Endangered Profession: True Fiduciary Financial Advisor (DOL Failure #471)

This post grew out of a response to how regulations and laws like Dodd-Frank and the DOL’s Fiduciary Rule do very little for consumer protection (the too big to fail are bigger, the term fiduciary is already weaker), but, like many of my posts, it took on a life of its own.

I read an interview with the chairman of one of the largest independent advisory firms in Florida on the benefits of regulation these laws. I’ll come back to offer a response to those points. However, I began to think about what it takes to become among the largest firms in any area.

First, you must deliver value at the appropriate price. If you set your prices too low, we all known that you may attract clients (although, many will wonder why your price is low!), but you will not gain the resources to build out the support and help that your growing business needs.

This firm likely charged a good rate for their expertise. And, rightfully so.

Next, is that you need a ‘thing.’ A differentiator. Something that makes you worth your fee compared to the rest of the market.

For the life of this firm, that ‘thing’ was independence. It was choosing to be a fiduciary for clients. And, for those and other ‘things’ the firm grew and was able to take on partners who I’m sure bought in, or maybe they bought based on their firm’s capital value.

And so it strikes me as strange whenever a firm owner who has taken advantage of these market forces, and has begun selling their firm, or other intellectuals and product firms who stand to benefit (or at least not lose if you’ve already begun to sell your firm!) tell us the need for regulations that will kill small firms, and remove much of the value in large firms who do not go on mass buying sprees.

Business is cutthroat. Business today is offering the products and services that people want, and filling all ‘demands’ in the most efficient way allowed by law.

By asking for ‘more’ laws, or promoting laws like Dodd-Frank, which by many accounts across political spectrums has gutted small and entrepreneurial banking firms, and left the firms that were already too risky, too big, and many times too aggressive for the good of the economy.

Even large firms who do not aggressively grow by acquisition will find themselves at a disadvantage. Their capital value will decline compared to larger firms with more clients who can underprice their competitor and offer greater services.

We can all easily see the end results when we play this out. It’s what we see in the banking industry after Dodd-Frank. Far fewer community and small banks that were able to compete, but are no longer.

After the Fiduciary Rule, we will see far fewer small financial and wealth management firms. Many will adapt. Many will linger on until the costs outweigh the alternatives. But, those who are successful in the coming years will need to add services, add assets through acquisition and merger, or, they will go the way of the community bank.

Advisors may always be able to offer some level of advice. Until the costs of regulation become too demanding. Many put the costs of the Fiduciary Rule at hundreds to thousands of dollars per year, per client. That is lower by some estimates, and it can be lower if a lower level of care.

However, when businesses lose their capital value it is due to consumers leaving, or cutthroat competitors offering lower cost (and lower quality) services like today’s online robo-advisors and mutual fund firms – who, are for the Fiduciary Rule precisely because it allows them to thrive.

True fiduciaries would notice this trend and outcome and realize that the world is not a better place when robo-advisors and mutual fund firms can legally tell clients they are fiduciaries, which was a term that once had much more value in many relationships far more prestigious than investment management.

But I still think there is a conflict we need to recognize with those who are largely retired and who have sold or are selling their businesses.

These advisors may not need to concentrate on growing their message (and business value in the process… the market is win-win!), but those serving their clients today and the clients of tomorrow do have to be concerned with growth.

And, they have already taken advantage of the time when entrepreneurs could start and offer a service that was innovative, fair priced, and reached beyond the normal client size required of these firms.

These advisors have moved on to another stage. Mega-growth by removing competition and acquiring devalued competitors through legislation.

None of this is good for consumers. Though it takes looking beyond the soundbite that regulation is good to understand the true outcome.

How many banks in your community have gone away in the last seven years?

(Economic lesson – The Fiduciary Rule will kill off a significant portion of business value of true financial advisors over the coming years. Business value is the value provided to clients. The large do not mind because they scoop up the clients of the smaller firms through acquisition or failure. They are not promoting this law out of the goodness of their hearts; there is a conflict that must be pointed out. After all, they didn’t feel the need to be so charitable when they were growing through the market, rather than through legislation.)

(Note - this is not to say there is anything wrong with firm growth in the open market. The wrong is in the promotion of laws to benefit oneself and one's firm at the expense of others who consumers would have chosen over them.)


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Detroit, Ann Arbor, and online fee-only, fiduciary financial advisor blog / podcast on retirement, investments, economy, taxes, 401k, 403b, Roth, IRAs