(Seeking Alpha) We’ve all heard of the distinction between a “job” and a “vocation” – the former being what a worker does to collect his paycheck and the latter being something a worker does out of a deep-seated desire to help people.
The problem is that as consumers there is no obvious way to distinguish between the two. One reason for this difficulty is that the business enterprises that succeed in a competitive economy are necessarily those that make a profit.
Take financial advisors: The ideal financial advisor would utilize his knowledge of financial planning and the specific circumstances of the client to provide the best possible plan and least costly products aimed at furthering the client’s goals.
What happens when our newly minted, idealistic advisor takes this calling of his to a national financial firm? He is likely to quickly notice that his careful and objective assessment of clients’ best interests is of little interest to most asset-management behemoths, which have minimum “production” standards that can only be met with lots of product sales. There is now a perilous incentive to skew advice to things that bring in
the business.
This problem is not unique to the financial services industry; it is
ubiquitous. But the problem can be more or less severe depending on the firm’s business model. And it is in that context that Mark Elzweig’s article about Wells Fargo’s daring wealth-management model change is of great interest. Wells Fargo got a big black eye for its “eight is great” account-pushing scandal.
Now, however, Wells is seeking to break out from the pack of other big national wealth-management firms in creating an RIA space for its advisors. Registered investment advisors, or RIAs, tend to have a more consumer-friendly business model that is not tied to product sales or commissions. Thus, financial advisors with more of a “vocational” bent tend to be attracted to the RIA space.
Enabling this kind of practice within the traditional wirehouse firm as Well is seeking to do, will thus lower the firm’s profit margins. But as Elzweig points out, it will likely boost advisor retention and attract new clients. This sounds like a win-win over the long term.
The above is not to say that all RIAs are competent or honorable, or that their wirehouse counterparts are untrustworthy. There are excellent advisors and poor ones in each domain. But even a good advisor can become less good because of a faulty business model. It would be great to see Wells Fargo succeed at this change to a visible enough extent that its competitors – Bank of America Merrill Lynch, Morgan Stanley, JP Morgan and others, follow suit. And for small independent firms to continue to give
the big ones a run for their money.
