Not so long ago, most investors had no idea if their financial advisor was obligated to put the client’s interests first or how they got paid.   

Times changed fast. Today, advisors all over the country tell us about inquiries they get from both current and prospective clients who want to make sure the person they entrust with their investments has a fiduciary obligation. Advisors say the calls and emails come in with striking regularity, and everyone wants to know the same things: Do you really put my interests first? Can my family and I trust you? Some clients even use the word ‘fiduciary’—a word that barely registered for most mainstream investors until recently.

Investors’ willingness to dive into topics like fiduciary duty is an indication of a broader cultural shift—one that puts trustworthiness front and center. A combination of factors has driven the change, including lingering distrust of the financial industry, choppy markets, increased transparency and the now-defunct Department of Labor fiduciary rule.

As the climate around investing and financial advice has shifted, the upshot is that the RIA model has enjoyed numerous years of steady growth—in fact, it’s been the fastest growing corner of the financial advice market for years. RIAs, with their emphasis on objectivity, independence and clients’ interests, are well placed to meet investors’ evolving needs and expectations, and this model is poised to keep growing and keep gaining share on Wall Street brokers.

Here are just a few reasons why.

Markets are volatile

For investors, the last year has been tumultuous. Up, down, back up again. The chop in the markets, in some cases, echo a stream of mixed signals coming from the broader economy. Indicators such as GDP and wage growth seem to indicate economic expansion, but those positive signs have been followed by data points such as halting consumer confidence and lower mortgage activity.

On top of all that, we layered a volatile political environment. Last year the specter of a trade war loomed for months, triggering global market uncertainty. As those fears subsided somewhat, we started 2019 with a protracted government shutdown.

None of this is comforting for markets—or investors. When we’re in turbulent times, investors’ need for transparency, information, confidence and guidance is heightened.

I’ve always said that at the end of the day, we’re a people business. Never is that more true than in uncertain times. It’s easy for investors to overlook advisor fees and opaque decision-making when portfolios are marching higher. When markets grow shaky, investors ask questions. When a client calls an RIA during a market downturn, she knows the advice that comes back puts her interests first. That’s a critical differentiator.

Because of that trust, these are the times when fiduciary advisors come out on top. In fact, in our 2019 TD Ameritrade Institutional Sentiment Survey, 33 percent of RIAs reported that in the previous year, the majority of their new clients came from commissioned brokers—more than from any other source.1

RIA pricing can be flexible

The move toward transparency in the investment advising business has been swift, but not without stress, on both advisors and their clients.

In recent years, more and more investors have started asking what their advisors are charging them, and what exactly they’re getting out of it. This scrutiny increased following the 2008 global financial crisis. Then, the rise of roboinvesting intensified the trend, as upstarts in that space have gone to great lengths to tout their transparent, razor thin pricing.

Investors are increasingly frustrated by what they perceive as an unwillingness in the financial industry to reveal what they charge and how their fees are baked in to their offerings. In one very public example, a Wall Street Journal reporter in 2017 underwent a quest to figure out how much she was paying her investment advisor in fees attached to her retirement accounts.2

Here’s what she said about the experience: “After a series of phone calls that elicited the kind of confusion and frustration I have rarely experienced outside of interactions with cable-company customer-service representatives, I think I have an idea. Barely.”

This trend toward pricing transparency has real ramifications for all advisors.

Recently, we’ve heard more from RIAs, many of whom have used the same AUM model for years, if not decades, about their mounting pricing pressures. Investment management fees have been falling steadily for years and are increasingly commoditized. In a recent TD Ameritrade Institutional survey, one in six firm owners cited pricing pressures among the top factors that will most challenge their firm’s future growth.1

The reality is that as the world has changed, advisory firm price levels, as well as pricing structures, have changed only minimally. While there are many arguments as to why advisory firms continue to bundle the majority of services under a total AUM fee, the most predominant is that it’s simple. It’s simple for clients to understand and it’s simple for advisors to bill.

Simplicity is good. But the downside in bundling all services into one fee is that clients may not fully comprehend all that a firm does on their behalf and the true value of all the behind-the-scenes work. RIAs deliver a multitude of different services, and yet they are only billing on investment management—arguably the most highly commoditized component.

The good news about the RIA model is that the pricing is flexible. We know from talking to RIAs that those who have begun to explore alternate models—whether it’s per hour, per service or packaged—are reaping clear benefits. The median fee for a financial plan among firms that charge a separate fee is $2,500, for example.2

Rather than be knocked by pricing pressures, RIAs have the opportunity to evolve their model—they aren’t locked into a particular structure or set of fees.

For those who are willing to take the leap, unbundling pricing may even offer access to the all-important younger clients who don’t yet qualify on an asset level but have high income and great growth potential. Hourly fees and flat fees are options that offer more flexibility for increasingly price-sensitive clients. RIAs, in charge of their business models, have an opportunity to get ahead of trends and make the pricing decisions that are best for their clientele, and their business.

Investors still don’t trust financial institutions

Let’s talk about the bad news: After making steady but limping gains following the 2008 financial crisis, financial institutions still have a long way to go when it comes to regaining consumers’ trust.

The 2019 Edelman Trust Barometer, which studies how much people around the world trust various institutions, still shows the financial services industry ranking last.3 That’s right—those who are most informed, which Edelman defines as those with a college education, income in the top 25 percent, and significant consumption of media and business news, reported trusting financial companies less than they trust their cable company… health insurance providers… even chemical companies. I don’t know about you, but I’ve never heard anyone get excited over a new chemical plant opening in their neighborhood.

This is a problem for many reasons, but the biggest being that those highly informed consumers are financial advisors’ target clients.

Some in our industry like to blame technology for our problems—shiny new fintech companies that offer a superior signup experience and app-based interactions. These new players allow investors to keep staring at their smartphones rather than call in and risk waiting on hold. Plus many are just plain flashier.

But that attitude misses the point. The growth of startup investment companies is a symptom, rather than a cause of the troubles some in the financial advising business have experienced. Much of the reason fintech firms have made gains with consumers is because they have, to some extent, been able to fill the bubbling trust vacuum that plagues traditional financial institutions. When people don’t trust existing institutions, they are more inclined to flock to new ones.

But here’s hope: Edelman research also found that when it comes to finding financial information and advice, credentialed investment advisors came out on top, with 42 percent of respondents saying that’s who they most trust.4

That’s where RIAs continue to enjoy an advantage.

The RIA credential is among the most respected in the industry, offering a clear competitive advantage. For a long time, we’ve found that many investors turn to RIAs after a negative experience with someone who sold them some kind of high-fee product that may not have fit their needs. That’s starting to change as more and more, new and seasoned investors understand and demand that fiduciary relationship.

Plus, RIAs enjoy the independence that allows them to build their advising businesses with the customer-winning combination of the latest tech and personal connections. The model is built to engender collaboration, trust and transparency. It’s ideally suited to today’s investor concerns.

Broker protocol is falling out of favor

Industry dynamics have changed, and while most wirehouses are still part of the broker protocol, that may not be the case for long. Increasingly, firms are abandoning the protocol, potentially making it harder for their advisors to leave.

When the first couple of firms left the protocol, many industry watchers were shocked they’d make such a broker-hostile maneuver. At this point, it’s no longer a surprise. Brokerages are no longer in the business of making it easier for their advisors to leave.

For advisors who are thinking of making the move toward independence and are employed by wirehouses that still offer broker protocol protections, there’s no time like the present. Just look to what’s happened at some wirehouses that have dumped the protocol—they quickly implemented new, more onerous terms for brokers who are considering leaving.

While leaving the protocol may have a chilling effect on departures, it can’t stop those who are truly motivated. Some firms have found that changing policies is still no guarantee that advisors won’t depart. In some places, brokers have continued to leave even amid potentially tougher and more litigious circumstances.5

When brokers do break away, RIA firms in many cases have been the beneficiaries, growing their ranks in no small part from former wirehouse advisors who are looking for greater independence and advisor-friendly terms. We don’t see that changing given all of the factors that continue to boost RIA growth.

These days, the investment business is about a whole lot more than investing. In a trust-challenged world, the top investment firms tend to be the ones that are most successful at articulating their value beyond investment management.

That is the RIA’s specialty. Their value comes from far more than picking asset classes. It comes from the unique service they deliver, a service that’s unabashedly rooted in their clients’ interests.

In recent years, RIA firms have become the envy of the financial advice sector, pulling in double-digit growth each year, much of it coming from full-commission brokerages.6 That trendline isn’t going to shift anytime soon.

In a volatile world, the client-first approach is simply the one that resonates with investors. People drive this business. RIAs never forget that.

 

1 “The 2018 FA Insight Study of Advisory Firms: Growth by Design,” TD Ameritrade Institutional, 2018. (Found here: http://fainsight.com/#!research-studies)
2 “What’s My Investing Fee? A Frustrating Quest,” The Wall Street Journal, May 17, 2017. (Found here: https://www.wsj.com/articles/whats-my-investing-fee-a-frustrating-quest-1494209820)
3 “2019 Edelman Trust Barometer Global Report, January 20, 2019. (Found here: https://edl.mn/2Bzk3ij)
42018 Trust in Financial Services, Edelman, March 29, 2018. (Found here: https://www.edelman.com/research/trust-in-financial-services-2018)
5 “UBS, after dumping the broker protocol, continues to see brokers come and go,” InvestmentNews, March 15, 2018. (Found here: https://www.investmentnews.com/article/20180315/FREE/180319954/ubs-after-dumping-the-broker-protocol-continues-to-see-brokers-come)
6 “TD Ameritrade Institutional2019 RIA Sentiment Survey,” TD Ameritrade, Jan. 8, 2019. (Found here: https://s1.q4cdn.com/959385532/files/doc_downloads/research/2019/2019-RIA-Sentiment-Survey.pdf)
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