In 2009, with the financial crisis having reached a crescendo, it became apparent that the best, most stable and reliable business on Wall Street was wealth management. Wirehouse broker/advisors had worked tirelessly to keep their clients cool and were not the cause of any massive blowups, as both investment banking and trading had been.
And while banking and trading revenues had fallen through the floor while their related liabilities (balance sheet, regulatory, etc) had skyrocketed, the wealth management departments within Citi (Smith Barney), Morgan Stanley, BofA/Merrill and Wells Fargo just kept on ticking.
BofA’s Ken Lewis said he’d had just about all the adventures in investment banking he could stand while extolling the magnificence of his expensive Merrill Lynch acquisition in the next breath. Lehman crumbled but its wealth / asset management unit, Neuberger Berman, was in such great shape that the founders bought it back. Wealth management became sexy because of its dependability while trading and banking became curse words as the subpoenas and lawsuits piled up.
And if wealth management was going to be the new hotness on The Street, then you just knew the wealth managers themselves were about to be paid like rock stars. And this is precisely what happened. Wall Street banks began doling out waffles to their top retail “producers” equivalent to 200% or even 300% of their trailing-12 months’ worth of gross commission and fee production. If you were working at these firms then, you’d have been a fool not to take the deal. Or take the same deal to move your book of business (read: client accounts) to the wirehouse down the street.
The 2009- and 2010-vintage broker comp deals broke every record imaginable and everybody bought a new house. I have four different wirehouse FA friends who signed and then upsized their homes dramatically within the same 12 months.
But the other thing about those deals is that they mostly ranged from 5 to 7 years in length. This means that in 2014 they began rolling off and the advisors became free agents. In the next year there will be a huge tide of advisors who’ve been biding their time while the ’09 deal drew to a close.
Without question, many reps will simply sign another one – either with their existing complex or with another wirehouse that’s been recruiting them (colloquially known as a “prisoner exchange” within the biz).
But there will also undoubtedly be breakaways aplenty filtering into the RIA side of the industry. This raises some interesting questions about the sturdiness of the term “fiduciary” should some old school broker/dealer practices come along with them.
Investment News has a story today about how some RIA custodians are paying “shareholder services fees” to the RIA advisors who custody with them. This could obviously bias an advisor to recommend one fund over another to their end customer, the investor. This is about as old school as it gets. Not only does it represent a potential conflict every time an advisor builds a portfolio for his clients, it also recalls some of the worst practices of the brokerage model – like “shelf space” fees wherein a mutual fund company engages in a payola of sorts to make it onto a brokerage firm’s platform or “recommended list.”
I have no idea how widespread the practice is at RIA custodian firms because my firm’s sole custodian, TD Ameritrade Institutional, does not engage in the practice. Here’s what TD Institutional’s head Tom Nally had to say about the phenomenon:
“We think this is one of the most egregious [conflicts of interest] we’ve seen in recent years, and it seems to be more widely practiced…To me, it sounds like a commission, and clients approach the adviser operating under the banner of fiduciary expecting those biases to not exist.”
The insinuation is that old habits die hard and some firms have these arrangements in place because their advisors were accustomed to earning trailer fees before they came over from the Old Country.
To be clear, the brokerage custodians and RIAs who do engage in this do have to disclose it. But this is the sort of Buyer Beware disclosure that is often unheeded amid 30 additional pages of legalese. Also, in fairness, just because a bias or conflict could potentially happen, that doesn’t mean it will happen. As I have repeatedly said over the years, I do not believe that the overwhelming majority of advisors – be they wirehouse, hybrid, independent or RIA – have gotten into this business because they want to work against their clients.
Now that the practice is becoming more visible in the press, we’ll see what the industry’s response will be. In the meantime, I am proud of my firm’s custodian, TD Ameritrade Institutional, for avoiding the whole thing altogether and not passing on these payments from fund companies to the advisors.