If present trends continue, the age of the dinosaur may repeat itself.
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:
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.
"So what, exactly, do you do for the 1.15% my client will be paying you?" I continued. "Will you be doing any financial planning, for example?" "Of course," she replied. "I'll collect her information." "And once you collect her information, will the plan be done by the home office, too?" I asked. "Partly," she answered. "I have my own financial planning software, as well."
"So," I wondered out loud, "how did you know to recommend the funds you've recommended if you haven't yet done the financial plan?" Her answer was something unintelligible. "Would the financial plan include, for example, estate planning?" I queried since, aware of my friend's age and tumultuous family circumstances, that would be one of the first things I'd have addressed were I her planner. "Sure," the broker answered.
I thanked her for her time and waited for my friend to call me after we disconnected the conference call. My friend said this three-way call was the first time the broker had ever said anything to her about financial planning, which didn't surprise me much. When the cart has been put in front of the horse and is empty of anything other than packaged financial products, the "plan" is clearly an illusion.
I've had glimpses into the wirehouse world just like this one all throughout my career--usually in the context of the unhappy prospect seeking to escape from that world and, this most recent time, in the form of a friend just trying to find a trusted advisor. And I don't blame the broker; she has a good reputation in the community and I believe she's doing the best she can given the restrictions she must work under.
And that's why we're seeing the trends we're seeing. How else can the institutional behemoths control the risk and liability to which their thousands of brokers expose them if they don't maintain tight controls on these people? They keep coming back to the only solution they've got: standardize the process, strip it of judgment or influence by the broker, such that no matter how talented he or she may be, every client ends up with a bland, simplified "solution" laden with fees.
Some things just never change in our industry, in spite of all the fancy TV ads, the marketing nod of the hat to the baby boomer generation, and all the other new faces put on old habits. What is changing, however, is that consumers get a little bit smarter every day and so do brokers--the ones who leave the wirehouses to be real professionals.