The second test, however, is a bit more complicated. More specifically, financial conflicts come in all kinds of shapes and forms and some are even structural. Moreover, there is also more than a little gray surrounding all of this.
Obviously, if what you get paid for advice is affected by in what you invest a client’s assets it is a somewhat dubious to claim that you are giving non-conflicted advice. This alone disqualifies all “fee-based” firms from claiming to be independent. It is kind of hard to argue when you are getting a massive commission for pushing a client into a product that the remuneration had no affect the advice that you provided.
Most independent brokers are not “independent”
It is likewise a bit disingenuous to claim to be independent if some outside gatekeeper limits the investment choices available to you for implementation. And because of this, it’s unclear to me how most independent brokers can be thought of as “independent”.
More specifically, IBDs provide a wide range of essential services and technology to their registered reps’ businesses and often make payouts as high as 90%. But how can they do this and still make money? Well, the IBDs charge a toll – a really big one – to the money managers on their platform.
Certainly, many of the best money managers – in particular, those that have limited capacity – won’t even consider paying such kickbacks. This, in turn, dramatically limits the choices that the brokers have for client solution implementation.
Compare this with firms that actually are independent. They have no such gatekeepers and, in turn, have used their independence (and the lack of any such tolls) to bludgeon money managers into giving their clients a better deal. Institutional classes of mutual funds are a good example of this and were created solely because the best advisers demanded them.
Even some independent Fee-Only firms aren’t quite “independent”
So what are we left with? Clearly, most Fee-Only wealth managers who largely custody with one or more of the big four (i.e., Fidelity, Schwab, TDAmeritrade and BONY/Pershing) and that have a team of experienced and qualified professional staff who own their firms are independent.
However, even some of these appear to be headed down a slippery slope. More specifically, several firms (including some large ones found on several “Best Wealth Managers” lists) now offer premium-priced, in-house investment products. Although there are many variants of such offerings, the most popular ones appear to be those that purport to protect clients from another 2008-2009 crash while at the same time claiming to retain most of the market’s upside.