As an add-on to my blog last Thursday (Four Trends That Will Affect Advisors in 2014), I’ve been thinking about the future of the custodians and broker-dealers that support the independent advisory industry.
My musings were prompted by a story that Brooke Southall posted on RIAbiz.com on Dec. 11, Envestnet Increasingly Cuts Schwab Out of Its Software Mix, about a growing number of Envestnet|Tamarac users switching from Schwab’s PortfolioCenter to Tamarac’s portfolio accounting software Advisor View.
In that story, Southall not-so-subtly suggested that Envestnet (ENV) may have designs on becoming a custodian for RIAs itself, quoting Tim Welsh, president of Nexus Strategy, who said that Envestnet|Tamarac “looks a lot like a custodian to me. [They] bought Tamarac for a reason. Now I see Envestnet and all their mutual fund strategies. They control the home screen. Why else would you pay $54 million [for Tamarac] if you already have [Vantage] for RIAs? One day they’re going to rip the Band-Aid off and say: ‘we’re a custodian.’”
Southall’s story got me thinking about the role that broker-dealers—and later custodians—have played in the emergence of “independent” financial advice. Back in the early ‘80s, when I started covering financial planning, the vast majority of planners were registered reps who affiliated with “independent BDs.” They were “independent” in the sense that they owned their own firms, but still needed a BD for their securities licenses. Around 1985, when the Reagan bull stock market (which had started in 1982 and ended with the Dot.com crash of 2001) looked like it had legs, independent planners turned their full attention to allocating client portfolios into mutual funds.
But thanks to the growing no-load fund industry launched by Jack Bogle at Vanguard Group in 1974 (see my upcoming February column in Investment Advisor about Knut Rostad’s new book on Mr. Bogle: “The Man in the Arena”), independent advisors didn’t technically need a broker-dealer. Not coincidentally, Schwab Financial Advisor Services was launched in 1987, to service independent RIAs and their clients. The FAS program enabled advisors’ AUM fees to be deducted directly from client accounts—eliminating the “commission split” taken by BDs, and jump-starting the AUM-based independent RIA industry.
Here’s the reason for this ancient history lesson: Since that time, independent broker-dealers have been scrambling to find legitimate reasons that independent advisors should pay them a portion of their growing AUM fees. Only a few have succeeded, and we saw massive consolidation of the “indy BDs” into the few giant firms we see today: LPL, ING, AIG, Ameriprise and Raymond James—who can afford robust support programs for independent firms, and make up their falling revenue share with sheer volume. Meanwhile, the ranks of RIAs who work with custodians—Schwab, Fidelity, TD Ameritrade, and Pershing—has skyrocketed.