When asked about how the Schwab-TD Ameritrade deal broadly fits into the industry’s history, Mark Tibergien — the recently retired head of BNY Mellon Pershing’s Advisor Solutions — doesn’t skip a beat: “It’s really important is to recognize that the business of financial advice goes through a transformation of material change about every decade.”
In the 1970s, the discount brokerage emerged with the elimination of fixed-rate commissions, Tibergien explained. In the following decades, there was “the introduction of the independent contractor broker-dealer and the disappearance of big-name brokerage firms like E.F. Hutton, Smith Barney and the names you remember from commercials — so vivid then, and now … they don’t exist anymore.”
Schwab, TD Ameritrade and other discount brokers “made such an incredible impact on the retail market that it was transformational as well,” he said.
Today, it’s worth recognizing that “there is no real truly branded fiduciary business — branded in terms of the consumer market,” according to Tibergien. “There are some really great firms, but none that you’d say would be [every]where in the country … like Goldman Sachs or Merrill Lynch.”
The evolution of a branded fiduciary business model is “pretty likely,” says Tibergien, now a board member of RIA Pathstone, “but it’s probably going to take … the next decade or so for that to occur,” he said.
The trend of some broker-dealers trying to eschew the BD model in favor of the RIA channel “is probably a good idea because their business has changed so much,” Tibergien explained. “But not all of them have fully embraced the idea of fiduciary business.”
For that to happen, “some things will have to change inside their organizations,” he added. “As an example, they’ll have to rethink their compensation model, because the way in which they’re structured today is very much based on sales. They pay their people on a grid.”
While some investors and advisors may think pay should be tied to performance, “Oddly, in the RIA business, you don’t have to pay on a variable basis. You can think in terms of how people are motivated to do their jobs and pay them fairly and well,” he said. What advisors do “doesn’t have to be a quid-pro-quo-type of compensation.”
“The compensation model [at the BDs] will have to change. The definition of what the deliverable is will have to change, because the fees are based on assets. That probably will continue over the next decade, just because it’s an easier way to price for the services,” he noted.
If there’s a lower rate of return in the market, like 2–3%, “that’s going to make it really hard to charge 80, 90 or 100 basis points or more on a percentage of assets,” Tibergien said.
“These kinds of things are going to be put under pressure generally. The nature of reporting will have to go beyond the investment statements and get into things like philanthropy, tax planning and helping people navigate [life] choices,” he added.
Overall, the total RIA industry doesn’t control the majority of the wealth-management industry’s assets, “though the philosophy of the RIA is very compelling,” the popular industry speaker points out. “The big brokerage firms, independent contractor firms and banks, that’s where the majority of assets are held.”
This prompts the question: “Over the next generation, as we see boomers retire and pass away, how will the new accumulators and inheritors begin thinking about their relationships with their financial professional, and how will they adapt to that?” Tibergien asked.
His answer: “It’s just going to cause a different focus on the client experience — rather than on the investment experience — around planning.”
As for a dominant player emerging in the fiduciary business, one might appear on a national, regional or local scale. “The theory in business is that if you are one of the top three firms in a market, you’re going to get twice as many opportunities to do business as the No. 4 firm,” he said.
Most RIAs today are small businesses. As they consolidate, maybe some will “consciously move towards creating an identity and a branded system .. and become recognized as one of top three firms in a market,” Tibergien explained.
If you ask the average person to name one of the three financial services firms, you might hear Merrill Lynch or JPMorgan Chase. But the real question “is whether a fiduciary business can establish their brand in a similar way, and I think there’s an opportunity to do that,” he said.
Might Schwab, which operates as a broker-dealer and has a strong national retail presence, pivot? While the idea is “very compelling,” explained Tibergien, “I don’t know whether they will ever change their approach to a more fiduciary model. But in terms of brand presence, they’re clearly formidable, and that’s something every advisor has to think about when branding themselves.”
When a firm creates a brand, it has “to create a differentiator — a me-too strategy is not going to work,” he added. “People get too consumed by the nuts and bolts and not by the way people feel,” Tibergien said. It’s worth considering “the mindset of the client and to what extent your business … values all your stakeholders, not just your shareholders.
“How you understand the emotional side as well as the financial side of [a client like] me. How you position yourself in helping me navigate through life choices — such as deciding to take on a board position and these kinds of things — [RIAs should] really think about that,” he suggested.
“This will be an interesting decade for transformation in the business,” Tibergien said.
“We’re going to see some new players emerge — both from the pandemic and from general changes in demographics, economics, how we function as a country and the way in which people make money. All these changes are opportunities [for an RIA] to change things a bit and become a noticeable business,” he explained.