Of course, the area of product development by wealth managers is by no means black and white. Many wealth managers directly invest their clients’ assets as part of their service and do a great job of it. They have a duty to find ways to improve client outcomes and the readily available investment options are often less than ideal for solving certain client problems.
Moreover, creating products to address specific client problems can be very expensive for wealth managers. And it is not unreasonable to pass through the incremental costs to the clients who need these products.
Unfortunately, some firms have gone far beyond this. They are now fabricating extremely complicated quantitative derivatives-based products. Even worse these products make them a boatload more money than if they just collect their traditional advisory fees.
So why are they doing this? Certainly, a small minority of these firms have rapacious owners. For many years these individuals have squeezed every dollar they could out of their firms and cramming house product down client throats is just another way of maximizing profitability while still pretending to provide independent advice.
However, it appears most of these owners are instead driven by a combination of frustration, boredom and hubris. Many have big firms and the law of large numbers has finally caught up with them. While they continue to add clients, their relative growth rates are understandably shrinking, frustrating the daylights out of their owners. Getting into the product manufacturing business appears to be a way to grow much faster rather than having to gradually build a much bigger firm.
Equally important, more than a few of their owners are bored. They have been operating wealth managers for so long that, for them, the idea of slowly growing by adding one client at a time over the next decade is about as attractive as having a colonoscopy without an anesthetic. And creating and managing very sophisticated in-house products is so much more interesting.
Obviously, it is kind of bizarre (if not delusional) that so many wealth managers believe that they actually that they can do a much better job of investing client funds in extremely complicated strategies involving derivatives than most outside money managers. But then again, never let it be said that the owners of wealth managers lack self-confidence.
Regardless, it is clear that these firms are slipping out of the gray and into the black. In effect, they are evolving from wealth managers into investment managers that use their financial advisors to distribute their products. And how they are different than firms like Goldman Sachs or JP Morgan or even the wirehouses is beyond me. More strikingly, perhaps the traditional providers of advice are not alone in pretending to be independent.
Mark Hurley is founder and CEO of Fiduciary Network.