According to an article in today's Wall Street Journal, consumers are voting with their money, and the vote is overwhelmingly in favor of the independent, fee-only advisory model.
There is a bit of a backstory to this. Going back several decades, almost all financial "advice" was driven by insurance brokers and investment firms selling products. Brokers earned trading commissions. Insurance agents pushed whole life policies as investments. Others sold mutual funds to consumers. There really wasn't such a thing as financial planning as a profession. Gradually, however, people started to demand more holistic advice, and the financial planning profession started to grow. And as financial planning became more and more accepted (and demanded) by consumers, the profession itself began to evolve. Many financial planners saw that, to be a true profession, advisors needed to work toward the elimination of conflicts of interest. A growing number of advisors (including Financial Pathways) adopted a "fee only" model of advice. The movement was helped along as financial publications and celebrity financial experts exhorted people to look for fee only advisors.
In the latest boost for the fee only model, the Labor Department is in the process of implementing rules that require that financial firms providing advice to employees regarding assets in retirement plans must act as fiduciaries. This means that the advice offered must put the clients best interests first. While this does not necessarily mandate a fee based compensation model - it is hard to envision how a commission sales oriented advisory model could reliably pass a fiduciary test.
Insurance firms are crying foul, as their entire business model is based on commission sales. In contrast, brokerage firms like Morgan Stanley, Wells Fargo, and Merrily Lynch are going with the flow. As the WSJ article points out, these firms are increasingly abandoning commission sales in favor of fee based compensation, where they are charging clients a percentage of assets under management.
This is vindication of sorts for Financial Pathways. We voted years ago to abandon the world of commission sales driven advice, in favor of providing advice only for fees. To us, it made sense. We work very hard on the financial plans we create. It is important to us that our clients buy in to our recommendations. Not because we expect to make a killing on the advice, but that we actually believe in it! With the fee only model, we hope that clients will take our planning recommendations seriously, and see them for what they are - our very best advice based solely on what we believe will help them achieve their goals. If we are selling a product based on the advice we give, then it is only expected that clients will question whether that advice is really in their best interest. Even if we had the most noble of intentions, clients will be suspect of our advice.
As more firms, especially powerhouse giants like Merrily Lynch, enter our fee only space, one might wonder if small independent firms like Financial Pathways are worried about competition. But another point the WSJ article makes is that consumers are increasingly choosing independent fee only advisory firms, rather than the traditional brokerage giants. In 2010, the article notes that independent advisors controlled 37% of clients assets under management, while large brokerage firms controlled 63%. In 2016, the tide had shifted in favor of independents, who have increased their share of the asset management business to 46% while Wall Street has fallen to 54%.
While the article does not offer a rationale for the consumer preference, we think we understand. When it comes to financial advice, consumers want to work with someone they feel they can trust. It is easier for smaller independents to build that trust, since clients are often dealing directly with the firms ownership. And we know that, no matter what they preach, the ownership of public firms like Merrily Lynch will always put corporate profits at the top of their agenda! Independent firms are more likely to be providing services beyond investment management in return for the fees they charge - especially ongoing personal financial planning and tax advice. These services are best delivered with the personal touch that large firms with huge client bases and a focus on bottom line profit can't easily replicate.
So while we are pleased that more firms are embracing a fiduciary standard, and making an effort to put clients needs first, we don't really expect the leopard to change his spots. We believe clients are still best served by independent fee only advisors who have built their very culture around putting clients needs first.