In Jon Henschen's article "How to Irritate Advisors: Tell Them Where to Invest" he outlines some of the main reasons that advisors leave wirehouses and captive insurance brokers and join the independent broker-dealer or RIA channels, mainly because they want to escape pressure from management to put their clients into proprietary products or platforms.
MINNEAPOLIS, July 13, 2022 /PRNewswire-PRWeb/ -- Featured July 1, 2022 on FinancialAdvisor.com, independent broker dealer recruiter Jon Henschen's "How to Irritate Advisors: Tell Them Where to Invest" he shows how one of the main reasons advisors leave wirehouses and captive insurance brokers and join the independent broker-dealer or RIA channels is that they want to escape pressure from management to put their clients into proprietary products or platforms. But broker-dealers are serving their own profit motives, too, and an advisor who doesn't look into those motives can end up going from the frying pan into the fire. He shows how small and midsize firms generally don't nudge advisors to move client assets to their profit centers, but shows how the pressure gets turned up at larger firms—those with more than 2,000 advisors.
Henschen shows the three tactics broker-dealers use to steer assets away from accounts that would otherwise be better for the clients:
1. When they charge advisors, say, $60 per mutual fund for holding clients' assets directly with the fund vendor (an arrangement that saves the clients numerous charges they would otherwise pay when the fund is held in a B-D's more profitable brokerage account).
2. When they charge the advisor a platform or access fee of 5 to 10 basis points for holding advisory assets at Schwab or Fidelity IWS. The broker-dealer instead wants those assets parked at its clearing firm, where numerous profit centers are embedded into the cost structure.
3. When broker-dealers pressure advisors to convert mutual fund assets into advisory assets.
Of the worst offenders, Henschen shows how firms owned by leveraged private equity can be notorious for using financial engineering to boost profits. The intention of such firms is usually to pump and dump or go public within five years. To pump up revenue for a sale, they must direct advisors to move client assets into their more substantial profit centers. Substantial market corrections can easily cause this type of ownership structure to unravel as the junk bond market implodes and cash flows decline.
Publicly traded firms can have their loyalties split. They want to please shareholders on one side of the table and advisors on the other. It's a balancing act. Some firms drip charges onto their advisors and clients slowly over time so they're less noticeable, but the charges still favor shareholders, not the advisors and clients.
Both of these ownership structures put pressures on advisors to invest in proprietary advisory platforms and custody all their assets in brokerage accounts. These types of owners also have big reasons to take away advisors' choices to do dual clearing of advisory assets (and remove Schwab or Fidelity as choices) or to otherwise frequently tack on platform and access fees (of 5 to 10 basis points on assets).
Over the last few years, broker-dealers have increasingly expressed frustration with advisors putting a large percentage of their book in mutual funds and put pressure on them to convert those assets into a fee-based platform. Henschen comments that in the past, "I've recommended that advisors looking for new homes consider fiduciary-focused broker-dealers when they are doing a large percentage of their business with advisory assets. But I've discovered that these fiduciary-focused companies are also a safe haven even for those advisors with mostly mutual fund business. These firms want advisors to do what is in the client's best interest whether it's through advisory or package products. They are not married to any one way to invest and realize both styles of investing can be appropriate and that it's a matter of personal preference."
Broker-dealers have a choice: continue to do what's in their best profit interest or do what's in the client's best interest. At many firms, the pendulum has swung in favor of profit motives. This has caused an uptick of advisors either getting their own RIA or joining RIAs so they can act in a way more favorable to the clients. Fiduciary-focused B-Ds will continue to attract advisors that want more choices and less expense for their clients.
Jon Henschen is founder of http://www.henschenassoc.com, an independent recruiting firm focused on independent broker dealers and RIAs based in Marine on St. Croix, MN. With more than 30 years of industry experience, Jon is a staunch advocate for independent financial advisors, and is widely sought after by both advisors, broker dealers and RIAs for his expertise and insight on industry topics. He is frequently published and quoted in a variety of industry sources, including Wealth Management, ThinkAdvisor, Investment Advisor Magazine, Wealth Management Magazine, Financial Advisor IQ, Financial Advisor Magazine, Investment News and others
Media Contact
Cristi Barkley, Henschen & Associates, 7578464107, [email protected]
SOURCE Henschen & Associates
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