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A Day Late and a Dollar Short

If present trends continue, the age of the dinosaur may repeat itself.

David J. Drucker, 09/20/2007

As one of the several hundred or so NAPFA members who struck out on his own (i.e., without institutional backing) to start a financial planning practice three decades ago, I've watched with great interest the rise of the independent planner and the decline of the broker-as-would-be-advisor.

The early 1980s were difficult times for me and my partner. Fueled by a business school education and a conviction that professional planning for upper-middle-income families had little to do with product sales, we forged a business out of nothing. The early years were lean, but we learned the business in a way a Merrill Lynch intern never would.

Finding clients was easy once we helped them understand how fee-laden were the "solutions" offered to them by the insurance and investment behemoths that dotted the financial landscape. Without the scrutiny of an army of lawyers or the overhead of multiple layers of management, we eventually made a good living and created a service the institutions tried to copy. That's a collective "we," because our fee-only brethren, starting to grow in numbers, were duplicating our experience all around the country.

Today, it's heartening to me to see the trends I'm seeing because with the fall of the full-service broker-as-would-be-planner comes the forward march of our industry's much-needed professionalism. Let's review the stats behind this trend, courtesy of Tiburon Strategic Advisors and its managing principal, Chip Roame:

  • There are now more than 110,000 independent advisors (82,000 independent reps and 30,000 partners at fee-only financial advisory firms)--well more than the number of wirehouse brokers (92,000).
  • Independent advisors, though, control just one third of the assets of full-service brokers ($2.1 trillion versus $6.2 trillion), including $1.1 trillion controlled by fee-only financial advisors and $1.0 trillion controlled by independent reps.
  • Yet, in terms of client assets, fee-only financial advisors (18%) and independent reps (14%) are far outgrowing the other channels: full-service brokers (11%), discount brokers (9%), banks (3%), and insurance agents (2%).
  • Although both are referred to as independent advisors, the independent rep and fee-only financial advisor markets are quite different. (Independent reps average $12 million in assets under management while fee-only financial advisors average $56 million; independent reps invest 15% of client assets in fee-accounts, while fee-only financial advisors invest 85% of client assets in fee accounts; independent reps have an average account size of $142,000, while fee-only financial advisors average $510,000).

Adds Roame, "Independent advisors are outgrowing full-service brokers on a percentage basis. Fidelity is now the largest financial services firm as measured by client assets in accounts. And Schwab should catch Merrill Lynch in 2008 or 2009, moving into second place.

But these are just numbers and, while they tell an interesting story, I believe the real story is being told in the trenches. I recently had the opportunity to be a fly on the wall--albeit one with an active role--in the discussion between a wirehouse "planner" and her prospective client. The latter is a friend of mine who came to me revealing her lifetime savings of about $1 million, saying she was tired of managing her own investments via a large mutual fund family and was thinking about hiring a planner another friend had recommended. I haven't taken a new client in years, but I offer to help my friends make decisions in times like this, so I said I'd look at the planner's proposal if she wanted me to. She jumped at the opportunity because, like most Americans, she doesn't have a clue when it comes to financial services.

The planner proposed to put most of my friend's money in two funds of funds--one for the qualified money and one for the non-qualified. Within each fund were about 20 subfunds spread across an asset-allocation scheme the planner deemed appropriate for my client, given her age--a mix of load and no-load open-end mutual funds. The load funds had expense loads of about 1.5%, and the planner was proposing to charge her own management fee of 1.15% on all of my friend's assets.

I initiated a three-way call between myself, my friend, and the planner. "Are you a broker or a registered investment advisor?" I asked. "I'm dually registered," she replied cordially. I questioned her on the funds of funds. "Let me understand. You would put all of my friend's money in just these two funds of funds, correct?" "Yes," she replied. "We monitor those funds very carefully, replacing the underlying mutual funds whenever they fail to meet performance expectations." "Do you do that analysis or is it done by the home office?" I inquired. "Well, the home office does it," she said.

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