Financial “advice” has been available in our country since—and even before—its capitalistic origins, though it looked quite different in the more distant past. The content, form, delivery, consumers and providers of financial advice have evolved—dramatically—since “founding father” Benjamin Franklin advised that “a penny saved is two pence clear” and later, “a penny saved is a penny got.” That evolution, like all forms of evolution, has been stimulated by changes in our surroundings, including demographic, economic, and societal changes as well as changes to market structures, the regulatory framework, the tax code, and, more recently, technological capabilities such as the proliferation of the Internet and the advance of the Information Age. Now, financial advice has entered a new phase of evolution, fueled primarily by competitive forces, regulatory developments, changing consumer preferences, enhanced connectivity, shifting values, and new capital structures and sources. The age of interdependent financial advice is upon us.

From Where Are We Evolving?
Before we can explore the current state of our evolutionary progress, we must first start with a brief survey of where we have been most recently. In the area of financial advice, the most recent evolutionary stage from which we are evolving is the age of independent financial advice.

This stage of independent advice was largely a counter-reaction to the lack of choice and satisfaction at least some people experienced when traditional “broker-dealers” almost fully controlled the market for financial advice. Until the proliferation of what we now call “independent advisors,” people frequently got what they considered to be financial advice from typically larger institutions whose employees were, and still are, salespeople who sold securities and who, under the law, could provide actual financial advice only if it was “solely incidental” to sales activity.

Until recently, these brokers were subject to the “suitability standard” when they engaged in sales activity, requiring that securities sold to customers be suitable for them given the circumstances. Importantly, brokers generally were not required to place the interests of customers ahead of their own. Making matters even more concerning, while brokers are ultimately regulated by the SEC and the states, they are primarily regulated by the Financial Industry Regulatory Authority (“Finra”), a self-regulatory organization (“SRO”) comprised primarily of other brokers.

In contrast, independent advisors as we now know them are advisors, not salespeople, though some do engage in sales-related activity. Most importantly, they are subject to the “fiduciary standard,” which, unlike the suitability standard, requires them to place the interests of clients ahead of their own and to mitigate their conflicts of interest. And they are directly regulated by the SEC and the states, not an SRO.

Independent advisors have been in existence for many years but had not received much regulatory attention early on, eventually prompting a legislative initiative to regulate them in the form of the Investment Advisers Act of 1940. Yet, it wasn’t until the late 1970s that they truly began to proliferate. According to a report published by the Investment Adviser Association in 2023, there were over 15,100 SEC-registered independent advisory firms in 2022, employing nearly a million people who served almost 62 million clients and managed over $114 trillion.

Given the above, one could reasonably have predicted that the broker model would ultimately fail as consumers seeking financial advice sought out advisors with their best interests in mind and shunned salespeople who were not required to place their interests first; but that has not happened. There are several reasons for this resilience, all of which will be relevant in discussing the next age—of interdependence.

First, after having been told by Congress to evaluate the possibility of imposing the fiduciary standard on brokers, the SEC declined to do so and instead chose to impose a new standard on brokers that is weaker than the fiduciary standard but gives consumers the confusing impression that their best interests are always paramount. Effective in 2020, the SEC adopted “Regulation Best Interest,” or “Reg BI,” under which brokers must now act in a retail customer’s best interests when making recommendations regarding securities. Yet, this standard is less demanding than the fiduciary standard, especially because it applies only at the time a recommendation is made and not continuously. In reality, however, Reg BI offers at least some cover for brokers because they can now tell customers that they, too, must place their clients’ interests first, though that is not always the case.

Second, the brokers continue to have considerable resources at their disposal and are often still much larger than their independent competitors. In turn, they can spend more on marketing and advocacy, building strong brands and diverting attention away from the shortcomings of their business model. In contrast, according to the IAA, 91.7% of all SEC-registered investment advisors had fewer than 100 people, and the vast majority managed under $1B in assets. They are simply too small to muster the necessary resources to pursue their own awareness campaigns to educate consumers about the differences between brokers and advisors.

Third, and to their credit, the brokers have further taken advantage of their scale to provide additional services that smaller investment advisors are not always able to provide. These additional services include cash-management, lending, insurance, family-governance, and trustee services, along with broad access to private investment strategies—all things that customers increasingly want, and preferably from a single, convenient source.

First « 1 2 » Next