Sirianni: “C-Change Coming To Custodians”

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I have seen a lot of change in almost 25 years, but I have never seen commissions go up, and I was convinced that Advisor revenue never would, until now.

The emerging post-wirehouse world is giving impetus to a new ethos. As Advisors leave the Wires, and according to Cerrulli they will continue to do so for years to come, they are bringing their expectations with them. These expectations are rooted in what the Indy world has espoused for years: transparency, respect for the client, fairness in pay, and self determination. You can almost hear some executive at a Custodian say “You guys thought we were serious about that?” Breakaways surely are, and they expect this new world to live up to their expectations. Those expectations will bring about great change.


The three Cs of change are Commoditization, Competencies, and Compression. Commoditization refers to the leveling of the playing field in terms of platform. Time was, during the Pink Sheet days, that it mattered where you worked. Research and technology were better in the wires, better products and better services gave advisors and their clients an edge. Today innovation lies mostly outside what is left of the Wires. You can confidently tell a client today that there are many Independent platforms that have products and services as good or better than the Wirehouse brands. Most financial products have become commoditized in the sense that you can now get them almost anywhere.

As for Competencies, Wires have gutted 60% of the resources from their branches since 2008, and continue to do so through complexing and slashing managers, regions, and divisions, thereby moving resources further from the field. This has led many Advisors to ask what their full service firms really provide for their cut, facilitating the break to independence. Conversely, many Indy firms are unprepared for assimilating Wire Advisors with their sometimes lofty notions of customer service, and firm amenities. Today we see all firms struggling with how to add Competencies; what the Wires once had and the Indys have not quite developed; things like capabilities in insurance, estate planning, and business planning. Competencies versus costs is the issue of the moment for management at all firms.

Compression, is the next big thing. Pricing Compression, lowering fees and paying on margin spreads, will occur as custodians of every stripe will be forced to start sharing more of the pie with the folks responsible for baking it.  Commoditization has shown that the Indy world can adapt and move from a sleepy mutual fund store to a place for the most sophisticated transactions and clients. Similarly, the rush to build out Competencies is a direct response to Advisor’s growing expectations about what the Indy world could and should deliver. Those factors combined with the ethos of the Indy space and its emphasis on transparency and fairness will create the environment for Advisors to control the discussion and set the compensation bar higher.

Confusing Environment

When an Advisor moves her practice she is given many options on the pricing model she can choose from various custodians. This is much like buying a car, where if the dealer lowers the car price, he ups the monthly payment, or lowers the trade in value. The obfuscation can become very complicated, even for folks who have researched prices of cars online. Same at a custodian, a 100% payout comes with high trading fees, and many hidden costs for bookkeeping etc. Similarly, a Wire will talk about payouts while lowering grids but raising potential bonuses that it knows statistically only a handful of Advisors will make. Real payouts to Advisors don’t really change at Wires, like the car dealer they just move the bonuses around to get the same result.

Grids and payouts are only some of the ways that custodians, including wires, make money. Securities hypothecation, dark pool trading, and service fees make up a large portion of income. Most firms reap the majority of their profits through cash balances and margin lending. The spreads on these last two income streams are significant and negotiable for clients and advisors.

As Advisors move to Independence their embrace of transparency and fair pay will have them not only understanding how custodians make money on their efforts, but demanding to be compensated along side them. When Advisors sit down to negotiate their pay they will insist on true transparency and fairness. Transparency means they should be shown exactly what type of revenue their books generate for the house, including margin and cash. Fairness dictates that they be paid on the totality of what their books earn for their host firm. A million dollar Advisor may generate 1.3 million or more in revenue for a custodian. Why shouldn’t they get paid for what they bring to the table?

It is becoming increasingly difficult for custodians to obfuscate. Advisors are beginning to cut deals based on their true worth, starting with the largest producers, but surely trickling down to the majority. At Wires, where they bribe Advisors to come onboard or to stay, and sue them when they leave, the upfront bonuses muddy the water somewhat, but will not stop top Advisors from demanding that their entire revenue stream be included in their grid.

Its ok for custodians to make money. Its also time for them to put their money where their mouth is and pay Advisors based on real revenue production. The emperor has no clothes, the cats out of the bag, the victory will go to the first custodians to embrace the new model. Custodians will realize that Advisors are flocking to the Indy arena for the pure values it espouses, not for money (they could have made more selling to a Wire), and that for custodians to practice what they preach requires working together. True partnership between Advisors, RIAs, and custodians will create the transparent fairness that will help serve clients best and live up to the ideals and expectations of today’s Advisor.

Tony Sirianni is one of the most respected voices in the Independent space, and a tireless advocate for Advisors and RIAs. Through his firm Sirianni Strategy Group, he works with elite Advisors, RIAs, and corporations on Public Relations and Strategy. Tony was a founding partner of Steward Partners, CEO and founder of Washington Wealth Management, and an Executive Director and Complex Manager for Morgan Stanley, Smith Barney, and Legg Mason.He has a Masters in creative writing, and a JD from New York Law School.

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