The Fiduciary Fallacy

The standard news release that advisors make when going independent is beginning to sound rote.  “I have left Wall Street to start my own firm where I will be a fiduciary.  This will allow me to show you unlimited investment options without any institutional constraints.  I’m a fiduciary now and have the obligation to always act in your best interest.”  This positioning is a fallacy because there is much more to the fiduciary standard.  The other items aren’t as compelling but they are essential for new fiduciaries.

Tools

Most independent wealth advisory firms service mass affluent clients a fact confirmed by the recent FA survey.  We are in the early innings of a Gold Rush in asset flows to independent advisors, but do they all need the same picks and shovels to find the gold?  The clients and the fiduciary police don’t think the answer is yes.

The products and services can be broken down to three major categories.

Investment solutions

Consolidated Reporting

Alternative investment needs*

* Ultra affluent clients

Investment solutions are the place most firms start.  The market share leaders are DFA, TAMPs , wrap programs and robo solutions.  Unfortunately these solutions won’t feel that different than your old firm and won’t deliver on your press release to find the best.

Consolidated Reporting is a service that will be a definite upgrade from your old firm and there a several flavors available from Black Diamond, eMoney, Envestnet and Addepar.  Each tastes and costs different.

The final area addresses the unique needs of ultra affluent clients.  This client segment is demanding and wants to invest in hedge funds, private equity and is VERY fee sensative .  Large firms like Hall Management, Tiedemann, Inconiq, and BBR have experts in their firm to address these needs.  A common asset of many ultra affluent clients is restricted or concentrated stock.  Wall Street trys to solve this problem by offering complex high margin solutions.  Fiduciaries can provide this advice too with the help of, Parametric, Spiderrock or the new firm StratiFi at a fraction of the cost and with Wall Street sophistication.  

Special Counsel

Independent advisory firms might need their own special counsel to help them address how to compliantly choose their client solutions.  Most decisions are typically made with the assistance of wholesalers, custodians or large platform firms.  Each has their own set of conflicts or lack of expertise.  Service providers might not like it but advisors might need a special counsel to confirm the veracity of their product and service decisions.

The good news is we have several special counsels to choose from.  The first and most important is the SEC, which during a review will ask the firm for due diligence files on each of the products and services they offer clients.  The largest firms create their due diligence files by establishing a separate investment committee.  Smaller advisors default to their personal opinion when choosing the best solution.  We did NOT collude with The Russians!

Cost

Establishing a firm that will meet the fiduciary duty of care isn’t cheap.  The first check I recommend you write is for training for you and your entire team.  The best firms I have found are Aspire!, Altius Financial and Cannon Financial. 

Building a fiduciary-based business that meets the fiduciary standard of care provision will be more expensive than the custodians and other consultants tell you.  I remember the advice I received early in my career from Bill Good.  He recommended that if you want to build a great business you need to invest a significant portion of your yearly compensation back into in your business.  That advice went over my head as a rookie advisor, but after 40 years Bill is still in business and I’m writing blogs….