practice management | PLANADVISER March/April 2017

Assessing Independence

By John Manganaro | March/April 2017

Cerulli maintains that, “as advisers become increasingly comfortable operating in a fee-based environment and embrace fiduciary duty,” they may be more likely to consider moving away from commissions-based business models associated with the B/D channel, in favor of the RIA approach.

The Appeal of Independence
Advisers’ reasons for feeling this way are not mysterious and stem at least in part from the Department of Labor (DOL)’s efforts, under the administration of former President Barack Obama, to strengthen conflict of interest standards applied to fiduciaries  that serve investors protected by the Employee Retirement Income Security Act (ERISA). Even though the new definition of “fiduciary” may end up being significantly dialed back by the Trump administration, many retirement industry experts still argue that the appeal of independence is increasing and will continue to do so in light of the lawsuits being brought against retirement plans, as well as sponsors’ keen awareness of fees.

For both large national wirehouse B/D firms providing their own proprietary products and small independent RIA shops strictly selling independent advice, the increased attention paid to fees and conflicts of interest has acted as a catalyst—forcing a re-examination of business models, simplification of cost structures and minimization of practice risk exposure.

“All industry stakeholders are now operating with a heightened sense of regulatory risk and are, therefore, more likely to be aware of cost and liability,” Cerulli researchers argue.

It is clear that one of the main points of going independent is to gain greater control over compensation models and what specific product recommendations can be made—also that the current environment favors flat-fee-based compensation approaches. Again, even among B/D-affiliated advisers with no plans to adopt the RIA approach, approximately two-thirds still intend to shift more of their business toward fee-based structures.

Cerulli feels the writing is on the wall: “Wirehouses have been experiencing steady losses from the continued migration of advisers to the independent space. Caught in a game of trading high-producing teams between the four firms, national wirehouses struggle to replace headcount outflows through recruitment from other channels. Independent broker/dealers are also at risk of losing their largest, most valuable teams to the RIA channel because these practices often operate fairly autonomously.”