It’s taken longer than I’d like, but circumstances have conspired to prevent me from responding to PPotts’ comment on my Aug. 27 blog: Can CFPs Really Be Fiduciaries? Still, her comment raises two interesting and important issues. Are the economics of being a broker better than those of an independent RIA? If so, how does that impact the CFP Board’s actions?
To bring you up to speed on how the discussion went down, it started with PPotts comment to my Aug. 20 blog (Fiduciary-Only Advisors: Of Attorneys, ‘Agents’ and Schmucks), in which she wrote: ‘I don’t see where the confusion lies [in solving the issue of ‘part-time’ fiduciaries]. Ask Mary Jo [White; chairman of the SEC] to simply require that a firm be either an RIA or a BD, and [state] that no individual can be a member of both.’”
I found her solution so dead on that I quoted it in my Aug. 27 blog, adding: “It’s certainly possible that this is the ultimate endgame to the discussion that Dodd-Frank started about making retail financial advice as client-centered as possible. What PPotts is describing is a kind of Glass-Steagall Act [which separated lending banks from investment banks] for financial advisors that would create a clear distinction between fiduciary advisors and retail brokers. Then retail investors could decide for themselves whether they want ‘advice’ or help purchasing financial products they’ve already decided upon. Under the Board’s current standards, that would seem to put CFPs on the RIA side of the fence. Problem solved.”
Curiously, despite the fact that I’d praised the brilliance of her solution, PPotts seemingly took issue with my “problem solved” conclusion, and posted another comment to say so: “You were doing so well, until the last sentence, Bob. The CFP Board of Standards would undoubtedly shrink as those who entered into the licensing arrangement with the CFPBOS would find that it would no longer be economical to give up the commissions from the BD. Can I make more on full service or advice? That is the question many [CFPs and brokers] need to answer.”
Seems to me that this is a question that has been asked and answered for quite some time now. The economics from an advisor’s perspective seem quite clear.
Ten years ago, or so, I was on a fight out of Dallas to somewhere, and learned that the gentleman I was sitting next to was stock broker at one of the big wirehouses. After some basic info exchanging, I learned he had converted his clients almost entirely to managed assets, which had recently hit $50 million, and on which his clients paid 2%. So I asked him if he minded telling me what his payout was. “Oh, I’m one of our top producers in Texas,” he drawled. “so I get the max: a 50% payout.”
I couldn’t stop myself from asking: “What could you possibly get from your firm that’s worth $500,000 a year?” His silence lasted for the rest of the flight.
For the past 25 years, advisors have been moving toward the assets under management model because it’s just a better business model.