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Reclaiming Professionalism

I’m in the early stages of writing a book about my experiences over 40+ years in the financial planning profession (is anybody going to want to read it?). And I’m discovering, somewhat to my surprise, how many times I’ve been right in the middle of pivotal points in the profession’s evolution.

But one of the themes that I’ve been running into over and over again in my reminiscences and storytelling is how often different members of the advisor ecosystem used misinformation (sometimes called lies) to advance their own interests.  

Examples abound.  The Financial Services Institute would tell regulators that they would be ‘forced’ to give up their smaller accounts if they were regulated as fiduciaries.  (Seriously?)  They also argue, over and over again, that regulation would reduce ‘choice’ in the marketplace.  (In fact, it would just give consumers a clearer choice: they could freely choose between somebody who has chosen to be paid to recommend certain products vs. a professional who has given up those conflicts and works purely in the best interests of the client.)

The broker-dealers would tell their reps (and some still do) that if they were to venture outside of the BD’s compliance umbrella and go fee-only, the SEC would come after them with a vengeance.  Or that FINRA is going to take over the regulation of all advice-givers, and bring the hammer down on those fee-only ‘rogue brokers.’

FINRA executives, back when the organization was called the National Association of Securities Dealers, claimed in public that they never wanted to become the regulator of RIAs—while they were furiously lobbying to do so.  In fact, they changed their name from something that strongly (and correctly) implied sales activities to the Financial Industry Regulatory Authority, which implies that they ARE the regulator of all members of the ‘financial industry.’  

Having that more broad-based and benign name made it easier to argue that the SEC should hand them the keys to RIA regulation, so that they (I suspect this was actually discussed at the highest levels) would be able to crush the pesky fee-only fiduciary community with a bunch of regulations aimed at ‘leveling the playing field.’  (Of course, the SEC seems to be on a similar mission today, but that’s a story for a different day.)

I’ve been told by advisors and consultants who have been sitting in on M&A related conferences that a new falsehood is being pushed, hard, by the companies that facilitate these deals and some of the more aggressive PE-backed buyers of smaller firms.  The new scare tactic takes two forms.  The first is to push out the idea that, to be a truly ‘professional’ firm, and to survive in the coming marketplace, smaller firms need ‘scale.’  Big ‘scale.’  Otherwise (and you read this in our industry magazines in articles written by credulous writers) that they will be crushed by the increasingly enormous competition.

The second form of the scare tactic is telling firm founders that they had better cash out now, because the multiples are going to suddenly dry up, any day now.

I’ve sent out a series of e-columns exploring the first part of this scaremongering, and the conclusion I’ve come to is that we have somehow gotten our definition of ‘professionalism’ all wrong; in fact, upside-down.  We hear about ‘professionally-managed’ firms.  When I talk with advisors who have been acquired by the large ‘professionally-managed’ firms, they tell off-the-record stories of diminished client service and bean-counters at the top looking for ways to cut costs and create efficiencies.  

There is certainly nothing wrong with being good at the metrics of managing an RIA as a business, but what does that have to do with professionalism?  I think a small partnership or solo practice that focuses on delivering professional services to the client would be more accurately called a ‘professional’ firm as we normally define the term. 

In every other service business, professionalism relates to conduct and service.  We don’t ever talk about how a law firm is tightly-managed to become more efficient and profitable, or how that somehow enhances its professionalism.  Why are we applying that term in our space?

The fear-mongering definitely benefits the acquiring firms and especially the M&A firms.  If independent advisory firms and practices are somehow convinced that they have to manage tens of billions of dollars of client assets if they want to be ‘professional,’ then they will also be convinced that selling themselves is their only way to attain that status.

My best recommendation to my readers here is to resist this redefinition of ‘professional.’  The way an RIA firm’s team is managed should be competent and effective; no argument.  It becomes professional when it applies certain fairly rigorous standards to the way it delivers advice and service to clients.  Larger firms don’t have a monopoly on that definition of professionalism; in fact, I would say that at least some of the newly-emerging monoliths, and their PE bean counters, have demonstrably less claim—no matter what they say to scare advisors into signing their sales contract.