Opinion: Report Card on an Industry in Transition

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Where have all the leaders gone?

It gives me great pains to write this, but at a time when a fragmented retail brokerage industry is in need of a clear, concise message to attract tomorrow’s investor, few leaders in any segment of the industry are stepping up to instill public confidence in their financial advisors.

The lines among wirehouses, regional firms, independent broker-dealers and even fee-only advisory shops have become increasingly blurred. One can argue that there are 20 types of firms from independent broker-dealer to family office. Firms such as Stifel Nicolaus, Raymond James Financial, JPMorgan, and LPL Financial (what I like to call the “New Nationals”) have the size or many of the characteristics of wirehouses, while Edward Jones with its distinctive offering has more advisors than anyone.

Although our industry distinctions are becoming passé, the lack of a coherent response to regulatory change and technology-enabled disruptors is alarming. Firms continue to fight each other as if nothing has changed, and advisors are lost in the shuffle.

If I were asked to grade retail brokerage leadership as a whole for its response to recent issues and its ability to instill confidence among investors and advisors, I’d give them a C-, at best.

To illustrate, I’ve grouped firms into our three general types and reviewed, among other things, two recent epochal events in this industry: the rise and fall of the DOL Fiduciary Rule and exits from the Protocol for Broker Recruiting (Prexit).

The Wires C-

The cracks first appeared with Merrill’s response to the now-defunct Department of Labor customer-care standards. In line with its history of setting precedent and direction for the industry and with its parent bank’s apparent fear of customer litigation, Merrill responded to the proposal with a radical stand that essentially banned commission-based retirement accounts. With the fiduciary rule now dead, Merrill leaders are reviewing whether to modify their position. The morale-hurting damage that the policy inflicted on advisors and, arguably, on customers may not be so easy to reverse.

Morgan Stanley and UBS maintained more flexible approaches on retirement accounts. Nevertheless, the ultimate shelving of the rules in favor of the status quo made a mockery of the industry’s ability to adapt, influence, or even understand where our business is headed.

Not every Wire jumped on the DOL bandwagon, but Morgan Stanley and UBS undoubtedly burned some bridges of their own with their matter-of-fact departures from the Protocol for Broker Recruiting last year. It’s hard to argue that wires led the way, or even had consensus on DOL, but there’s no argument that the Prexit phenomenon is completely of their making.

I admit there is some wisdom to trying to end the no-win prisoner exchange of expensive broker hires that went on for years among the big firms. Surely the big firms with stringent non compete contracts are feeling vindicated as Prexit has put a damper on advisor breakaways, and legal fees likely cost less per share than lost assets.  Time will tell whether these firms will reap a long-term benefit, or have created, as in the case of fired branch managers, a resentful underclass of employees that could come back and haunt them.

To my way of thinking, it’s preposterous to believe that any one firm will have everything that every advisor will find right, for every client, for all time. Trapping clients and advisors at one firm in perpetuity limits industry innovation and chills change at the large institutions.

Wires still have enormous advantages in platform and products, of course. If they can embrace those strengths while showing the flexibility to return to the advisor-centric cultures with which they began, they will remain a relevant force.

Regionals/New Nationals B-

Regionals and the New Nats, have been, for the most part, outspoken in their support of advisor-centric issues year to date, IBDs less so. Regionals held steady in the wake of the DOL madness, and have not only stayed in Protocol but been critical of the Wires who have left.

One can call their actions self serving, and that may be true, but regionals have for a long time put clients first, advisors second, and company third. They are culturally bound to advocate for their employees simply because they have to. With no large banks or meaningful trading desks to challenge advisor/client primacy, they ignore their advisors at their own peril.

Why a B-? Regionals et al, have done a terrible job of telling their story, and have not grasped at the laurel of leadership. In many cases their payouts are nearly as good as Indies after expenses, their culture strong, their management boosted by Wirehouse vets, their product platforms tight, but their sophistication and ability to scale is viewed as suspect, as is their technology.

This segment of our industry needs to find its voice. The New Nationals have the size and strength to lead, but continually refuse to take their seats at the big table.

Independents/RIAs B

Independents—broker-dealers, registered investment advisors and hybrids—have been the big industry disruptors again this year, and remain the fastest-growing channel. Thanks to the aforementioned technological advances and the blandishments of money-management firms eager for distribution, indies now have top-notch product platforms and plenty of good managers, including a growing number with wirehouse training.

They have been outspoken in their condemnation of Prexit, although some of them have used it to their advantage to sue their own departing advisors. They straight up had no clue on the DOL rule, so they stayed the course, which turned out to be prescient.

Independent growth stems not from their stance on issues of the day, but is due in large part to having won the battle of culture. Wires at first refused to engage in a character debate with a bunch of small firms they didn’t recognize as equals. Once wires realized they were in a fight, it was too late. They already fired their managers (keepers of culture) in the most public way, and engaged in a mercenary war of attrition with themselves by waving huge paychecks. To their chagrin Indies, for the most part without big checks, but many times with former Wire managers, still managed to recruit their advisors away.

The war though, rages on. The culture battle is won, until the Wires wake up to their opportunity to change, but Independence itself is ready for some scrutiny. Not every new indie firm has been a success. Poor leadership, poor planning, and most of all poor financing, have hampered growth at many firms. Billion dollar producers that made headlines jumping from wires to aggregators, are now moving out on their own, creating truly independent firms, and leaving aggregator firms in the lurch.

Many of the firms suffer from their own weak leadership and planning, and need to find sustainable financing models. The shoestring budgets they began with cannot see them through to the finish. I expect many will consolidate to ensure survival in an increasingly expensive world of litigation,  regulation, and the need for technology upgrades.

I’m nevertheless giving the indie leaders an B for innovation, for culture, and for advocating their model. In many ways, it is testimony to having won the cultural battle, without having to use big checks. Culture, for now, has trumped cash.

Industry overall C-

Where are our leaders?

The Bull market has covered up a lot of bad decisions. Once the market turns, the emperor will have no clothes, and all the assets that left because they were marginalized and ignored by big firms will be padding other firms books.

We need leadership now. American Politics and regulation are a genuine threat, and need consensus to fight/influence. Internal squabbling is stifling growth and innovation at a time when our industry needs to embrace new technologies and fit them into our matrix at the peril of being subsumed or replaced by them.

But there is hope. As firms distinctions meld there is room for one, or all of our New National firms to set the stage, anticipate the trends, and be mindful about what this business is all about: advisors and clients. Then, maybe, we can compete like adults, and lay our weapons aside to face challenges that impact us all with a collective voice–only then will we have a say in the future of our business, rather than merely a role in tearing it apart.