It's time to completely rethink personal financial services, according to Jeff Spears, co-founder and chief executive of Sanctuary Wealth Services.

It's time to completely rethink personal financial services, including everything from employee pay to fees, training and job satisfaction, according to Jeff Spears, co-founder and chief executive of Sanctuary Wealth Services, which provides consulting, investment and support services to advisors.

From 2007 to 2010, wirehouse assets fell 7 per cent while they climbed 21 per cent for independent advisors, and even further at online self-directed brokerages, according to a recent white paper from Sanctuary Wealth.

“They [wirehouses] still have the lion’s share of private client assets today – they’re already starting to fight back with a couple of items which they have a competitive advantage on. The first is the credit side because almost all of these big wirehouse firms are owned by banks. They have the ability to offer mortgages and corporate loans to their private clients,” says Spears.

“Is that unique? Not really, but…the consumer is not being offered the credit that they need, and if they could be offered that through the private client groups of these firms then maybe that will keep them there.”

But if you look at “the drivers of old” such as esoteric product sales, he says, “I don’t think it’s very realistic to think you’re going to see Wall Street create something there because (a) you’ve got much better dissemination of information through the internet and (b) they [the products] haven’t worked.”

That has hit compensation and is part of a movement (the breakaway movement) that Spears thinks is reaching “tipping point,” as laid out in his white paper, Compensation Parity: Why Clients, Independents and Brokers All Win.

He says “three major things” came out of doing the research. “The first is a very real sense, from the conversations with Wall Street brokers, that we are approaching a tipping point…That most brokers would even consider going independent signals a pretty big change over the years.”

This is backed up by an Aite Group report released last year which found that only one-third out of the 25 per cent of wirehouse advisors (in the study) who were likely to swap employers would consider going to another similar firm, while two-thirds were looking to go to an independent firm.

The second is compensation. “You still make more money on Wall Street,” says Spears, and there are people who are in it “100 per cent for the money.” But, many are not. He thinks two key demographics that could lead the charge are younger entrants and older advisors, who want to enjoy their careers.

According to his research, between 2009 -2011 broker compensation was around $1.1m compared to $875 for an independent advisors. “That is significant, but if you look back…it’s definitely trending down.”

This is linked with the third factor, which is that clients aren’t interested in the high margin products of the hubris days, and this doesn’t offer the kinds of compensation brokers are used to.

Implications

One implication of disaggregating advice and product sales is that firms really have to figure out how to add value to earn those fees, just as more firms come into the fray.

This is where he believes established firms have a competitive advantage as they have more money to invest in client events, family governance and the like. And many are doing so. “That’s a big deal,” says Spears. Client education has become another competitive area – with wealth managers of all sizes launching materials and initiatives for clients. But, says Spears, smaller advisory practices can compete on these fronts but in a different style, i.e. not necessarily in flashy surroundings but based on an intimate one-on-one environment with flexibility.

“In wealth management it’s a little different because it’s not a consumer product where they’re buying the brand – in wealth management it’s all about trust, and that’s personal.”

This model, of providing high-touch services, comes at a cost though, as highlighted in a recent report from Rothstein Kass. The report, which looked at advisors’ interest in providing some form of multi-family offices services, found that many advisors wanted to but often lacked the scale. One model laid out in the report for such advisors was to bring in specialists as and when needed, sharing revenues where appropriate and establishing a so-called “virtual multifamily office” on a variable-cost basis.

A move towards advice-based models also requires a different skill set, and this brings the issue of training into question: are there enough well-trained advisors for this transition?

“It’s not trivial how much retraining needs to take place with the core professionals,” says Spears.

“What has emerged in the States has been a lot of universities have developed programs, usually collaborating with the CFA program or collaborating with the CIMA - you’re seeing institutions that already have the professionals who can help educate partnering with financial accreditation groups to provide this education… The other thing that I think will be interesting on the back of that is that now you have so many more resources online to train yourself.”

Regulation in flux

There is also a regulatory component to all this. The move to an independent model for many is tied up with a move to adapting to a business model more aligned with clients’ interests – i.e. moving to a fiduciary rather than suitability standard.

The proposal to move to a single fiduciary standard for brokers and advisors faces “an uphill battle thanks to opposition from a relatively small segment of the broker-dealer community,” writes Barbara Roper, director of investor protection for the Consumer Federation of America, in Forbes.

Spears says that while working to a fiduciary standard should be a competitive advantage at the moment, in reality many clients don’t understand the difference and tend to assume all their “advisors” have to meet such a standard.

“This isn’t going to be solved any time soon. And that’s unfortunate, I don’t like that, but I’m just being realistic,” he says.

However, it’s not only a case of having a standard, but how well implemented any standard is. For example, the chairman and CEO of FINRA, which regulates brokers, has pointed out that only 8 per cent of registered investment advisors (which are regulated by the Securities and Exchange Commission) were examined in 2011.

While Spears says implementation is “a huge issue,” what he believes works in favor of the SEC and a fiduciary standard is that “it is much easier to regulate a fiduciary than it is to regulate suitability.”

“With the fiduciary standard there really is only one thing to regulate. It’s just one thing. It is, are you conflicted in the advice your providing your client? It’s binary.”

“Suitability is a ‘grey area’ – were clients sophisticated enough? Did you provide them with enough information? That’s a lot of grey. There is always a judgment call there. It’s not a judgment call on the fiduciary.”

It’s also worth pointing out that there will always be an element of idiosyncrasy about such matters. In John Taft’s recent book on the culture of stewardship on Wall Street, he says he was exposed to a culture of client centricity in his first job at a regional brokerage and investment bank. Likewise, even with a fiduciary standard, there will be instances of advisor malpractice.

For Spears though, it’s a matter of personal choice, and that can drive change ahead of regulation.

A study from a University of California researcher studied twenty-four entry-level investment bankers over a decade, and every one of them developed a physical or emotional stress-related issue within a few years of work, according to the Wall Street Journal. The WSJ did however point out that the sample group was fairly small.

“I’ve run businesses on Wall Street and in independent wealth management and it gets back to happiness or an enjoyment of the job… I will tell you I’m a lot happier not working on Wall Street.

“When I run into friends of mine who work on Wall Street, to a person, they say you look so much healthier. The stress of working on Wall Street is real,” he says.