What's the definition of truly independent wealth management and can a satisfying measure be set for clients to use? Industry luminaries in the North America market provide some answers.

Wealth management firms frequently brag about how independent they are. But the devil, as they say, is in the detail. What are the markers of genuine independence? (The same sort of debate goes on when firms that call themselves “family offices”.) This question matters because without a benchmark or way of judging independence, how can a client know what they are getting? How can they compare one institution with another? It is perhaps one of the ironies of wealth management that the higher up the wealth ladder one goes, the harder it can sometimes be to get a clear read on all this. (Some aspects of this debate arose at this publication’s recent conference in New York where business models were discussed.)

Family Wealth Report spoke to some industry practitioners, including several members of its recently reconstituted editorial advisory board, about what independence means to them. A related issue is what “un-conflicted” advice means (not everyone argues that this maps exactly with what is “independent”.) As more ideas flow in, FWR may update this piece. It’s a debate that is sure to continue. To have your say, email tom.burroughes@wealthbriefing.com

Michael Zeuner, managing partner, WE Family Offices
The word independent shouldn’t be shorthand for “good” nor lack of independence a shorthand for “bad.”  Independence is a concept directly linked to a business model and the role a firm is playing for a client.  Our view is that there are two distinct and different roles to be played: providers with a business model of selling financial products and services; and advisors with a business model of helping families buy, integrate and optimize the financial products and services that are right for them. WE for example, is an advisor, not a provider.

In many cases UHNW investors have relationships with both types of business model; it’s not a question of one model versus the other.  An advisor can help investors buy and optimize from a range of providers with a wide variety of services (banking, brokerage, asset management, custody, trust services, legal, accounting, insurance, etc). Independence is less relevant to the service provider because it’s clear that their role is to sell and distribute financial products and services. They are paid only for the products they sell and are often paid by both the investor and the manufacturer of the product they are selling to the investor (the asset manager for example); independence is an irrelevant concept to a provider. Unfortunately for investors, many service providers market themselves as independent, but there is nothing independent about their business models. This doesn’t mean that providers aren’t relevant and valuable to investors, it just means that they aren’t and can’t be independent.

On the other hand, independence is a profoundly relevant matter for the advisor who is on the buy side representing the family’s interest and helping them assemble the right collection of financial products and services. It’s first and foremost independence of products: to be able to assess everyone else’s products objectively. It’s independence coming from how an advisor is paid: ideally a flat retainer, not a percentage of assets or hourly billing, with the only source of revenue being client advisory fees. It’s also independence of ownership - an advisor working for a family can’t be beholden to an owner with a different agenda; selling products, or cross-selling financial services, for example. And finally it’s independence of ideas: the ability to be open to everyone’s ideas (the myriad of providers) as they pertain to the family and what may be right for them. An advisor must be independent in the broadest sense of the term to fulfill their role for an investor.

Marc L Rinaldi, CPA, partner-in-charge, financial services, PKF O' Connor Davies
The most independent financial advisory firm is one that offers asset allocation, investment management selection and other similar services, and gets paid by the investor for their advice, without regard to assets managed or products invested in by their clients. “Impartial” perhaps best describes this; how can you be impartial if you/your firm receive remuneration for investing in a product? Finding this type of provider is possible, but the payment side with regard to AuM is very difficult. The closer a firm is to the stated model, the more independent and un-conflicted the service provided will be. The full service provider is a different animal with pluses and minuses. The biggest minus is that the family is unsure of the independence (impartiality) of the advice given when all services lead to more revenues for the firm providing them, regardless of their good intentions or product quality.

Charles Lowenhaupt, chairman, chief executive, Lowenhaupt Global Advisors
Independence can but need not result in un-conflicted advice. Certainly, if an advisor is not owned by a product manufacturer (whether bank, insurance company, investment bank, etc) there will be less pressure to sell products manufactured by the parent.

But consider the number of independently owned companies (whether by employees or by investors) that look to products to build revenue. How many so called “multi-family offices” have turned into fund houses by creating investment partnerships for their client base?  And how many have investment “platforms” designed to accomplish efficiencies of scale?  These partnerships and platforms are often seen as benefits to the client because they allow investments in funds and managers otherwise closed to clients, but their fee structures or the exigencies of populating them with clients can leave the multi-family office on their own “side of the table.”

“Un-conflicted” is easy to define and hard to achieve. It means that every dollar earned by the advisor (and any parent or related entity) is paid by the client as a transparent fee.  Soft dollars, “expense payments” and other payments not designated as fees and not disclosed to the client would not be allowed a purely “un-conflicted” advisor.  In effect, it seems hard for the “un-conflicted” advisor to justify a pooled fund – at the very least the advisor is incentivized to populate the pool.

“Un-conflicted” requires that the only benefit that the advisor seeks is the benefit to the client. The difficulty of achieving a purely “un-conflicted” relationship appears if you consider advice to be offered relating to asset ownership, organization, gifts and the like. Any advisor paid on the basis of assets under management is incentivized to keep as much value as possible in the hands of the client. That advisor might well be incentivized to discourage gifts, charitable or otherwise, direct investments in non-managed assets (real estate or otherwise), or encouraging younger family members to find their own advisors.

There is another side to un-conflicted or, even independence.  With modern complexities of investment products and advice, a responsible advisor may well conclude that depth of capability - research, purchasing power, and resources available - may outweigh a loss of independence.  Who is the “independent” advisor that can offer custody, lending, credit cards and all the other fundamentals a client needs? How does the truly “un-conflicted” advisor offer small portfolios what they need?
 

Jamie McLaughlin, J M McLaughlin & Co
For me the single biggest test is a firm’s capital structure where there is the potential for a misalignment of interests between a capital partner or an indirect owner and the business operator(s).

McLaughlin also noted that there is a “capital paradox theme” where firms organized as partnerships desperately need capital but often compromise their true independence in upholding their presumptive agency duty to their clients.

Shirl Penney, chief executive, Dynasty Financial Partners
I do think it would be in the consumer’s best interest for them to have a better understanding of what independence means. 

A lot of advisors who cover clients as employees of larger brokerage firms and banks are seen as distributors for the firm’s products. I don’t know any clients who are getting excited about getting cross-sold to. There’s an inherent conflict that exists when your advisor works for the product manufacturer.

Many ultra-wealthy individuals who have started family offices have known for years that to get more pure independent advice you need to triangulate the model; separate advice from the safe custody of your assets and separate from where products and services are made and sold.  Then reporting technology ties the experience together for the client and their family office.

A large section of the press talks about a breakaway advisor movement but people aren’t talking so much about the breakaway client movement. The organic growth of RIAs, which occurs in a large part by clients leaving captive advisor employee models and moving to an RIA, is now surpassing even the large asset migration to independence coming from advisors moving into the space. The RIA space is exploding and is being led by clients wanting a more independent model!