Independence? It depends

The financial advisors who want independence, and the wealth management clients who want independent advisors, will have to figure out their own interpretation of what independence means. Amid rapid consolidation of registered investment advisory firms and more choices than ever in the setup of a planner's practice, the profession is struggling to find the exact criteria to decide whether an advisor is truly independent.

"I would assume there is confusion, broadly. In some conversations, I definitely hear it, see it, feel it," said Marty Bicknell, the CEO of Mariner Wealth Advisors. "I'm the CEO of a relatively large RIA. I'm confused." 

To Bicknell (whose private equity-backed firm is beyond "relatively large" at more than $200 billion in client assets through accelerating acquisitions), the many fraught factors involved with advisors' declarations of independence highlight the current phase of the industry's cycle.

"That complexity is normal as more people are putting their own touch, spin — whatever the right word is — on whatever they think the solution should be for the advisors," Bicknell said. "Then consolidation will start to happen, and then it'll get simpler again."

Not everyone believes that the industry is definitively moving toward independence in advisory services, given that the biggest firms are becoming bigger, the conflict of interest disclosures are getting longer and the lawsuits are piling up. 

Nearly a dozen planners, executives and other experts from firms such as Mariner, Creative Planning, LPL Financial and Dynasty Financial Partners expressed concern that advisors may wind up in the wrong position in the wealth management marketplace for themselves and their clients if they don't arrive at an answer to the many questions involved with the meaning of independence. 

However, the solutions to those problems often prove murky at best. Independence is nuanced, evolving and, maybe, ill-defined. But advisors keep making their way to it.

For consumers, the tangle of issues around what constitutes advisory independence can also create confusion. 

Those in the market for financial advice from an independent wealth management company should "do some digging" about a firm's ownership, advisors' fee structure and when and whether the professional is a fiduciary, said Joni Alt. Alt is chair-elect of the fee-only planner professional development and advocacy group the National Association of Personal Financial Advisors and a senior wealth advisor with Arlington, Virginia-based registered investment advisory firm Evermay Wealth Management.

"Unfortunately, it takes some homework for consumers," Alt said. "There are so many ways that I don't think our profession has made it clear enough for consumers to figure out what they should be doing."

READ MORE: Leaders: How financial advisor independence is changing 

The mixed statistical evidence of the traditional advisor career path

Alt herself is a fee-only RIA planner occupying the most independent end of the industry's traditional spectrum. That's on the opposite end of employment as a broker at a wirehouse or another brokerage. 

The common industry trajectory toward independence loosely follows this career path: An advisor begins as a W-2 employee broker, then becomes a 1099 contractor with an independent brokerage, then leaves to launch a small-business standalone RIA. Over that transformation, the advisor moves further away from sales incentives for proprietary products and services and turns into an entrepreneur taking responsibility for every aspect of their firm's operations and sending the smallest sliver of the company's revenue to external vendors.

The best available statistics illustrate that basic pattern — with major caveats. 

Rapidly expanding RIA conglomerates whose advisors may be either 1099 contractors or W-2 employees are absorbing a greater share of a former cottage industry of small business owners who could again be calling someone else their boss, or at least their parent firm. The biggest RIAs have grown larger than some brokerages. And over the past 10 years, many of the brokerages that have lost the most registered representatives have added the most, too.

Between 2014 and 2023, at least 92,422 brokers left Merrill, Wells Fargo Advisors, UBS, Morgan Stanley, J.P. Morgan Chase, Citigroup, Goldman Sachs, Raymond James & Associates, Edward Jones, Ameriprise, RBC, Stifel, Baird and Janney, according to figures provided to Financial Planning by ISS Market Intelligence from its Discovery Data MarketPro solution. 

Tracking departures and moves over the past decade, the annual number of brokers exiting from those firms has climbed 6%, reaching 10,233 in 2023. Across that 10-year period, Merrill lost the most (18,758), followed by Wells Fargo (15,099), J.P. Morgan (13,953), Morgan Stanley (11,527) and Edward Jones (7,211). 

While those brokers' destinations weren't traced, many of them may have left not for independence but for a position at a competitor: The four wirehouses and J.P. Morgan each made the list of the 10 firms that added the most brokers for the 10-year span. However,  independent firm LPL picked up the most incoming representatives from other companies at 16,507.

In sum, the data show that more advisors are fleeing brokerages, but they're not always going to independent firms. And if they join an RIA, they're often competing with giant aggregators (if not working for one). 

As of late 2022, research firm Cerulli Associates reported that the 78,282 advisors at independent and hybrid RIAs comprised 27% of the industry's headcount and managed the same percentage of its client assets. By 2027, their share of advisors is forecast to rise to 30%, and their portion of assets to 32% — a signal of continued record numbers for the channel but far from a dominant position. And RIAs remain heavily fragmented. Although just 7% of RIAs manage $1 billion or more in client assets, these firms manage 71% of the channel's assets and employ 47% of its advisors.

READ MORE: It's not just wirehouses: Lure of independence strong for IBD advisors

A 'skewed' marketplace

The clouded picture presented by those statistics and the shifting nature of the channel reflect the varying characterizations of independence emerging in recent years, according to Peter Mallouk, CEO of Creative Planning, the Overland Park, Kansas-based RIA aggregator. The firm has topped $300 billion in client assets and has more than 400 advisors and about 2,000 other employees. 

Mallouk said in an interview that he sees independence as being a "fiduciary all the time," providing advice for pay that is the same regardless of the particular recommendation.

"There's the legal view. There's the client view. Then there's the advisor view," Mallouk said. "That's why I think people can talk past each other on the subject."

With the massive expansion of the largest RIAs in recent years, advisors will have to determine for themselves where they see "important dealbreakers" impinging on their autonomy in the independent channel, said Michael Kitces, the planning entrepreneur, writer and podcast host who's co-founder of advisor billing software AdvicePay and RIA platform XY Planning Network as well as the head of planning strategy for St. Louis-based Buckingham Strategic Wealth. 

"The industry hasn't sorted out how this works. We don't really have clear labels for what these tiers are," Kitces said. "I think the marketplace will sort itself out more in the coming years."

One factor driving the shift toward independence is capital from private equity firms. Such investments have "changed the recruiting landscape" and enticed many smaller independent brokerage and RIA firms to fold into larger firms through moves or M&A deals, according to Jodie Papike, CEO of Encinitas, California-based advisor and executive placement firm Cross-Search.  

"Because of that infusion of capital, larger firms have been able to be more aggressive in recruiting," she said. "It's skewed the marketplace. It's made it more difficult for midsize and smaller firms to compete with those types of offers."

READ MORE: PE's big catch: RIAs. Is the haul sustainable?

Conflicted independent arrangements

Financial advisors and clients can review the disclosures about compensation and other conflicts of interest in the documents required by regulations that ensure firms at least clearly state such conflicts if they aren't going to eliminate them. 

For those who read the lengthy disclosures dutifully posted on firms' websites, standard brokerage industry practices — recruiting and production bonuses, revenue sharing agreements between asset managers and wealth management firms, cash sweeps that give companies much higher yields than their clients, to name a few — don't look much like independence or like putting customers' interests first.

Other broker-dealer services, such as processing transactions and handling certain products and accounts, are more like a daily necessity. Brokerages are not going away, even if advisors break away from wirehouses for the independent channel.   

Transparency on the fees paid by clients and on advisors' arrangements with brokerages provides the information needed to make educated choices in a business in which "someone will pay you to bring assets" to the firm in "every different segment of the industry," according to Tom Rippberger, managing partner of New York-based advisory and brokerage network Affiliated Advisors. The firm spans about 100 advisors in 70 offices, which means that most of them are solo practitioners. And its brokerage relationship with Osaic endures as a small percentage of its predominantly RIA business, he noted.  

"We can probably pull up each way someone is doing business and find a conflict of interest," Rippberger said. "Are you doing the best thing for your clients by limiting the product set you can recommend?"

Many kinds of independent firms that may not be as well-known are growing by providing this flexibility around the brokerage component of advisory practices. 

Atlanta-based Advisory Services Network has $7.8 billion in client assets managed by about 225 advisors who use the firm's RIA and other services and, if they want, an outside brokerage firm. Advisory Services Network has added nearly $5 billion to its client holdings in the past five years, according to co-founder Tom Prescott.

"There's a movement in the industry to try to quantify who is fee-only and who is not," Prescott said. "As a platform, we have to accommodate both sides of the house. ASN will never be a broker-dealer." 

Amid such lingering brokerage subtleties in a majority RIA business industry, few, if any, firms are straddling as many parts of the independent channel at once as LPL Financial. 

As the largest independent brokerage, the industry stalwart's acquisitions and recruiting have pushed its advisor headcount to record levels every quarter, thanks to its ability to work with advisors on every possible basis, from RIA custody to W-2 employment. 

At least 150 advisors with $22 billion in client assets have joined LPL Strategic Wealth Services, where they pay a larger portion of their revenue to the corporate office in exchange for a more robust layer of services and infrastructure than the firm's traditional independent teams. And the company refers to another group of 150 advisors who are part of its W-2 unit, Linsco by LPL, as "independent employees."

The Linsco advisors "desire the benefits of operating like a branch employee" with "greater control over their business and no pressure to sell proprietary investment products," said Rich Steinmeier, LPL's divisional president for business strategy and growth. 

"Advisors own their book of business and have the flexibility to run their practice, their way, backed by a blend of sophisticated resources and a dedicated support team at LPL," he said in an email. "Our W-2 advisors also have the freedom to transition into different affiliation models as their businesses evolve." 

In terms of the revenue-sharing that LPL and other brokerage firms receive to the tune of hundreds of millions of dollars per year from product sponsors, Steinmeier said that LPL "believes in an open architecture for our advisors, and we do not advocate for one product over another." The firm is trying to help "advisors define their perfect practice" rather than "imposing a rigid definition of independence," he said.

Others contend that brokerage practices undercut claims of independence. At least 53 RIAs with 300 advisors and $85 billion in client assets under administration use the services offered by St. Petersburg, Florida-based Dynasty Financial Partners.

"I spend a lot of time with consumers, with the end client, with our advisors. These are the things that frustrate the consumer — the wordsmithing," CEO Shirl Penney said. "If you believe you have a fiduciary-based advisor, then I would say to a client, 'Have them put it in writing.'"

Conflicts, consolidation and advantages enjoyed by the largest firms (like the client referrals that only flow to select RIAs) combine to create an environment that makes it difficult for the small practitioners to be truly independent, according to Kevin Thompson, who launched Fort Worth, Texas-based 9I Capital Group last year after more than a decade at brokerages.

"We're in danger of becoming the 1980s wirehouses," he said. "That's the danger of this business — are we just running toward something that's more of the same? That's what scares me."

READ MORE: The wealth management industry's $1T conflict of interest

RIA breakaway lawsuits a fact of life?

Another jarring development affecting the independent channel is playing out in lawsuits that pit RIAs against exiting advisors. The cases resemble the litigation that wirehouses and other employee brokerages lodge in their legal claims against their brokers. 

Some advisors who agree to sell to a larger company "may not take the time to really understand those contracts upfront," said Abby Salameh, chief growth officer of Birmingham, Alabama-based hybrid RIA firm RFG Advisory. 

"Ultimately, they can go to the court of law and probably win, but it's just a pain in the butt and sucks up time and money that I'm sure many advisors don't feel like dealing with," she said. "There's a saying: Measure twice, cut once. Do the front work so that you cut once and you know what you're doing. Take that time to really understand what you're getting yourself into."

Lawsuits often follow in the wake of advisors' moves to a new firm, according to Mariner's Bicknell, who said he wasn't commenting on any specific cases involving his company.

"It's part of the business going forward," Bicknell said. "If that means that increases the number of lawsuits because the firms losing those advisors are trying to protect themselves, I just think that's part of the business."

The clauses in M&A deals tying advisors' business to the buying firm are "what allows for the marketplace to exist," said Creative Planning's Mallouk, who estimated that RIAs would lose 80% of their value if they didn't agree to those contractual terms. 

"You sold your practice. You can't now leave and take your clients with you," he said. "No one would buy a firm at any price if, six months later, someone could say, 'Thanks for the money, we're going to leave with our clients.'"

RIA lawsuits are "messy" because some advisors seem to be "trying to change the terms of engagement after the fact," Kitces said. 

He sympathized with advisors who find themselves in a "more restrictive model" than they had envisioned for their business after major shifts in their parent firm over the years or a new one that made a deal negotiated without them, as well as with the RIAs arguing "that's really not your client relationship to take with you," he said.  

"Sometimes the problem is the advisor joined a firm a long time ago that was on a different place on the spectrum," Kitces said. "They got forced into a short timeline and didn't really have the means to make an objective decision and are now stuck with it."

READ MORE: Are independent wealth managers that punish exiting financial advisors really independent?

A 'fearful' future?

The continuing flow of private equity capital and other investments into the independent channel marks "a time of great opportunity for advisors," said Papike. But it also exposes "a lack of trust" in the stability of the long- and short-term plans of their many suitors, she said.

"There's so much change all the time that I think advisors are just sort of anticipating that change is going to come and feeling a little bit defensive because of that," she said. "It's a really tough environment."

Smaller RIAs could achieve collective economies of scale by banding together, without giving into what Thompson described as "'forced' consolidation." That type of approach could benefit planners who don't want to spend their careers in an environment that looks "a lot like what I ran from" at the brokerages, Thompson said. 

"I'm fearful of where the industry is headed," he said. "What happens to the smaller RIAs out there?"