So long “Wealth Management,” it was nice while it lasted…

In what could arguably be called a watershed moment in the history of the financial advisory business, IMCA, the Investment Management Consultants Association, released a white paper recently defining the practice of wealth management.

Finally! After years of vague generalities, a respected industry organization nailed it down – through their own lens, sure, and not without a healthy dose of self-interest, namely promoting their own “certified private wealth advisor” certification program.

But hey – they did it –

And they did it well, sending out a survey to 43,000 advisors (seems high, but OK), and carefully processing the 400 responses. IMCA’s white paper includes a comprehensive overview of the market, the high-net worth clients in that market ($5 million minimum net worth), and what specialized skills and knowledge advisors need to properly service those clients.

Sometimes the white paper lapses into jargon (“knowledge domains”) and sometimes it can cause eyeballs to roll (“the knowledge required to provide competent wealth management incorporates 169 topics”), but overall it’s pretty damn good.

There’s only one problem, and it’s a big one: the phrase “wealth management” itself has become so commoditized, so diluted and so ubiquitous, that it’s now almost synonymous with “financial services.”   Let’s be honest: “wealth management” has been nearly completely stripped of its original meaning, and its common usage simply doesn’t convey what IMCA says it means – or should mean.

Just look at all the firms that either have “wealth management” in their official name or as part of their business, as in Merrill Lynch Wealth Management, etc., etc.

How many clients of those firms have a net worth of $5 million or need half the services IMCA’s definition says they do?

Several years ago, when Citibank launched its “Personal Wealth Management” division,

it was obvious that a teenager who wanted to open an account at Citi with his or her savings from a summer camp job would be considered a “wealth management” customer.

It’s as if an automobile industry association laid out specs for BMWs, but they ended up being applied to Kias.

Inevitably,  the true high-end of the industry will  want to distinguish itself from the hoi polloi  and come up with a new name that reflects the premium services  truly wealthy clients need.

For example, consumer publications targeting high income readers who buy luxury products are increasing fond of the word “bespoke” to convey really expensive stuff.

On the business side, private banks, which really do have clients that fit IMCA’s definition, may have a head start with that oh-so-exclusive sounding moniker “private.”

Some variation of “ultra,” as in ultra-high-net worth, may also be in the running.

Shirl Penney, chief executive and founder of Dynasty Financial Partners, who knows the market about as well as anyone, thinks “Wealth Advisory” will do just fine.

Or maybe Madison Avenue will come up with something entirely new.

Today’s “wealth manager” may well become tomorrow’s “affluent advancement advocate,” or “strategic resource consultant,”  suggested Ken Krimstein, a former creative director at New York advertising agencies who now teaches  at DePaul University in Chicago.

“My Very Own Goldman” may also appeal to the well-heeled client, Krimstein speculated.

Don Draper couldn’t have said it better.



What Kind of Growth?

There’s little doubt that the independent advisory business is growing rapidly, but the shape and direction of that growth remain one of the industry’s biggest unanswered questions.

The most recent Cerulli report confirmed that independent advisors are growing at the expense of traditional wirehouses, a trend that is unlikely to be reversed anytime soon.

Announcements of more firms being gobbled up by the likes of HighTower, Dynasty,  United Capital and Focus seem to be in the news everyday, and plenty of other companies are also setting their sights on establishing a national footprint – just ask Ron Carson, Ric Edelman or Marty Bicknell.

And most recently, Jeffrey Lovell and James Minnick, whose private equity firm wants to bankroll a national chain of trust companies for the high and ultra-high net worth market, beginning with the Houston-based Kanaly Trust Company.

In fact, United’s Joe Duran recently predicted the industry will eventually be dominated by five or six national “megabrands,” leaving only the left-overs for everyone else.

But is that scenario realistic?

For starters, there’s the looming force of the “wirehouses,” that antiquated term for the multi-billion dollar financial service superpowers:  Bank of America Merrill Lynch; Morgan Stanley Wealth Management; Wells Fargo Advisors and UBS Wealth Management.

Sure they’re losing market share. But so are the broadcast television networks, which are still very much around, still draw the biggest audiences and dominate television ratings and the advertising revenue pie.

In addition to their established base of customers – far larger than anyone else’s – the Merrills of the world continue to pour hundreds of millions of dollars into national advertising, marketing and branding campaigns. What RIA firm on the current scene has anywhere near the resources to begin to even make a dent in such a massive head-start?

Duran claims that comprehensive financial planning and advice will be the RIAs’ ace in the hole. But Merrill, Wells Fargo, UBS and Morgan Stanley all emphasize their own advisory expertise, and have hardly been in a coma while the anti-broker revolution has swept the industry. What’s more, it would be very hard to argue that true financial planning – especially done by certified financial planners – has replaced asset management (and gathering) as a priority for most RIAs.

Certainly, smart businessmen and industry veterans like Joe Duran, Focus’ Rudy Adolf and HighTower’s Elliot Weissbluth shouldn’t be under-estimated. Their progress over the past several years has been impressive and undeniable. But so are the hurdles they face on their way to a national brand: entrenched competition and the need for massive capitalization to achieve the necessary scale and infrastructure.

Which is why Advizent, Steve Lockshin and Charles Goldman’s brainchild, which wants to put leading independent firms from all over the country under a common branding umbrella while maintaining their own identity, is the other horse to watch as the industry grows.

Advizent faces formidable capitalization problems of its own, to be sure, but can also tap the resources of deep-pocketed vendors and custodians who also are poised to benefit if brand awareness for RIAs around the country increases.

Perhaps most realistically, cutting-edge advisory firms will grow to become strong regional powers and brands, but not national ones.

And there’s always the very distinct possibility that the independent advisory business will remain more or less true to its highly fragmented roots, which also means highly personalized.

It’s worked so far, hasn’t it?


The Conflict Question

Call it the third rail of the wealth business: conflict of interest.

It’s the mantra independent registered investment advisors constantly evoke when attempting to distinguish themselves from their brokerage firm brethren: we are fee-based, don’t sell proprietary products and are therefore pure as the virgin snow. We have no conflict of interests. None. Zero.

But could this endlessly repeated claim turn out be an Achilles Heel for the swelling number of RIAs who are so sure their business model is the Next Big Thing?

This elephant in the room was broached at last week’s MarketCounsel Summit inLas Vegaswhen Knut Rostad of the Institute for the Fiduciary Standard publicly asked Elliot Weissbluth, chief executive of High Tower Advisors, if he really had “zero” conflicts of interest.

Weissbluth replied that if a business is making money from a client in two different business lines, there’s a conflict. HighTower, he continued, has “structured out the business conflicts” and does not get paid twice.

But that hardly ends the debate. There is, in fact, a growing chorus of critics who are pointing out potential conflicts, or, at the least, deficiencies in the standard RIA business model of getting paid by a fee based on a percentage of assets under management.

During the summer, Charles Ellis, author of  the investing classic “Winning the Loser’s Game: Timeless Strategies for Successful Investing”  argued in the Financial Analysts Journal  that investment management fees “should really be based on what investors are getting in the returns that managers produce.”

Clients  who take a car in for repairs are unlikely to allow a mechanic to charge them merely for just keeping the car in his garage, Ellis argues, so why would a client who can mach the market’s performance  by buying  an index fund for merely five basis points pay an advisor much more to simply do the same thing?

According to Bert Whitehead, founder of the Alliance of Cambridge Advisors, conflicts are “inherent” in assets under management pricing.

AUM compensation poses conflicts, Whitehead contended in an Investment News op-ed, when wealth managers weigh in on decisions that could directly affect their own revenues, such as advising clients on whether or not to invest in real estate or buy an annuity; make a sizable charitable contribution or roll over a 401(k) from an employer’s fund manger (especially if costs are equivalent or lower) to their own firm.

While conflicts in the old commission model were “right there in your face to see,” says industry guru Chip Roame, managing partner of Tiburon Strategic Advisors, “nearly any model you develop has conflicts of interest, [including] fee models. The most obvious is when a client wants to withdraw funds from you and pay off his mortgage: do you say yes or no?”

Then there’s the extremely sensitive matter of what wealth managers might be getting from third-party fund managers and what is being disclosed, a conflict of interest if there ever was one.

Are financial advisors getting in-kind compensation such as research support or other benefits?  Are they using an outsourced product platform that may have other conflict issues? Are they getting some sort of payment or “retrocession deals” that are hidden or embedded costs within a product’s fees? Or are they getting old-fashioned under-the-table kickbacks, more politely know as “finder’s fees?”

The lack of transparency regarding public disclosure of fee data and portfolio performance was highlighted in an analysis of the websites of 40 of the world’s largest wealth managers done last year by the Swiss-based research firm MyPrivateBanking.

Only 18 per cent of the wealth managers offered precise, quantitative data on fees, the study found, and just eight per cent published at least a three-year track record of the performance of their discretionary accounts.

As for the advice part of the “value proposition,” Andrew Haigney, managing director at EL CAP Investment Consultants, has argued in Registered Rep that while clients are paying for investment advice every day, “the advice rarely changes. It’s akin to hiring an attorney to write a simple will and keeping the attorney on permanent retainer, paying him a yearly percentage of the value of your estate.”

Of course, RIAs can always charge clients flat retainer fees, or by the hour or even, as Ellis suggests, based on performance. But few do, and from a business point of view, have good reasons not to. Independent advisors will also have plenty of valid counter arguments against charges of conflicts of interest.

But that doesn’t mean that none exist. And it won’t stop a new breed of competitors from exploiting any vulnerability RIAs may have.

In fact, at the most recent Tiburon CEO Summit inNew Yorkthis spring, Roame warned industry leaders not to be too complacent. A whole new crop of Internet-based firms such as Betterment, Goalgami, Personal Capital and Wealth Front are on the horizon, he said,  with impressive offerings that have great appeal to a generation that have grown up on the Web.

These new competitors are leading with ETF and DFA offerings, and offering state of the art simplicity and transparency when it comes to investment management.

With no conflicts of interests, unlike their competitors, they will undoubtedly claim.