Page 33 - Investment Advisor October 2022

While there are economic challenges like inflation, market mented with largely fragmented approaches; some firms inte-
volatility and some changing tax policies, “think medium- and grate, others don’t; some share an investment approach, others
long-term the impact that this has on retirement plans, [and] don’t; some have long time horizons and others shorter. There’s
the impact this has on the kind of wealth transferred to anoth- a lot of diversity in approaches in our space. It makes it great for
er generation is pretty dramatic. And this is where you really sellers, who can really choose a firm that matches their needs.”
need your professional good advice to help through these com- Furthermore, Mallouk explained in a recent interview, “The
plex times,” Adolf stressed. secret of the RIA space is that most firms are not growing
“In many ways, the industry is still underconsolidated,” he [much] at all. But that has been masked by a strong market over
said. “[In] this industry, depending on which numbers you the last five years. The No. 1 challenge for RIAs to compete in
believe, there are like 250 deals a year. There should be 400 deals the future is to have an approach that can result in growth.”
a year. There should be 500 deals a year. And there is still too —Janet Levaux contributed to this article
little M&A volume and, over time, it’s going to continue to go up.”
Creative Planning’s Mallouk believes the RIA industry is “frag- Staff reporter Jeff Berman can be reached at [email protected].

Have you always been opposed to “hat-switching”? How will this play out?
Yes. And the CFP Board doesn’t authorize it. They say that What is likely to occur is that there will be a binding declara-
once you’re a fiduciary, you’re a fiduciary for that client, period. tion or disclosure by each person either as a product or secu-
But under the SEC, you can be a fiduciary for part of the rela- rities salesperson or as a fiduciary. Hat-switching should be
tionship, maybe for an investment advisory account; and then prohibited — except in rare circumstances.
you can have another account that’s a brokerage account. You
can do some really bad stuff because a different standard applies. Next prediction: “Large broker-dealer firms continue to
migrate into the RIA space.”
Hat-switching is confusing to clients, no doubt? I’m talking about firms like Schwab, Vanguard, Fidelity, Merrill
The SEC says you’re supposed to be clear with your client Lynch, Morgan Stanley and UBS. They’re all dually registered
when you’re a fiduciary and when you’re not. I’ve never met or have an RIA affiliate. Most advisors who work at these
a client who said, “Oh, my broker, who’s acting as my dually firms are doing fee-based accounts, which is more than half
registered [representative], told me he just switched [hats] the business of the large wirehouses. They’re doing more fee-
to a fiduciary.” That just doesn’t happen. based accounts than commission-based business, on average.
It really creates a lot of trust to say to a consumer: “The only Advisors who practice as true fiduciaries will [find it]
compensation I’m going to be receiving is from you. I don’t receive increasingly difficult when pressure is put on them to push
compensation for a product or security that I recommend to you.” products and securities that are proprietary. If you work at
That’s the way fiduciary duties are supposed to work. But such a firm and are being pressured to meet certain quotas,
unfortunately, the SEC over the decades has allowed fiducia- that’s going to rub on you.
ries to quote-unquote manage their conflict of interest. So instead of adding to your company’s bottom line and
“Manage” most of the time just means [to] disclose conflicts hurting your clients, you can go out into the marketplace,
of interest. How do you “manage” conflicts of interest? If you’re where there are thousands and thousands of products, some
a fiduciary, basically that means you need to get the informed really low-cost, and [choose from those].
consent of your clients to have a conflict of interest — but
under no circumstances would an informed client ever consent Where do young advisors want to work?
to being harmed. That’s the test that should be applied. New talent isn’t attracted to firms where the survival rate is often
less than 25%. Rather, they‘re attracted to registered investment
What do you think of the SEC’s Form CRS advisors, where the retention rate for new hires is 90%.
relationship summary? I train my students to become financial advisors and
It just muddies the water. Under that document, there’s look to place them with firms that are going to invest in
no way a consumer can tell the difference, say, between a and train them and also have a promotion path, including
product seller and a fee-only advisor. In fact, the SEC would to become an equity owner of the firm someday. These
apparently even allow you to say you’re a fiduciary in that are firms where they have a very good probability, 95% or
document [if you’re not]. That’s kind of crazy. better, of staying employed.

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