An Old Dog Learns Some New Tricks

I had to admit to myself that, with those disclosures, I wouldn’t have any problem with advisors charging commissions, nor would they conflict with a fiduciary standard. Now, with that said, it has been one of the perennial tactics of the brokerage industry to advocate in favor of disclosure to “protect consumers,” and then to write disclosures that are so empty and misleading as to offer little protection to anyone. The key to disclosures is the wording, which still leaves lots of room for abuse. But I’m now willing to concede that disclosure could work to protect consumers, if made fully and accurately.

I’ve also come around on the notion that all retail financial advisors who deal directly with the general public should have a fiduciary duty to their clients. Now don’t get me wrong, you still probably won’t find a stronger advocate for a fiduciary standard for all advisors. But, what about clients who genuinely don’t want advice? Should they be forced to go to an advisor rather than a transactional broker and probably pay more?

My broker-dealer friends have suggested that they shouldn’t, and upon reflection, I suspect they are probably right. There is certainly a place for brokers who simply execute clients’ orders. But again, in light of the brokerage abuses of the past, this practice would have to be regulated with clear and inflexible conditions. Any attempts on the part of a “broker” to suggest or recommend what a client should do, should automatically be considered “advice” and as such fall under the responsibilities of an advisor.

What’s more, the nature of the relationship must be fully disclosed: that the broker represents his or her firm, and is not required to act in the client’s best interest, but will simply make a best-effort attempt to fill the client’s order. The real danger here is that as technology and the Internet increasingly render securities transactions a commodity obtained at the lowest cost, it will be difficult for brokers to make a living without providing investment advice, with increasingly larger financial incentives to cross the line.

Finally, a senior Wall Street executive, with whom I’ve been in contact over the past six months or so, has been enlightening me on the benefits of dual registration. Since the late ‘80s, when clients started showing a preference for fee-based asset management, we’ve seen many advisors on and off Wall Street trying to straddle the fence between advice and sales. Brokers would wear “two hats,” sometimes serving as a client’s advisor, and at other times selling them products that may or may not be in the clients’ best interest. For obvious reasons, I’ve been firmly against this abusive practice.

However, my executive friend suggested we look at the problem from a different perspective: That of the client. What people want are reasonably priced solutions to their financial challenges. Those solutions often involve various kinds of insurance, and frequently for the higher net worth clients, sophisticated brokerage products. Is it really in the client’s best interest to be sent to an agent or broker to get what they need, when those outside firms have a history of high loads and expensive execution.

The current advisory practice of maintaining fee-only purity by referring clients outside for the business that advisors “won’t” do, doesn’t seem so client-centric to me anymore. While there are certainly important conflicts of interest to manage, I’m warming to the idea that clients are truly better served by having all the solutions they need provided by one advisory firm. Today, that’s called a hybrid firm, because the advisory firm would also own a broker-dealer to execute securities transactions, and often, an insurance agency.

As with my other new insights, there are important conditions that would ensure hybrid advisory firms maintain their client-centered focus:

• They should be stand alone firms, owned by advisors themselves.
• The advisors should all be RIAs.
• The firm shouldn’t sell any proprietary products, nor have any financial interest in any transaction other than getting its clients the best pricing and execution.
• Any affiliated broker-dealer or insurance agency should be wholly owned and controlled by the advisors—no outside influences.

In this type of structure, the firm’s clients would be able to get their financial needs met in-house, at the lowest possible cost. Such a firm would truly be in the client’s best interest, and would be able to protect its clients from the conflicting agendas of the financial services industry—possibly making hybrids the structure of advisory firms of the future.