Independent RIA firms could lose an important differentiator as the U.S. Department of Labor’s fiduciary rule forces the entire industry to raise standards of conduct, according to custodial-firm leaders speaking Thursday at the spring meeting of the National Association of Personal Financial Advisors in Phoenix. 

“The word ‘fiduciary’ was something that differentiated you in the industry,” said Bernie  Clark, head of Schwab Advisor Services.  “Now everyone will be using that word.”
 
“We were scared that we would get a watered-down standard [and that] advisors would lose a significant differentiator,” said Tom Nally, president of TD Ameritrade Institutional. “To me that’s a very scary thing.”
 
Although custodians think the DOL rule will benefit RIA firms, any future effort by the SEC to harmonize broker-dealer rules with investment adviser regulations via its own fiduciary rule-making could have a negative impact.
 
“There will be a follow-on strategy” from the SEC, Clark said, “which we really have to advocate against, with the potential for Finra becoming the SRO for advisors.”
 
Beyond the regulatory issues in the headlines, Nally warned the crowd that aligning pricing with clients’ perception of value is the biggest challenge advisors have.
 
While most advisors charge based on assets under management, clients put more value on planning services, he said.
 
“Investment management has the lowest value,” Nally said. “It’s like buying the mats and getting the car thrown in for free.”
 
Clark agreed about the need to better define the value of non-investment services, but noted that Schwab’s annual RIA survey showed advisory fees moving up slightly, to about 76 basis points on average. “That is still so much value compared to the traditional models,” he said.
 
The next challenge will be how to incorporate low-priced, low-touch, digital solutions into a full-service practice, Clark said. “How do you bridge a 25- or 30-basis-point experience [at a robo platform] to a 76-basis-point experience?”
 
“We have to think about alternative pricing methods,” Nally said.  “We’re seeing firms … charge on everything [because they’re] giving clients advice on everything.”
 
“Don’t be afraid to drive that point home,” Oros said about the value of holistic financial advice. “We’re also seeing alternative fee arrangements, a flat fee, with a complexity rider on it. … It gets away from the idea that everything is about the investments.”
 
Aside from getting pricing and value aligned, successful advisory firms have to think strategically, the executives said.
 
The most successful advisory firms run their businesses as businesses, they execute on a strategic plan, track important metrics, and have a succession plan in place with younger talent on board.
 
Mid-sized firms of $250 million to $1 billion in assets are challenged the most, Oros said, because they have the higher costs and management demands similar to a larger firm, but aren’t big enough to achieve significant scale.
 
“There are strategic decisions that have to be made” by mid-sized firms, Oros said.
 
The biggest outside threats to RIA firms come from hackers and fraud.
 
“I’m shocked at how good the fraudsters are,” Oros said. “I’m surprised at how many of them we see.”
 
“We see dozens of [fraud] attempts every single day, of clients of advisors who have had their email compromised,” Nally said.
 
The custodial leaders told NAPFA members to be prepared for more regulatory scrutiny over cyber-security issues.