Will the passage of the DOL’s fiduciary rule drive top-producing reps away from broker-dealers? We asked the 2016 Broker-Dealers of the Year about a shift to fee-only business.
Eric Schwartz, Cambridge Investment Research, Division IV: We’ve been heavily into fees for over 20 years. Forty percent of our business was fees, even 20 years ago. We’ve been dealing with the potential for some number of advisors to go feeonly, or what I call quasifeeonly, which would mean the broker-dealer gives 100 percent payout or near 100 percent on fees and just collects on the other side.
Historically, we lose one or two advisors like that every year. It’s still a trickle, not a flood. The ones that do [leave] tend to be bigger. In the old days, somebody with $10 million or $20 million might form their own RIA and go feeonly, but nowadays, because of the costs and the fact that you actually get audited and some of the difficulties of running your own RIA, we see it happening in $250 million to $500 million range.
We actually have some $500 million to $1 billion offices that are still using our RIA. As commissions become a lower percentage of the business done in the industry, and fees become the higher, you have to find a way to add the same kind of value on fee business that historically you’ve added on commission business.
In good part, the regulators are helping us with that, if you want to call it that, because they’re making it more and more challenging to be an RIA. It used to be almost free to do and you never got audited. Now, it’s gotten more difficult.
I do see long term that it’s possible some broker-dealers could be just RIAs with a thousand advisors associated with them, even without having a broker-dealer.
I’m not saying we’re trying to go there, but if indeed fee business became 80 percent or 90 percent of the industry, rather than the current 34 percent, I think I saw last, there’d be a place [for that] because not every advisor or group wants to be out alone handling that or has the scale [to handle that].
It’s just like a broker-dealer today has to do more than just make sure they get their commissions out on time and not get in the reps’ way, you’ve got to do more to keep them there.
Lon Dolber, American Portfolios, Division III: I would agree with Eric, here. I’ve had a few leave, here and there, for that reason. Like you said, our job now is to create value for them to be with us. We create value for them, help them grow their business, whether it’s on the broker-dealer side or the RIA side, as well as take care of some of the regulatory burden that they’re just not used to.
They think it’s just going to get tougher for them. For years, there’s nobody auditing those independent RIAs.
Schwartz: Now they are.
Dolber: Now they start doing it. They’re going to be under the same scrutiny that we are under. It comes down to service and providing value to them.
Brian Murphy, Lion Street Financial, Division I: A lot of them get interested [in going fee-only] at $100 million-plus. They get interested because they go to a conference or they read something in a rag somewhere. From that, there are two misconceptions. It’s around myths and math. Their bets are that they’re going to more control than what they’re actually going to have. The myth is they’re going to have fewer regulators in their knickers than what they’re actually going to have.
The myth is that it’s not going to take as much infrastructure. The myth of that is that they’re taking a part of our [full-time equivalent employees] to help manage theirs. They’re either going to be paying top hourly rate to hire someone who’s not going to have the same vested interest, or they’re going to have a full FTE who’s underutilized and probably under-skilled from an expertise standpoint.
On the math, they always expect they’re going to save more money. It actually costs more.
It’s an educational role with people. First of all, what practice do you want to have in the next five, seven years? If all they want to do is manage money, and they don’t want anything from any other shelf, and they have enough critical mass or even if they don’t have enough critical mass, the myth of having control trumps math.
If they want to be a broad-spectrum type advisor, you just look at where regulations are going, and you’re going to want to maintain your ability to access these other products. You’re also going to want to leverage our expertise.
Dolber: Of course, it’s about value. What is that value? To me, [it’s] the network. Whether they’re their own RIA, whether they want to be their own RIA, or whether they’re without an appropriate RIA, you’re providing value through something that either you integrate or you build.
That’s particularly important for an outside RIA who may have his assets at TD or Schwab or Royal Bank of Scotland, wherever the hell they may be; the end result is that you have to be able to put them in a position to illustrate, model, execute and build.
I could sit there and try to argue, ‘You shouldn’t be your own RIA.’ I could argue until I’m blue in the face, but they may not listen. If I can show them value [and] if they are their own RIA, then does it make a difference? If they’ll pay for that value, I don’t care.
Schwartz: We have about 500 advisors that have their own RIA or are associated with, say, their branch manager’s RIA. Then we have about 2,300 that are using our RIAs. We have room for both.
In total, between feeonly and solicitors who can solicit business for fees only, not for commissions, we have almost 100 of those right now. That’s not a huge part of our business. Most of them are not really big producers. We can already see that there’s a market for that.
We have a guy that’s been with us many years. He’s doing about $1 million a year, and I’m going to be talking to him at the next conference. He talked to us a month or two ago, about if he dropped his securities license but stayed with our RIA, could the pricing be different because there’s less regulatory burden on us, and so on?
We’ve been working on a model for that for the last year or two. It can’t be 100 percent payout and no basis points — we haven’t figured out that math yet — but there is less burden on us in that scenario. We believe that we’ll see more of that going forward, and that it’s an opportunity for all broker-dealers to potentially get people that are happy doing their $500,000 or $1 million worth of revenue and don’t want the burden of having their own RIA.
It’s always easier to do it from a retention point of view. For example, it’s much easier to get somebody that likes you, has all his accounts with you, is already using your RIA, trusts you for 15 years, and they don’t really need a broker-dealer anymore.
We’ve averaged about five RIAs a year who have been with us, that have actually closed their RIAs to move their business back to our corporate RIA as the regulation has increased. We are also now getting people who want to give up their securities license but potentially stay with us.
For some broker-dealers, this move toward fees and feeonly will be responsible for their demise, in part. For others, it will be the opportunity, if you can put together the right package to make it work.
Andrus: The fiduciary rule has actually made it easier to recruit because people don’t want to do it on their own?
Schwartz: I think it’s been happening some already. People know that the regulatory environment in the last five to seven years has gotten harder. DOL will probably push that some more.
A lot of RIAs right now haven’t come to realize that DOL’s going to affect them. Depending on how they do business, they say, “Well, I charge 1 percent. That’s level fee. I’m done.” It isn’t that simple, especially if they’ve got IRA accounts; every time they rollover an IRA from somewhere else or rollover a 401(k), they’ve got DOL [oversight].
They may have to sign a BICE contract just for the advice they give, even though they’re not allowed to have a BICE contract for their fee based business. They have to have a temporary BICE, but they’re still then taking on the liability.
There’s no one who says, “Boy, I wish we could have a double scoop of this DOL thing,” but obviously once you have it, that’s the world we live in. Let’s make the best of it.
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