What is financial advisor independence? Industry experts disagree

June 4, 2024 9:30 AM

Financial advisors and wealth management professionals widely agree that they want to be independent, but they disagree on the meaning of that word.

The notable variation comes from how brokerages and registered investment advisory firms have changed over the past five to 10 years, according to Michael Kitces, the planning entrepreneur, writer and podcast host who's co-founder of advisor billing software AdvicePay and registered investment advisory firm platform XY Planning Network, as well as the the head of planning strategy for St. Louis-based RIA Buckingham Strategic Wealth.

"If you look at the traditional brokerage world, for the better part of 30 years now, we've had this range of options of how you can affiliate your firm," Kitces said. "We framed RIAs as this pinnacle of independence because it was more independent than the broker-dealer."

Those once-distinct lines are blurring as the largest RIAs grow to the size of the biggest brokerages and those broker-dealers take on more characteristics of their RIA rivals.

As part of Financial Planning's feature on the changing nature of independence in the profession, the slideshow below highlights the many issues involved with how planners and their clients may view the concept of independence. In addition to Kitces, the following advisors, entrepreneurs, executives and experts shared their insights:

Joni Alt, chair-elect of the fee-only advisors professional development and advocacy group the National Association of Personal Financial Advisors and a senior wealth advisor with Arlington, Virginia-based RIA firm Evermay Wealth Management

Rich Steinmeier, managing director and divisional president for business strategy and growth with Fort Mill, South Carolina-based independent brokerage and wealth management firm LPL Financial

Kevin Thompson, CEO of Fort Worth, Texas-based RIA firm 9I Capital Group

Abby Salameh, chief growth officer of Birmingham, Alabama-based hybrid RIA firm RFG Advisory

Marty Bicknell, CEO of Overland Park, Kansas-based RIA firm aggregator Mariner Wealth Advisors

Jodie Papike, CEO of Encinitas, California-based independent advisor and executive placement firm Cross-Search

Peter Mallouk, CEO of Overland Park, Kansas-based RIA firm aggregator Creative Planning

Shirl Penney, CEO of St. Petersburg, Florida-based RIA platform Dynasty Financial Partners

Tom Prescott, co-founder of Atlanta-based RIA platform Advisory Services Network

Tom Rippberger, managing partner of New York-based advisory and brokerage network Affiliated Advisors

Technology is driving much of the continuing momentum toward independence — and the accelerating changes in the field of planning, Salameh said.
"It's a hell of a lot different than it was even 10 years ago. There's so much new technology that makes it easier, smarter and faster to go independent than it was 10 years ago," she said. "Back then we used to have to put together packets for every client, get wet signatures, then come back and punch in the new account numbers. The transition is so much easier."

To be independent, an advisor needs to meet "a few criteria," according to Mallouk.

"You have to be part of an RIA. You have to be a fiduciary all the time," he said. "You don't have proprietary product — if you have proprietary product, really you're in conflict with the client automatically."

Within that general criteria, though, advisors will begin to wonder whether the traditional perspective that a 1099 independent contractor status confers independence is fully relevant anymore. For example, Mariner is one of the largest and fastest-growing RIAs, and Bicknell views either 1099 or W-2 status with the firm as independent, he said.

"The 1099 is probably easy to understand: They're running their own practice. They're doing everything themselves. We just have a platform for them," Bicknell said. In contrast, the W-2 employment comes with offers of more services such as an advisor playbook, operational systems, tax planning, practice management resources and investment solutions — "all to elevate the value proposition and the client experience," he said.

"But none of that is mandated," Bicknell added. "Everything is at the advisor's discretion as they see fit to serve their client the best that they think that solution will do."

Others use alternative rubrics for deciding whether advisors are doing enough to be fiduciary advisors making recommendations that put the client's best interests first in every situation — or being independent, in other words.

To gain membership in NAPFA, advisors cannot have any relationship with a brokerage or sell insurance directly because the organization is for fee-only advisors, and those lines of business pay commissions, Alt noted.

NAPFA is "trying to propel the industry forward so that we can educate consumers to understand that there are a lot of choices out there and that they need to be able to understand so that they can make the best choices for themselves," Alt said.

Scroll down the slideshow for nearly three dozen takes from experts organized into five categories related to the shifting, evolving concept of advisor independence. To read the feature story taking a deep dive into those themes, "Independence? It depends," click here. To watch a live Leaders Forum discussion about how advisor independence is changing, click here. And, for a ranking of the 10 companies that added the most brokers from other firms in the past decade, follow this link.

The importance of defining independence

"What we're seeing is, true independence is you get to make every decision all on your own," Rippberger said. "What we're seeing over the last couple of years is that is becoming overwhelming, so people are looking for independence with some guidance. Advisors tell us they don't like the lack of choices at their firm. When they have no choice and then they have every choice it can be overwhelming."

"Independence is the freedom for an advisor to control their own destiny," Steinmeier said. "An independent advisor owns their own business, makes the decisions on how to run it and decides how to best serve their clients."

"Is that really independence if your book, your brand, your life's work is now being sold not once but multiple times?" Prescott said.

For many advisors, "If you are being gobbled up and consolidated," that could mean "the rules have been changed," Thompson said. "They can say, 'Well, we don't deal in X space.' I've been in X space. Now all of a sudden we can only sell certain products, certain services."

"The beginning birth of independence was when you're an independent contractor versus an employee," Papike said. However, now advisors get offered the chance of "being an employee but also owning your book of business," she added. "It's sort of a gray employee structure. It's not as clearly defined as true independence in my mind."

The fundamentals and subtleties of independence

"Most advisors that I have worked with now or in the past are looking for more freedom," Salameh said. "They want the ability to really grow and build a legacy — so building something that they can eventually either monetize or pass down to the next generation and better serve their clients."

An independent firm is "an advisory business where the advisors own their ADV, which I think is a very important distinction," said Penney, using the acronym for the regulatory disclosure that every RIA files with regulators each year. "A fully independent advisor is only paid by their client to provide fiduciary advice."

"If a firm is commission-based, they won't be eligible for membership at NAPFA," Alt said. "If they are acquired by a firm that is not eligible, then they are no longer NAPFA members."

The question of whether advisors "get paid more for one thing than another" when making recommendations is much more important to clients than finding out if the "advisor is by themselves or a firm with 100 people," Mallouk said. "Whether that's a doctor or a financial advisor, it probably makes sense to say I'm not good at everything, so how do I focus on what I'm great at."

The different forms of independence

"It's not just one or two choices anymore," Bicknell said. "We can have an advisor join us as a W-2 [employee] advisor or a 1099 [independent contractor] advisor, and I don't think either choice strengthens or weakens the independent conversation. It's two separate models to allow the advisor to deliver their value proposition and the client experience to the client."

"In addition to traditional independence and RIA models, advisors now have alternative paths to independence, such as partnered independence, supported independence and independent employee models," Steinmeier said. "We're seeing independence redefined by advisors who are building their perfect business by choosing the aspects they wish to manage, and which aspects are better outsourced to free up their time."

"It's harder today than it was five years ago," Prescott said, noting that the cost has "gone up significantly" in areas like technology, errors and omission insurance and cybersecurity. "It's always going to be harder for the smaller advisor to compete and to do it correctly."

"Not everyone likes having partners — the more partners you have, the more arguments you get in," Rippberger said, citing how many sole practitioners view the situation. "'I would just like to run my own business and be my own boss."

The NAPFA definition of independence basically means working in the "best interest of the client" without the "influence of commission," Alt said. "The client is the client. You're not worried about who you're gonna get paid by. I always say we're sitting on the same side of the table with the client."

"What's emerging really is the question of autonomy," Kitces said. "There's not a right or wrong answer on autonomy because you really only need autonomy on the things that matter to you."

Committing to a philosophy of independence

The launch of Thompson's RIA last year displays "especially as an African American advisor how important autonomy is and what it represents," Thompson said. "I wanted my autonomy. I wanted to build something that stands for what I believe in."

"The consumer is getting more educated," Penney said. "The reality is, the breakaway client movement is four times bigger every year than the breakaway advisor movement."

"What I always try to educate advisors on is, anytime you own your business and you're a 1099 independent contractor, you're going independent," Papike said. "It doesn't matter if you keep your securities license or drop and go full RIA. It's all independence."

"The wirehouses for some advisors could be the right place for them," Salameh said. "Not everyone wants to be a business owner. For those that do, I think there's a huge opportunity for us to support them in ways that we haven't in the past."

"Now we're adding all kinds of coaching and different things so that those advisors can be comfortable and run their businesses the way that they want to," Rippberger said. "They don't want to be running their operations and compliance and technology everyday."
"Each advisor has their own individual perspective on what it means to be 'independent,'" Steinmeier said. "As a result, there is no one-size-fits-all definition of independence within our organization. We encourage a culture that values and respects the varying viewpoints and interpretations of independence among our advisors."

"We're IA-only," Prescott said, noting that advisors with his firm work with third-party "friendly" brokerages for their businesses. "He or she can be dually registered with a broker-dealer, do that business over there and still maintain control of the book of business on the IA side."

RIAs that use Dynasty's services may use Purshe Kaplan Sterling Investments as their brokerage, but "that business is getting less and less, not just with Dynasty but in the RIA space," Penney said. "Less than 5% of revenue in the network is done via brokerage."

Questions about independence in the future

While independent brokers "clearly meet" the legal definition of independence, the question in light of conflicts of interest such as revenue sharing remains, "Are you providing independent financial advice?" Mallouk said. "If I'm a doctor and I make more money if I prescribe one medication more than another, how independent am I really? That's how I would view that."

"As a fiduciary you're supposed to do away with the conflicts of interest," Prescott said of investment advisors' duty of care for clients. "As a true IA, you're not getting cash sweeps. You're not getting back-end money off of product. It's not what you're meant to be."

Some conflicts of interest "will fall off the radar because they don't fit the fiduciary model and shouldn't be done," Bicknell said, declining to predict which ones will be completely eliminated over time. "Some of them will continue to exist and become normal as the fiduciary movement continues to grow."

Advisors with insurance licenses or who may be "receiving some kind of revenue from a product" cannot join NAPFA, Alt noted. "It's just very interesting how deep they do go down to make sure that they're keeping the integrity going at NAPFA."

The key question advisors may ask themselves in deciding whether they're really independent is whether someone else can fire them or not, Penney said. "Clearly there's been a lot of talk in the media, in the press that all roads are leading to independence and the independent movement used to be a trend. Now it's a movement. It's accelerating. There are a lot of players trying to capitalize on the notion of independence, and they'll say that there are degrees of independence. But our view is, you're either independent or you're not."

"The RIA model is now reinventing every point on the independent spectrum that brokerage and insurance companies had for years," said Kitces, arguing that RIAs have now "reinvented a more restrictive employee model" than some used by wirehouse advisors. "There's a lot of confusion in the advisor marketplace right now."