Is there a future for independent financial advisors?

Wednesday, December 22nd, 2010

Con­ven­tional wis­dom holds that in Canada advi­sors asso­ci­ated with finan­cial insti­tu­tions will gain an increas­ing share of the mar­ket — whether these be advi­sors work­ing for the banks’ invest­ment deal­ers or as branch based finan­cial planners.

The pro­po­nents of this view point to the advan­tages of scale and the reas­sur­ance for investors and advi­sors pro­vided by Cana­dian banks, par­tic­u­larly impor­tant in mar­ket envi­ron­ments such as those in the past cou­ple of years.

In addi­tion, the poten­tial to tap into refer­rals to exist­ing bank cus­tomers can help exist­ing advi­sors accel­er­ate their busi­ness growth and be a strong asset in recruit­ing new advisors.

A con­trary view from south of the border

A recent white paper sug­gests a very dif­fer­ent path in the United States.

Titled The Future of the Finan­cial Advi­sory Busi­ness, it pre­dicts declin­ing share for bank affil­i­ated bro­kers and strong growth by inde­pen­dent advisors.

The key ques­tion: Is this an area where Canada and the U.S. will fun­da­men­tally diverge or will some of the U.S. trends in this area migrate into Canada?

This white paper was writ­ten by Bob Veres, a highly respected observer of the U.S. invest­ment scene. For many years edi­tor of one of the major U.S. advi­sor pub­li­ca­tions, he is pub­lisher of Inside Infor­ma­tion, an online resource for the finan­cial plan­ning and invest­ment advi­sory pro­fes­sion — the full report can be found on his site.

An overview of the U.S. scene

One big dif­fer­ence in the United States is a thriv­ing seg­ment of advi­sors called Reg­is­tered Invest­ment Advi­sors, com­monly known as RIAs.

These advi­sors typ­i­cally work as sole pro­pri­etors or in small to mid sized firms, are com­pen­sated on a per­cent­age of client assets and have no in-house prod­ucts; they can offer clients a full range of invest­ment prod­ucts and gen­er­ally focus on man­aged money solutions.

The growth of this chan­nel was accel­er­ated by Charles Schwab’s launch in the early 1990s of a back office plat­form on which inde­pen­dent advi­sors could oper­ate; today other large firms that offer sim­i­lar plat­forms include TD Amer­i­trade and Per­sh­ing Advi­sor Solutions.

There are an esti­mated 29,000 RIA firms in the U.S. -  this is also the fastest grow­ing seg­ment, it’s pro­jected that by 2012 assets held by RIA’s will equal those held by large bro­ker­age firms such as Mer­rill Lynch and Mor­gan Stan­ley Smith Barney.

Today, most of these RIA firms are fairly small — it’s esti­mated that only 4,000 (or about 15% of these firms) have assets over $100 mil­lion — and half of those have assets under $250 million.

The growth of the inde­pen­dent segment

There are a num­ber of fac­tors dri­ving the growth of RIAs, not all of which apply in Canada:

• The neg­a­tive image of Wall Street

One impor­tant dif­fer­ence between Canada and the U.S. is investor dis­il­lu­sion­ment with Wall Street firms.

In a recent sur­vey, 46% of U.S. bro­kers said that their firm’s brand was not help­ful in retain­ing exist­ing clients or attract­ing new ones.

• Dis­il­lu­sion­ment by expe­ri­enced brokers

The U.S. has seen grow­ing defec­tions by “break­away” bro­kers, leav­ing estab­lished firms to strike out on their own.

In part, this is dri­ven by the push from head offices to sell inhouse prod­ucts and an increas­ing empha­sis on higher end clients, penal­iz­ing bro­kers who have a mid mar­ket focus.

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