Semantics are important. When referring to oneself as an independent advisor, do you mean you are an independent business owner, independent in your ability to select technology and platforms, independent in your ideas and recommendations to clients, or independent from direct supervision?
In recent years, both the financial services industry and advisory firms themselves have become more complex, giving rise to confusion and potential conflicts. With new claims of fraud or malfeasance against financial professionals of all stripes and innovations that are changing the way we do business, clients and regulators are demanding more transparency in business activity. Whenever a quid pro quo element enters a professional relationship, independence is eroded—by any definition.
Defining oneself as independent does not connote a higher standing or a better business model, yet it is often articulated in a self-righteous tone. It raises the question: “What do you mean by independent?” Clarity is important. Using vague or muddled language to convey information to consumers makes it difficult for them to tell the difference between a zebra and a horse.
Your Definition of Independence
Does your definition of independence hinge on business ownership and self-governance? If so, think about your growth cycle and span of control. If you have multiple partners, each of whom has a say in business governance and policy, might you have drifted away from the freedom to act according to your own ideas or instincts? Is it possible that you are losing independence as you grow and accumulate more shareholders?
Let’s delve a little deeper into the concept of independence. If you have sold your firm, are you able to conduct your business as you did when you were not owned by a passive investor? Are there consequences for not hitting your growth numbers, and does this influence your behavior? If you have become a division of a bank or an accounting firm, do you have the freedom to make decisions that make sense for your advisory business, but that conflict with the policies or interests of your parent?
If independence means the freedom to use whichever vendor you want whenever you want, how do you demonstrate that, and how do you communicate this value to your clients? For example, if you participate in a referral program with your custodian, do they require that you hold those assets with them and pay them a referral fee in perpetuity? Are you selecting the custodian based on the client’s best interests or yours? How do you communicate to your client what limitations (or increased fees) this program may impose on their assets over the life of the relationship? And if you decide the custodian is no longer delivering on its promise of good service or high value—or no longer seems a safe place to hold assets—may you move your clients without consequences to them or you?
If the custodian gives you favorable pricing in return for your use of their proprietary mutual funds, ETFs or cash sweep accounts (where they make substantially more in the relationship with you), are you giving your clients access to the whole of the market as a proper fiduciary advisor? Or are you acting as a salesperson for products? If the custodian gives you money for technology or some other business support at a ratio tied to the volume of business with you, are you free from conflict?
If you define independence as the freedom to make investment recommendations or act with discretion, how does this change when your broker-dealer limits you to the solutions in their proprietary managed account platform? If your firm requires that you use only the master limited partnerships sponsored by your own company, are you acting as a client advocate or product advocate? If you rigidly utilize ETFs or index funds without considering other investment vehicles, are you truly independent in your advice?