Clark At Large: Done Deal

With a more powerful sales model (financial planning), access to a world of information and financial products, a system to painlessly receive client fees, and stronger, more client-oriented, client relationships, more and more advisors were asking themselves why they needed to split their revenues with a wirehouse, or even give up 20% to an independent B/D? As more advisors set up their own firms, either as RIAs or with a B/D affiliation, it became clear first to them and then gradually to the rest of the financial services world that independent advisory practices were actually a better business model.

It turns out (not unpredictably) that with a small office in a nice office park, an owner/advisor has far greater incentives to keep overhead low, staff to a minimum, and marketing efforts tied to successful results than do W-2 employees of large corporations. In short, the independent model is by far the most efficient way to deliver financial and investment advice. That's especially the case for the now-wealthy baby boom generation who never trusted institutions much, anyway. That's why we've seen banks, rollup firms, consolidators, and even some brokerage firms such as Raymond James all moving

toward owning or distributing through independents over the past 15 years or so.

The next step toward truly independent advice was the large-scale conversion to fee compensation. I can't help thinking about the parallels between the current fiduciary issue and the movement toward fee compensation some 20 years ago. As some of you may remember, fees were emerging as a far better business model for advisors and brokers (recurring, compounding revenues, a closer identity with clients' interests, etc.). Naturally, there was some institutional resistance to such a major change in the securities business; At first, charging fees on AUM was limited to a few "crazy" independent RIAs and financial planners.

But, in the early '90s, practice economics and client-orientation drove the fee movement to expand. And through the dogged efforts of NAPFA, Ron Rog?, Charles Schwab & Co., and others, the financial media began to catch on to the consumer benefits of fee compensation. Once explained clearly, the fee advantage was also an easy concept for financial consumers to understand. From that moment on, the handwriting was on the wall. Never ones to miss an opportunity to give clients products they want, Wall Street leaped onto that bandwagon–by 1999, Merrill Lynch had converted to fees, shortly followed by the other wirehouses.

So, What About Fiduciary?

Which brings us to the current debate over a fiduciary duty for brokers. To my mind, based on the long-term move toward independent advice, what's happening in Washington today is not so much a "debate" as an acknowledgement that the fiduciary duty for advisors has won the war (just as fees did in the '90s); now we're just down to the short strokes of how it will get formally implemented.

Just as with the "fee debate," the tipping point came when the national media finally "got" the difference, and started to explain it clearly to the public. I've long suspected that if consumers understood that their brokers did not have the duty to put their interests ahead of the brokerage firm's, there would be a citizen's revolt. It looks to me that that revolution is about to take place. Due to the discussions over financial reform, the coverage of when and if brokers or other advisors have a fiduciary duty to their clients has been overwhelming (to see what I mean, just Google it). Every media outlet from the New York Times to CNBC has covered the issue extensively (see "Different This Time" sidebar).

After all, Washington is rarely a leader: Most of the time, Congress is more than happy to merely jump on whatever bandwagon of popular trends happens to be passing at the moment. At present, in the aftermath of the Mortgage Meltdown, that bandwagon is mostly a knee-jerk Wall Street Reform. But included in that reaction to an immediately passed crisis (don't get me started), is at least one solution that has been percolating in the consciousness of consumer advocates, regulators, and some astute members of the media for some time: the fiduciary duty. We can debate the pros and cons of doing the right thing for the wrong reasons (see my May 5 blog on Goldman Sachs) another time, but regardless of the reasons, the "F" word in now firmly in the minds of the media and increasingly in the minds of the public. As consumers increasingly demand a fiduciary duty from their advisors, I can't help but believe it will be very hard even for Wall Street to get that genie back into the bottle.

Bob Clark, former editor of this magazine, surveys the advisory landscape from his home in Santa Fe, New Mexico. He can be reached at [email protected].