“The role that limited choice plays at broker dealers was also a staggering for me,” he added. “At a broker dealer you are captive to their platform, their investments, their lending, their product creation and your clients’ assets are custodied there. So as an example, your clients’ cash goes into their money market, and it may be playing 25 basis points at a broker dealer, when elsewhere they can earn 2%. Now we are able to find the very best, profitable and cost-effective options for our clients,” Pagnato said. “But before, like so many brokers, we didn’t know what we didn’t know.”
Jamie McLaughlin, a veteran industry consultant, said that in two of the four large broker-dealers he works with “think they’re fiduciaries. They believe they’re conducting business in the best interest of clients and are fully transparent,” said McLaughlin, who added that some times brokers don’t understand how conflicted their selling agreements are or realize their compensation is embedded in sometimes supporting the house, particularly on the bond side where they’re selling BD syndicated products, he added.
Advice will remain profitable, even as products and distribution lose their pricing power in the next market cycle—a fact not lost on broker-dealers who have actively lobbied for the registration carveout SEC proposal would give them, McLaughlin said.