reps at its member firms are also RIAs. But it’s also pretty brave, considering that no independent B/D that I know of extends its supervision to the RIA portion of its reps’ practices. It would certainly be much safer for the firms to argue that their reps should be exempt from the obligations of investment advisors.

Another possible reason for financial planners throwing in their lot with their B/Ds is the current regulatory climate. Knowledgeable industry insiders have recently suggested to me that RIA compliance requirements are going to quickly become so onerous that for the first time we’ll see advisors migrate away in droves from fee-only independence back to broker/dealers. “The 10% cut that the independent B/Ds take will seem like a real bargain compared to what it costs to do it yourself,” one of those insiders told me, requesting anonymity. If this is the case, then the single-issue FSI would be focusing on exactly the right issue at the right time. However, a planner-B/D alliance could be either short or long term, depending on the ultimate direction of advisor regulation.

Broker/Dealer Backlash

The other, darker possibility is that the client-oriented, professional elements that financial planning has been struggling to embrace–the CFP designation, professional ethics, fee compensation, and fiduciary duty–are becoming less popular with financial planners. It would be ironic if this were to happen just when it looks like the FPA may be taking serious steps toward building a profession and when the CFP Board, while still largely cowardly on the subject, has at least hired a CEO in the person of Sarah Teslik who seems both suited and inclined to push toward making planning a true profession. Or would it? Perhaps Dale Brown’s gambit is a backlash against the movement toward professionalism in financial planning–an alternative to the responsibility of truly putting your clients first–what amounts to a last chance to stay safely on the distribution side of the table.

Of course, this is all speculation. The implications are huge, and the FSI membership drive certainly warrants close watching, but chances are it won’t get too far. Will it?

Bob Clark, a former editor-in-chief of this magazine, sagely surveys the advisory landscape from his home in Santa Fe, New Mexico. He can be reached at