Broker-dealer corporate RIAs have jumped on the proprietary advisory platform bandwagon at a rapid clip over the last five years. We've been approached by broker-dealers wanting us to recruit advisors to their broker-dealer with a focus on bringing advisors to them, not only with a large percentage of advisory assets but assets that will specifically go into their proprietary advisory platform.
Financial products such as mutual funds can't be pushed with such overt bias, yet there appears to be no issue with advisory platforms being pushed in a similar manner.
Bringing up proprietary advisory bias to the head of advisory at a broker-dealer, his response was that "proprietary advisory is not an issue because they are not products, but rather, platforms."
Granted, broker-dealer standards are different from RIA standards, but a fiduciary standard is supposed to set a higher bar than Regulation Best Interest.
Broker-dealer corporate RIAs are free to set whatever profit level they choose, but the conflicts with proprietary advisory platforms include directly and indirectly controlling client assets to their biggest profit center (proprietary advisory platforms), leaving advisors in the dark regarding new, value-added offerings that compete with their proprietary platforms.
It is uncomfortably common to hear advisors' feedback on broker-dealer management telling them directly that they should put their advisory assets into their proprietary advisory platforms. But it is the more subtle ways the platforms are pushed that remind me of the days when insurance broker-dealers manipulated sales into their insurance products. Here are just a few of the tactics we see employed:
- Company websites giving preferential exposure to proprietary advisory platforms.
- Offices of supervisory jurisdiction receiving bonuses based on proprietary advisory client assets from the advisors they supervise.
- Advisors consulting with advisory departments for guidance being steered to use their proprietary advisory platforms.
- Offering incentives to direct more assets into proprietary advisory platforms, such as free services when you hit a certain asset threshold.
As effective as these tactics are at directing assets to their best profit centers, keeping advisors in the dark is even more effective.
You Don't Know What You Don't Know
Advisors rely on their broker-dealer to keep them apprised of new innovations and pricing values, but when pricing values are more attractive than the broker-dealer's proprietary platforms, it is in the broker-dealer's interest to keep advisors in the dark.
A case in point: Fidelity last year launched its Fidelity Managed Account Xchange (FMAX) for advisors as primary managers. If advisors use National Financial Services for clearing, they can receive Fidelity's entire model portfolio lineup of modeling and rebalancing quarterly changes supplied to them at no charge.
If your broker-dealer's corporate RIA allows access to Fidelity Institutional IWS, you can not only receive the quarterly model allocations at no charge, but quarterly model changes can also be automatically implemented at the advisor's discretion at no charge via Wealthscape. The point is, Fidelity has offered a strong value proposition that can bring advisors' clients substantial cost savings and greatly simplifies running a managed model portfolio.
Translating this to a broker-dealer RIA level, we've been active over the last year with a broker-dealer specialized in advisors with tax practices. Many of these advisors opt for the broker-dealer's proprietary advisory platform that manages models using mutual funds and ETFs at a cost between 20 and 30 basis points.
They also use NFS for clearing, but access to Fidelity IWS is not made available. Fidelity's FMAX offering gives advisors an option to go from 20-30 basis points to zero, and you can opt for a broker-dealer that offers billing and performance reporting for around $50-$75 per account annually (no basis points on assets). The advisor will initially need to set up the models per the Fidelity model structure, but once in place, changes can be made automatically or customized by account if they so choose.
These are some of the best ways to battle fee compression by lowering costs to clients, leaving the advisor with less pressure to lower their management fee. How does such cost savings translate with the broker-dealer RIAs that have proprietary advisory platforms? It doesn't.
Even though this program was introduced last year and as of May 2021 the entire model portfolio lineup has been made available, only 40 broker-dealer corporate RIAs of the approximately 275 broker-dealer RIAs using Fidelity NFS clearing have plugged into this offering. The broker-dealer RIAs we work with that are fiduciary focused — having no proprietary advisory platforms — were quick to make Fidelity's offerings available to their advisors.
