When I first started writing about the Fiduciary Standard of care versus the traditional brokerage industry’s Suitability Standard seven years ago, my view was that the Suitability Standard would eventually be dead. My best guess was that a combination of consumer choice and regulatory pressure would bring about a drastic industry change over to the Fiduciary side. To understand why this is so important to America’s retirement investors, read my post at Fortune, The Most Horrendous Lie on Wall Street.
This week, LPL Financial, America’s fifth largest brokerage, took a giant step toward embracing the inevitable.
“While we continue to advocate for a thoughtful resolution to the fiduciary issue — one that preserves investor choice — LPL recognizes that the DOL rule will have implications for financial advisors and investors,” said LPL President Dan Arnold, in a statement.
“The changes announced today position both LPL and our advisors for growth and increased market share, while offering choice and flexibility to serve a range of investors seeking both ongoing and occasional advice,” Arnold said.
They’re not throwing in the towel on brokerage business, but they’re dropping prices and lowering managed account minimums to get their platform ready. They know the future of the industry is Fiduciary and fee-based, not sales-oriented and transactional. They’re telegraphing to the firm’s over 14,000 advisors and 3400 employees that this is where things are going.
It’s a smart move, regardless of what happens in the battle of the Department of Labor and the securities industry. It’s smart because the clients and potential clients are already voting about how they want to be served with their feet, with their wallets. The reputable advisors are voting too. I have never met a real advisor, at any firm, that didn’t believe they could serve clients under either standard and do a great job. Some of the schlock merchants may have a hard time transitioning, but the real guys and gals are ready, willing and able. Some old dogs who can’t let go of the old tricks may need to retire, but I think the bulk of my peers are ready to move forward.
Between December 2015 and February 2016, LPL Financial’s sprawling network of advisors, brokers and hybrids saw their assets under management drop from $475.6 billion to $459.7 billion. This drop occurred as the average advisor in the industry grew assets over the same time frame. The writing is on the wall.
The switch over to a more fiduciary-friendly business model will not be easy for LPL Financial. The company’s brokerage assets, as of last month, total $279.2 billion, while it’s advisory assets clock in at $180.5 billion. As you can probably guess, the brokerage assets can be more profitable than advisory assets because they include transactional revenue and commissionable product revenue – the bread and butter of the broker/dealer industry. No fiduciary advisor collects commissions from selling variable whole-life policies, private real estate funds, muni bonds with hidden spreads or A- and B-share mutual funds with massive up-front fees.
But longer term, that legacy side of the industry will be under increasingly more pressure – with or without the DOL proposal becoming law. Clients have become increasingly aware of how conflicted brokerage advice is and are more fee-conscious about investment funds than ever.
Advisors have become increasingly disinterested in selling the types of products that can be considered to be conflicted as well. I meet young advisors of the next generation everywhere I go – they have different values than their elders in the industry. They increasingly tie the concept of career success to feeling good about what they’re doing for clients. Motivating them to think about the firm first will only become more difficult, if not outright impossible. Boomer executives and Gen X middle managers are completely flummoxed when dealing with a generation that is willing to forego comp in exchange for purpose.
The brokerage firms have had the choice about whether to shift to a Fiduciary Standard for years now. That choice is being taken away from them by a combination of regulatory change, consumer preference and the power of the internet to unleash statistical truths like a neutron bomb. Fortunately, for the remaining holdouts doing business the old way, all is not lost: Their advisor workforces are up to the challenge and the sacrifice necessary to change with the times. All they need is to be empowered with business models and compensation plans to facilitate the future.
Congratulations to LPL Financial for seeing the potential in moving peremptorily. Who’s next?