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March 28, 2011 at 02:04 PM
“This will not be the last event where brokers capitalize on their clients’ confusion about the duty that is owed to them,” said Elliot Weissbluth of HighTower Advisors, the fast-growing Chicago-based firm which specializes in recruiting top wirehouse brokerage teams as partners to its RIA model.
Weissbluth (left) made the comment in an interview on Monday, and he — along with several industry observers and consultants — explored the ramifications of the Securities America legal case for broker-dealers, their reps, regulators and even clients.
Dan Inveen, principal at FA Insight, the advisor research and consulting firm, took a different tack on the lessons learned from the ongoing Securities America saga. “I think it was Warren Buffett who said it best: 'It’s not until the tide goes out that you discover who has been swimming without swim trunks.' ”
In an e-mail, Inveen pointed out that “the past few years have been tough for many IDBs, who have struggled to make any type of profit.” As a result, Inveen wrote, “some BDs may have compromised their standards for the kind of advisor they take on or the oversight they have over their advisors. For the hope of sustaining cash flow, these BDs and certain advisors took risks that have left them exposed and over a longer term are certainly detrimental to the sustainability of their businesses and practices.”
(Disclosure: FA Insight partners with AdvisorOne and Investment Advisor in its annual Study of advisory firms.)
Lessons for BD Reps and All Advisors
Eliza DePardo, who heads the consulting efforts at FA Insight, was asked about possible lessons regarding reputational risk associated with business models and the kinds of products that advisors provide to clients. DePardo (left) said that an advisor must have “strong relationships with clients, beyond transactions, in order to overcome” the kind of bad publicity that advisors affiliated with Securities America must be experiencing now.
Inveen argues that “Any advisor who positions their value proposition around access to particular products or investment performance will always be traveling a riskier road than those advisors who are more service-, planning- and relationship-oriented.”
The same goes for advisors partners, he argues: “Regardless of their business model, firms that cater to a product and performance-oriented advisor also travel a riskier road. At best, markets face downturns and products fall out of fashion. At worst products can blow up with ugly after-effects. The businesses of more planning-oriented advisors will always be more insulated against these types of risks.”
Those advisors who are dually registered face a different kind of issue, DePardo says. “I suspect a lot of reps will question whether a dually registered status” is still worth it, she says, noting that such status might complicate matters. “More and more,” says DePardo, the question for advisors is to determine whether the interests of the client and the advisor “are aligned” within the advisor’s chosen business model.
While she believes that, “by and large, advisors want to put their clients’ interests first,” their business model might make that more difficult. One lesson that shouldn’t necessarily be drawn from the Securities America experience: “It doesn’t mean the solution is not to join a BD, but rather to determine which one is more appropriate.”
