A Pitched Battle for the Future of Wealth Management

RIAs have been poaching clients from broker-dealers at a steady rate. Now, broker-dealers are fighting back.

Illustration by George Wylesol

Illustration by George Wylesol

The Fiduciary Standard is a hot topic these days in the advisor community. While many assume the standard focuses merely on acting in a conflict-free basis on behalf of clients, there’s more at stake. In a July 2018 risk alert, the Securities & Exchange Commission (SEC) called for “Best Execution,” noting that a financial adviser must handle investments in “such a manner that the client’s total costs or proceeds in each transaction are the most favorable under the circumstances.”

Note the emphasis on the phrase “total costs,” as the expense and value of financial planning and wealth management are coming under ever greater scrutiny.

You can see cost-consciousness creeping in wherever you look. More advisors are utilizing low-cost exchange-traded funds (ETFs) to help trim holding costs. And the rapid growth for discount-brokers means that transaction cost savings can also be passed on to clients. Make no mistake, the growing emphasis on value and total advisory costs for service has emerged as a key focus for planners and their clients.

For decades, brokers were often content to charge one percent or more to manage client assets for mere wealth management. And they often solely focused on simply managing portfolios, without any sort of financial planning framework in place to support investment decisions.

“Those advisors that are only managing assets are seeing greater fee pressure,” says Mark Tibergien, CEO of Advisor Solutions at BNY Mellon’s Pershing. His firm provides custodial support to advisory firms with a collective $650 billion in assets.

Standalone wealth management is becoming a harder sell. Increasingly, many wealth managers are working in teams, with planners supporting the relationship in the background, says Tibergien. He adds that high-net worth clients don’t often have the same expectation for broad-scope planning services.

Yet for the middle market (also known as mass affluent) that more often seeks out comprehensive financial planning as part of the wealth management process, the cost of doing business isn’t always clear.

“A lot of people have no clue about how much they are paying for advice,” says Allan Roth, founder of investment management firm Wealth Logic, adding that “my industry is brilliant at making fees as non-transparent as possible.” Indeed, most quarterly brokerage statements make no mention of costs. Asking a wealth manager what he or she actually charges per year can create sticker shock for clients.

In response, a growing number of consumers are seeking out fee-based financial planning and management. Tibergien says that “we see the shift in assets toward fiduciaries growing quite dramatically.” (Fee-only advisors are the only ones that can call themselves fiduciaries.) “Consumers like the idea of dealing with a client advocate rather than a product advocate,” adds Tibergien.

As this trend has played out, RIAs have been snagging a larger slice of the financial advisory market. In response, traditional investment firms are looking to become more like RIAs. Morgan Stanley and BlackRock, for example, have bought stakes in RIA-focused platform firms such as Solium Capital and Envestnet in the past half year. And more recently, Goldman Sachs acquired United Capital Financial Partners and its team of 220 financial planners for $750 million. “That’s as big an endorsement of the fiduciary model as you’ll find,” says Tibergien.

In some respects, large broker-dealers have no choice but to adapt. That’s because they’re struggling to retain relationships with the heirs of clients that have passed away. “The child inherits the relationship, looks at what they are paying, and decides to fire their advisor,” says Wealth Logic’s Roth. A recent survey by Cerulli Associates found that less than 15 percent of affluent investors maintain ties with the advisors their parents worked with.

What’s at stake? A stunning $60 trillion in assets in generational wealth transfer over the next 25 years, according to Cerulli.

Tibergien notes that “one reason is that younger people don’t want to work with older advisors.” He think’s it’s crucial that advisory firms develop and recruit younger advisors in order to meet that challenge. Time is of the essence. Industry thought leader Michael Kitces estimates that nearly one-third of all financial advisors will likely retire within the next decade.

Willingly or not, traditional wealth managers may soon be forced to adapt to changing industry—and client—expectations. In early May, Dept. of Labor Secretary Alexander Acosta told the House Education and Labor Committee that the Trump administration has plans to revive the fiduciary rule. That’s the “higher standard” rule that looked headed for passage during the Obama administration, but was never ratified. It’s unclear how the rule will be defined and enforced this time around, but the trend towards greater accountability and transparency for clients appears increasingly inevitable.

David Sterman, CFP, is President of New Paltz, NY-based Huguenot Financial Planning.

Related Articles
Goldman wants a leader with specific skills and attributes, and says the board already has a short list of candidates.
Wealth management providers in the banking industry must highlight their stability to maintain their market position, says Cerulli.
Companies need to adopt practices more common at wirehouses and RIAs to better retain talent.