I recently gave a presentation at a national conference contrasting the strengths and weaknesses of being an advisor in a wirehouse, at a bank, with an independent broker/dealer, or as a totally independent RIA. During the Q&A session that followed my prepared remarks, a gentleman stepped up to the microphone and proceeded to inform me that he was especially proud of his 23 years as a wirehouse broker. While my presentation had obviously challenged his way of thinking, he was cordial enough but made it clear that he didn’t agree with my assessment. Interestingly, about 20 minutes later, after he’d had some time for self reflection, I learned from a third party that he was questioning whether he should leave his brokerage firm to become an RIA.
At the same conference, I met another broker who was planning to leave his large wirehouse firm and become an RIA. He said his company has instituted too many frivolous rules which have made it difficult for him to conduct business and provide high quality service to his clients.
I believe these examples are just the tip of the iceberg concerning a trend occurring in our industry. Many brokers are casting off the shackles of their large firms in favor of independence. You see, once you experience life as an independent advisor, you may never want to go back.
I’ll admit up front that I am partial to the RIA platform, having decided to leave the wirehouse world for the life of an RIA–a journey that I continue to chronicle in the pages of Investment Advisor and through my blog at www.investmentadvisor.com. In this article I will attempt to accurately convey several different facets of each business model, so you, the reader, can make a determination for yourself as to the most favorable choice. If you’re currently working in a large firm and have had thoughts of going independent, I hope that my treatment of this subject provides you with some interesting food for thought. On the other hand, if you are already independent, I believe you should also find value in the content. And if you think I’m wrong, I encourage you to tell me via e-mail or by replying to my blog. It’s an important conversation to have.
Advertising and the Battle for Market Share
I sometimes chuckle when I see advertisements from some of the largest brokerage firms. When a large firm decides to create an ad campaign, they don’t necessarily assess their company’s strengths and advertise them. Instead they will usually look to the marketplace and decide how they want to be perceived and shape their message to appear to meet that need. But does the mere fact that they create an ad campaign bring about any material changes in the structure or behavior of their organization? Probably not. Most ads are full of platitudes which are designed for the sole purpose of connecting with our emotions.
Incidentally, this topic resonates very well with clients. In fact, I think it validates their suspicions that many large firms are simply out to make a buck–and at their expense. Let’s look deeper into the structure of the large firms and why this is often the case.
Shareholders and Clients–Conflict Round One
Whether we’re talking about a bank or a brokerage firm, if they are publically traded, there are characteristics common to both. Let’s examine the structure of these organizations and explore how this can often create a conflict of interest from a client’s perspective. First, these companies have a board of directors that is charged with the task of assuring that the right leadership is in place to turn a healthy profit. The board also hires the CEO to steer the ship. The CEO works with his management team to create policy and direct the company’s current efforts and future plans. If the company doesn’t perform well, the board has the authority to replace him. The board, which answers to the company’s shareholders, exercises authority over the CEO who has power over management which, in turn, controls the client-facing advisors.
These firms have an obligation to its shareholders who have invested their hard-earned money in return for either (or both) dividend payments and stock performance. Stock performance is derived largely from earnings and earnings stem from prudently managing revenue and expenses. Expenses are fairly easy to control but revenue projections are much more precarious. To drive revenue, they will typically create sales goals. They may, for example, decide that selling a certain number of Product X and a certain amount of Product Y will accomplish their mission. Frequently, they will arrange an advisor’s compensation to entice them to focus on these specific products or services which often are the most profitable to the firm. This type of structure has led to an entrenched culture of sales.
Many times in my previous positions as an employee advisor I have sat around the table at sales meetings where the focus was on certain products or services, while clients were viewed as opportunities. When a company’s primary focus is on revenue, it is not putting the client’s interest first. Of course, revenue should be monitored, but it should not be the main focus. If this sounds strange then consider a recent quote from the CEO of Google. When asked what their growth target was for the next 12 months he replied, “We don’t have a growth target. We have an innovation target. If we innovate well, the growth will come.” In our industry, if we serve the needs of the client well, placing them above our own, then the revenue will follow. You can’t have it both ways. Either you will have a sales-oriented, revenue focus or a “client’s interests first” mentality.
That’s Not All, Folks
This most basic difference–that of what essentially drives the corporate culture–is not the only place where there is a wide divergence between the captive, employee model and the independent approach. Consider these issues:
Breadth of Offerings. I had always assumed the large firms had a broader product selection. I reasoned this was true simply because they were so large. In reality, now that I’m on the independent side of the advisory fence, I see very little difference in the number or quality of products offered by most firms. In fact, in some cases an independent advisor may actually have more products available since they have no management constraining what they can offer.