Since the wealth management industry’s founding, independence – free of all of the constraints and conflicts that are endemic to traditional providers of advice – has been at the core of its very being. It was started by thousands of budding entrepreneurs who went off on their own and hung out a shingle.
But few of them did so because they wanted to make a lot of money. Rather, they recognized that anything but truly independent, non-conflicted advice is, well, useless and they were tired of what they saw happening to unsuspecting consumers. So they instead started their own firms so they could be different.
In recent years, however, the term “independent” has been expropriated by so many different types of advice providers – brokers, agents, you name it – that it is now bastardized beyond recognition. Yes, the same geniuses with more conflicts than the Real Housewives now proclaim that they are “independent” financial advisers.
But it is understandable why they are doing this. The focus groups that they conduct with prospective clients have taught them that they are held in about as high esteem as that of Lois Lerner at a Tea Party convention. So they have reinvented – or at least repackaged – themselves so as to try and blur the difference between what they do and the advice provided by truly independent advisers.
Some independent wealth managers are shedding their independence
Unfortunately, at the very same time this is happening, an unsettling trend has emerged within the industry. More than a few firms appear to be slowly shedding their independence. And should this trend become more widespread, it is unclear to me how the industry’s participants will be that much different – or independent – than brokers at wirehouses or regional B-D's.
Sounds a bit outrageous? Well, what exactly does it means when one says a financial adviser is independent? I think to answer this question you have to start with what financial advisers actually do.
At their core, they are problem diagnosticians and solvers. Clients come to them because they do not even begin to know all of the issues that they should be worried about. A financial adviser “diagnoses” their problems and then develops and implements very personal, customized solutions.
Now consider what adding the term “independent” implies. It suggests that the adviser both (i) has complete freedom to recommend and implement what he or she believes is best for the clients and (ii) has no financial conflicts that could in any way influence the advice provided.
To meet the first test a wealth manager must be controlled by the people who work at the firm and it is solely they who decide what advice the firm provides to its clients and how to implement it. In other words, the people who advise clients are the decisionmakers and are not influenced by any outside parties.