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Retirement Planning > Social Security

Lessons Learned From Securities America

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“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 in which several industry observers and consultants explored what the ramifications are, will be and should be of the Securities America legal case for broker-dealers, their reps, regulators and even end 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 Buffet 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, said in an interview Monday. What’s the lesson on reputation risk associated with business models or the kinds of products 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 belives 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.”

Securities America has not had much contact with the press since the Dec. 18 federal judge’s ruling that disallowed a class action settlement, though on March 28 Janine Wertheim did talk to AdvisorOne on several allegations made by a Securities America rep and recruiters. That reticence might be understandable on the BD’s part since it is in legal talks, but should Securities America reps be talking to their clients? DePardo says she’s a “firm believer in getting in front of these issues, rather than being on the back foot; the smart advisors will get ahead of the issue and communicate with clients” in a one-one-manner.

It’s not all that different, she says, from when the market plummeted in 2008-2009: “Whenever there’s an opportunity to make clients feel better in a difficult time, good advisors should do so [by communicating with them],” says DePardo. For Securities America and other BDs, the experience should “raise alarm bells as well,” she says. “I expect that clients are going to be far more concerned and careful about who they’re working with” saying “this is one more example of why clients have to be more diligent in who they partner with.”

Back to the Broker-Dealers
So then, do the current challenges faced by Securities America imply broader implications for the long-term viability of the IDB model?  “Yes,” says Inveen (left), “if only in the sense that it will accelerate the already long-term trend of IDBs to embrace the provision of advice over products and putting the interests of clients first.  The industry’s most successful IDBs get this.  The consequences will be dire for those who fail to adapt.”

Long an advocate of the fiduciary standard, Weissbluth remains an optimist that such an authentic standard will be implemented, using the analogy on the dangers of cigarette smoking that played out in the 1960s. “Early in the debate there were lobbyists and other interest groups” questioning the scientific findings, he recalls, “but once the conversation started, it was not hard to prove that cigarettes were bad for you.” Regarding the fiduciary standard, “the fact that the conversation has started,” Weissbluth says, suggests that the American consumer “will eventually understand the difference between a product provider and a service provider. Consumers are in the process of becoming educated.”

The bottom line, according to Weissbluth? “As long as the industry continues to allow brokers to sell securities and the marketplace of consumers is confused as to whether they’re dealing with a salesperson or an advisor,” this result is possible.” This is not an anomaly.” 


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