RIA vs. Wirehouse – The Fiduciary standard, and why one embraces it while the other (still) fights against it.
Much has been written recently about the fiduciary standard, which requires that advisors place the interests of their clients above their own. Boiling down the hundreds of articles, op-ed pieces, official statements and professional debates, what the issue really comes down to is fairness. And culture. And billions of dollars in unfair fees and commissions coming out of investors’ pockets.
While many smaller, independent firms, particularly Registered Investment Advisors (RIAs), have been successfully meeting this highest of standards for decades, the big four US wirehouses, Bank of America’s Merrill Lynch, Morgan Stanley Smith Barney, UBS and Wells Fargo have all fought tirelessly to prevent being held to it. Instead, they’ve been held to the so-called “suitability standard.” This arrangement allows them to sell their services and products to their clients, regardless of who benefits the most from the transaction, as long as the product or service is deemed suitable at the time.
It is widely reported, and has been stated by government regulators, that the suitability standard has resulted in billions of dollars a year in unfair billing, inappropriate investments and many cases of conflict-of-interest. We believe the fact that the wirehouses are actively engaged in protecting this unfair status-quo reveals a weakness in their business, at least with respect the services they offer certain clients – a culture that does not always promote the best interests of all clients.
Perhaps because of this, wirehouses have been losing market share at a rate of 1%-2% a year. Industry analysts are forecasting that the wirehouses will shed 25,000 jobs in the next few years alone, and that up to a quarter of their advisors will seek opportunities elsewhere. Statements published in a 2015 Cerulli and Associates report indicate that a major reason for the flight of advisors is dissatisfaction with the employee model, as well as a desire to avoid conflict-of-interest issues when dealing with clients:
“[A] recruiter shared that ‘[those] folks who truly go RIA are tired of big firms, tired of employee model, [and] want a non-conflicted type of environment.’ He added that those who do move are rarely unhappy with their decision.”
Because RIAs are generally for giving advice, not for selling products and services, they are motivated to give good advice. To do otherwise would soon result in a dissatisfied client, and the loss of revenue. For this reason, many RIAs choose to be compensated based on the value of AUM. The arrangement is such that the better the client’s investments perform, the more the advisor makes. In this respect, both interests are in alignment. Perhaps it is this natural alignment, made possible by being held to a higher standard – and by a natural desire to earn a fair reward for providing a valuable service -, which accounts for the rise of the RIA as the fastest growing segment of the industry today.