The Haunting Problem Keeping Wealth Management Executives Awake at Night

Fearful their best advisors will leave, executives weigh loosening the reins on investments at the risk of going too far.

(Illustration by RIA Intel)

(Illustration by RIA Intel)

Advisors leave and join wealth management firms for different reasons. Many say their moral compass pointed them toward becoming a full-time fiduciary to clients. Fewer lead with the fact their move will be lucrative for them, especially if they become an owner.

But another driver is woefully underappreciated.

Advisors also seek new employers to diversify the array of investments they can offer clients and prospects. Some investors, especially the wealthiest, request or require more complex portfolios and if an advisor can’t deliver that, investors will find one who can, according to Doug Fritz, the CEO and founder of F2 Strategy, a technology and marketing consulting firm to wealth management firms.

“The reason why advisors are moving is that new firms will allow them to win larger and larger client meetings,” said Fritz, who was previously the CTO at First Republic Private Wealth Management and worked for Wells Fargo.

New investments require a due diligence process and blessings from many people. Exclusion from a platform doesn’t mean they are inherently bad. There might simply be a concern that some advisors won’t use an investment appropriately, even by accident. Depending on its nature, a mistake like that could be detrimental to the client and firm.

The majority of RIAs also use their own model portfolios. An overwhelming 83% of RIAs use only their own practice’s models, a much higher rate than hybrid firms (64%) and wirehouse advisors (56%), according to a July report by Cerulli Associates. Only 7% of independent RIAs surrender discretion over client investments to either a home office or third party and just 10% start with models of some kind and modify them.

At least one study has shown that advisors’ portfolios have rampant bias, adding unnecessary risk while potentially forgoing higher returns, and could benefit from using models. But old habits die hard and advisors have been slow to take them up.

Advisors who feel a limited menu of investments or constraining portfolio models are hindering their growth will look for a remedy, perhaps at another company. It’s hard enough to grow a wealth management business and doing so organically (without help from the market or acquisitions) proves elusive to most wealth managers.

As a result, executives are agonizing over deciding to loosen the reins on investments, and perhaps risk, or remaining steadfast while potentially losing advisors. It’s the number one thing keeping wealth management executives up at night, Fritz said.

“It’s overshadowed really important stuff that doesn’t get much attention,” said Anton Honikman, CEO of MyVest, a software and service provider to wealth managers.

So, Fritz and Honikman teamed up and authored a paper in an attempt to raise awareness of the ongoing evolution of discretionary advisory programs. To be sure, the paper is self-serving and they acknowledge that. Both of their businesses stand to gain from readers searching for a consultant or technology company to help them make changes.

Still, their hope is the paper will be a reminder to industry decision makers that they don’t have to choose between appeasing their advisors and sleeping well at night. “When implemented correctly, these capabilities manage the expectations of wealthy clients and their advisors, plus the compliance oversight needs of the home office,” the paper states.

“We like to think that there is a path to providing customization and control, and not customization or control,” Honikman said.

During their research for the paper, Fritz and Honikman found that advisors, in some cases, were frustrated because their home office was forcing them to do the wrong thing for clients, either in the form of trades or an allocation. All wealth managers should be working to achieve some sort of middle ground or be prepared to live with losing advisors or excluding their firm as a potential suitor for new ones, they argue.

The paper published Monday morning and Fritz is speaking about the topic on a panel Tuesday at the 2019 Money Management Institute conference.

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