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….

Comments

  1. Jeff SpearsAugust 17, 2017 at 6:25 AM

    Other coverage of The Standard of Care

    http://financialadvisoriq.com/c/1711103/201513/must_address_duty_care_fiduciary_rule?referrer_module=emailReminder&module_order=3&login=1&code=WVdWd2MzUmxhVzVBYzJGdVkzUjFZWEo1ZDNNdVkyOXRMQ0EwTXprME9EUXpMQ0F4T0RnMk9ETTROVFk0#

    ReplyDelete
  2. Jeff SpearsAugust 31, 2018 at 7:03 AM

    I should have added custodian services to my Tools section. RIABiz did that for me in a recent article that is a good read. https://riabiz.com/a/2018/8/29/twitter-war-pits-josh-downtown-brown-against-michael-kitces-over-hush-hush-issue-do-ria-custodians-face-merrill-lynch-style-conflicts-over-advisor-custody-fees

    ReplyDelete

Post a Comment

Popular posts from this blog

Inorganic

Image
Our industry has always looked down on Wall Street’s recruiting checks.  Last week there were numerous announcements that independent firms were offering advisors money to purchase their practice.  The term for these transactions is inorganic growth.  This week we will look at why these transactions are the new rage and examine if they are better than the old Wall Street checks. Wempy Popeye and financial advisors fall for the “I’ll gladly pay pay you tomorrow for a Hamburger today” pitch.  Unfortunately Popeye and and most financial advisors provide their hamburger but seldomly get paid what the firms and Wimpy promise .  Why?  The advisors need the cash and Popeye is gullible.  On Wall Street the deals adjusted when the advisors changed firms looking for a new deal every five to eight years.  The recent Luminous departure shows that the advisory contracts need to be adjusted.  The new contracts are written by experienced firms and lawyers to prevent serial departures. 
Read more

Stop Judging

Image
I have known that I have MS for over four years.  My doctors believe I have had MS for over twenty years.  Initially, When I received this diagnosis  I was very opinionated when I saw disable people. I assumed the worst. As a currently disabled person I can educate and warn you regarding things you shouldn’t say to me or disabled people..  This blog will educate on my disability. The places it manifests itself and how you can react and support me and other disabled people. The three items are: 1.) Needing a walker 2.) Government disability  3.) Falling MS causes me to loose my balance and fall.  The walker prevents this reality  I look at walkers as being as sign of old age,  I was incorrect and a good walker is an aid!  With a walker I fall less often.  I might look old, but I am OLD! Our government provides support to the millions of MS patients in the US.  Support is through Social Security and must be approved.  I am approved. The service can be cancelled if i get a full time job.
Read more

Summer Changes

Image
  Our summer is almost over,  What did we learn during all of our downtime?   I will summarize all of my observations and share my plans on what I will implement when I return to my office.  I discovered/ learned 6 items on my beech lounging, morning walks and social media tolling that I’ll share.  Hope they help.  My first and easiest change was my eye glasses.  Many of my friend asked it was trying to look like Elton.  I wasn’t…. The next three changes were business related. The changes will be voted on by my colleagues.  Steve Jobs of solving client problems the client didn’t know they had will be our guiding light.  I tried to change a few items. The obvious item what I changed was my eye  glasses.  The other areas were business related and I wanted wanted to be in control of my changes. The first change s our business’s model.  It has taken years to realize that I can’t beat thr market index.  Growing up on Wall Street this change was difficult.   Alpha is difficult to achieve an
Read more