More specifically, conflicted platforms do the following things:

  • They offer payout advantage for proprietary advisory platforms over non-proprietary platforms (say, a 100% payout for something from the firm’s platform over 90% for a product from an outside platform).
  • They limit the selection of competing advisory platforms.
  • They promote proprietary platforms on their company website and at conferences while limiting the exposure from competing platforms.
  • They put pressure on advisors to move client assets to proprietary platforms.
  • They penalize advisors and clients for holding advisory assets away at turnkey asset managers or outside custodians like Schwab or Fidelity IWS. One way they do this is by imposing platform fees, usually paid by the advisor, costing 5 to 10 basis points on assets. They do this because they otherwise miss out on embedded profit they receive when those assets are in a brokerage account. The platform fee helps them make up the profit difference. Remember, a substantial percentage of broker-dealer RIAs won’t allow advisors to custody advisory assets outside of their clearing firms. For a fiduciary, the client advantages to using Fidelity IWS or Schwab for advisory assets are numerous, but the most obvious one is that the clients don’t pay ticket charges on stocks and ETFs. (Most B-D RIAs require clients to pay ticket charges, but not all.)

Transition Forgivable Notes
Last year, our recruiting firm was approached by a broker-dealer owned by an insurance company. The B-D boasted about its generous transition packages to advisors who joined, and said it paid more forgivable note money than most competitors. But there is no free lunch. We did some digging and found the firm charged an advisory administration fee that tiered around 18 to 28 basis points, a very high cost for clients to incur when much better values were available.

We did a formalized cost analysis comparing a fiduciary-focused option (in other words, one with a low administrative fee) to options that paid substantial up-front note money—along with a high administrative fee.

In most cases, it was the clients who paid for the advisors’ up-front note money, more than three times over during a seven-year note period.

For our analysis, we took a real-world advisor with $90 million in assets: $40 million of that was in stocks and ETFs; $30 million was held with a third-party manager; $20 million was in mutual funds and variable annuities. The advisor had $900,000 in gross dealer concessions and 250 brokerage accounts. To transition to his new firm, the advisor was given a $315,000 forgivable note payable over seven years. This firm charged 30 basis points in administrative all-inclusive wrap fees (the assets were managed at Pershing). There was also a 15 basis point markup on third-party money manager fees.

The advisor’s clients ended up paying $1.155 million in advisory administrative fees over seven years to service that $315,000 note.

We compared what would have happened to him in a hypothetical situation at a fiduciary-focused broker-dealer RIA. This time, there was no forgivable note. There was a flat $50 annual service charge per client account. He got 2% to 5% in trailing GDC. The advisor’s transition expenses were covered, and there was another $30,000 paid in incidentals.

Those clients would have paid only $87,500 in admin fees over the same seven years.

This particular analysis compared two different broker-dealer RIAs, but an independent RIA can offer even greater cost savings to clients. Forgivable note money makes it clear whether a CFP is putting his clients’ interests above his own—or if he’s taking a large amount of note money at his clients’ expense.

Advisory Administration Fees
Broker-dealers warn advisors about future fee compression, yet no one seems to be discussing the elephant in the room, which is broker-dealer RIA expense compression. Many broker-dealer RIAs charge 10 to 15 basis points in administration fees on advisor-directed advisory assets for billing and performance reporting. But a growing number of fiduciary focused broker-dealer RIAs and producer groups are charging flat fees of $50 to $75 per account annually, which substantially cuts the clients’ expenses.