Pillars of Wall Street such as Bear Stearns and the spine of the US housing market, Freddy Mac and Fannie Mae, have either required government intervention on an unprecedented level to survive or been forced into a shotgun wedding.
In the UK, the Government and the Bank of England had to save Northern Rock and Alliance & Leicester has been snapped up by Santander for less than half its value at the end of last year.
Investors everywhere are worried about their life savings, their ability to retire in dignity and their capacity to support their families and charitable causes. In good times, anyone can make money for clients. There is a need for high-quality advice from a trusted, competent source as big institutions have lost their status as a trusted adviser. This is the time for quality independents.
In the US, 15 per cent of household wealth, a total of $1.5trn, is managed i a dramatically different model to that provided by traditional banks or brokerage houses. Established by the Securities Act of 1940, registered investment advisers, the US equivalent of IFAs, are held to a fiduciary standard which means they have a legal obligation to put their clients’ interests first.
This market has outgrown the traditional models significantly over the last decade due to the strength of its value proposition to clients. These advisers are not selling products but are providing the best possible advice to clients. They are truly advisers, not salespeople.
The UK has a much more established independent wealth management industry, with IFAs accounting for over two-thirds of investment products sold. The industry is an amalgam of different approaches and does not follow a consistent advisory model. This offers choice but perpetuates differing standards of advice, leading to the best IFAs being tarred by those that fail their clients.
This does mean, however, that there is an opportunity to establish an advisory model that is truly differentiated and centred on the client’s need for independent, comprehensive and high- quality advice. Treating customers fairly, the retail distribution review and Mifid will establish some of the structure needed but regulators can only do so much – true leadership has to come from the industry.
Focus Financial Partners entered the UK market when Greystone Financial Services joined us in April as part of the first global network of independent wealth management firms.
Greystone then expanded with a subsequent sub-acquisition of Roger Harris & Co. What we saw in these firms was a successful entrepreneurial wealth management business model similar to the US fiduciary level of quality independent fee-based advice.
Many UK IFAs continue to be focused on a product sales model, frequently putting themselves in a position of conflict with their clients as they are financially forced to focus on the next commission as opposed to long-term quality relationships with clients.
Some IFAs have emerged with a superior model but the RIA principle of being trusted family advisers, where remuneration is in the form of fees rather than commission, sets a gold standard for advice.
With our global resources, we want to support all our partners in their journey towards market leadership. We believe that the time for high-quality independents is just starting.
A recent survey by global consulting firm McKinsey found customer satisfaction of independent advisers leads the financial advisory industry by a wide margin. Not surprisingly, independents lead the industry in quality of asset allocation, retirement and financial planning, identification of new opportunities and more.
Stunningly, in the first quarter of this year, mega-brokers Merrill Lynch, Morgan Stanley and Smith Barney brought in a combined $14.5bn in new US assets while RIAs added $35bn to the industry’s biggest custodians, Schwab and Fidelity. This growth is due in part to the fact that independents are providing the highest satisfaction in the areas most important to clients – responsiveness, objectivity, simplicity, credentials and transparency of fees. This is the power of the truly independent model. Particularly in times like this, who wants to get “advice” from a salesperson?
Given the global challenges in wealth management, the established tradition of independent wealth management in the UK, the move toward regulation and the customer desire for high- quality advice, we believe there is a major opportunity for true market leaders to emerge in the UK industry.
Rudy Adolf is chief executive at Focus Financial Partners