B/d, RIA, fee only - the big ?

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planrcoach's picture
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Joined: 2006-12-13

How about some specific discussion around conflicts of interest around advisor affiliation with these three platforms?
We  continuously hear charges levied against the objectivity and potential for conflict of interest with broker dealer affiliation - for all of the obvious reasons.
To the extent that broker dealer affiliates are chided for COI issues and perhaps even ethical concerns (myself included), it would be appropriate for those who make the charges to justify their point of view, in terms of their own behaviour.
My first question for any RIA here, (even those who choose to affiliate with both platforms): How do you get paid, and please name evey potential for conflict of interest that exists with your clients?
 

Captain's picture
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Joined: 2006-04-07

We use the BD platform to accomodate the VA's that exist OFF of the
Fidelity RIA platform. That's it. You'll typically find that type of
arrangement is more for accomodative actions, rather than generating
business. At the least, I don't expect to ever write another VA ticket, or
mutual fund ticket on the BD side again.

As for conflicts.... I can't name many. Being paid on a fee-basis means
that regardless of the number of trades done, the compensation structure
remains constant. Regardless of whether or not I advise clients that
holding a large cash position is good or bad, we are still paid for that
advice. Bond allocations, stock allocations, the advisory fee is the same.
If they WERE different, advisors MAY have a conflict since they would be
paid less for managing conservative assets, and may advise clients to be
more aggressive. Keeping a constant fee schedule eliminates this
conflict.

I've also seen other advisors who create their own wrap-fee program
within their RIA. This means that the advisor PAYS the transaction fees
themselves, rather than having the client pay for the trades. Generally a
nominal charge for each trade (most mutual funds exempt, but some at
$30 per trade, with $10 equity trades) results. If the advisor pays for the
trades themselves, wouldn't it stand to reason that absorbing $20,000 in
quarterly trading fees MAY keep them from making wholesale, and
necessary changes? You betcha.

My RIA is fee-only. Client pays the trading costs, and again... they are
small. But, I don't see where we have a conflict of interest. I've explained
where a few may exist for other practices, however, it seems that it's
certainly the exception within the RIA community, rather than the norm.

So, to answer your question directly..... I'm paid on a fee-basis only. No
trails, no commissions, just advisory fees only. I can't see where I have
COI's with my clients, but I can see where some may exist, as described
above.

Just my $.02.

Good question.

C

AllREIT's picture
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Joined: 2006-12-16

Conceptually I would prefer to pass trading costs through to clients,
but at the moment we pay for them ourselves, to save clients the
nuisance of being billed for them.

I would be hard pressed to imagine doing enough trading that it would be more than minor expense.

My model is that we charge $200/hr for advisory/research services and
1% for custody/management with a 50% soft dollar rebate for advisory
services.

I guess there would be some interest in overselling advisory services,
but clients approve all advisory work (and the time involved) before we
do it. Custody isn't the cheapest arround, (and some of our clients use
Scottrade), but alot of people want a fully hands off account.

In a theoretical sense, I could be influenced to tell people not to withdraw money from the accounts.

That seems to be pretty much it.

Now would anyone like to buy an annuity?

planrcoach's picture
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Joined: 2006-12-13

Now would anyone like to buy an annuity?
Not just yet. Thanks, Captain, Allreit.
If an RIA is negligent with a client's money, (real or perceived), what options do your clients have to recover losses or damages?

AllREIT's picture
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Joined: 2006-12-16

planrcoach wrote:Now would anyone like to buy an annuity?
Not just yet. Thanks, Captain, Allreit.
If an RIA is negligent with a client's money, (real or perceived),
what options do your clients have to recover losses or damages?

They would would sue you, and then you have E&O insurance plus the LLC. Except that you run the business in such a manner as to not be sued.

So clients have an investment policy statement, we go through our investment philosophy etc etc. But fundamentally you follow the prudent man rule and everything will be ok.

If you go look at NASD settlements, they all involve various bits of
egregious conduct that would be impossible, very hard, or very stupid
to pull off in an RIA enviroment.

We don't get kickbacks on clients investments, so it 100% against our best interests to do anything not in the best interests of the client.

AllREIT's picture
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Joined: 2006-12-16

planrcoach wrote:Now would anyone like to buy an annuity?
Not just yet.

You could lose everything in the stockmarket, and be forced to eat cat food when you retire.

You'd better buy an annuity today.

Starka's picture
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Joined: 2004-11-30

AllREIT wrote:
planrcoach wrote:Now would anyone like to buy an annuity? http://forums.registeredrep.com/smileys/smiley1.gif">
Not just yet.

You could lose everything in the stockmarket, and
weight: bold;">be forced to eat cat food when you retire.

You'd better buy an annuity today.

I might buy one! Do you hold the coveted CFRA designation?

AllREIT's picture
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Joined: 2006-12-16

Starka wrote: I might buy one! Do you hold the coveted CFRA designation?

I glad you asked . Most clients arent aware of the importance of the CFRA designation.

I do hold the CFRA designation, but decided not to put it on my business card as it would be too much clutter next to my six other designations.

Now, where do you keep your checkbook?

planrcoach's picture
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Joined: 2006-12-13

 My model is that we charge $200/hr for advisory/research services and 1% for custody/management with a 50% soft dollar rebate for advisory services.
Please explain rebate - do you reduce the 1% to offset hard dollars paid in fees?

planrcoach's picture
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Joined: 2006-12-13

My RIA is fee-only.
Captain, do you carry E&O insurance? How much do you carry, if you do?

AllREIT's picture
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Joined: 2006-12-16

planrcoach wrote: My model is that we charge $200/hr
for advisory/research services and 1% for custody/management with a 50%
soft dollar rebate for advisory services.

Please explain rebate - do you reduce the 1% to offset hard dollars paid in fees?

I means that 50% of advisory fee's are apply'ed against custody/service fee's.

So if we bill clients for $1000 worth of advisory work, we take $500 off the custody bill.

planrcoach's picture
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Joined: 2006-12-13

and then you have E&O insurance plus the LLC.
Do you carry E & O insurance for your practice. I understand some RIAs don't carry it - too expensive, and they worry it will encourage claims.
What amount do you carry?

AllREIT's picture
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Joined: 2006-12-16

planrcoach wrote:and then you have E&O insurance plus the LLC.
Do you carry E & O insurance for your practice. I understand
some RIAs don't carry it - too expensive, and they worry it will
encourage claims.
What amount do you carry?

$1 million, per incident and its not that expensive. And no I'm not
giving you quotes on it, the coverage is pretty much custom tailored.

Captain's picture
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Joined: 2006-04-07

planrcoach wrote: My RIA is fee-only.
Captain, do you carry E&O insurance? How much do you carry, if you
do?

Yup... E/O insurance is carried by my practice.

$1 million per incident, $1,700 per year premium pade, per partner. Not
expensive at all.

C

AllREIT's picture
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Joined: 2006-12-16

Captain wrote: planrcoach wrote: My RIA is fee-only.
Captain, do you carry E&O insurance? How much do you carry, if you
do?

Yup... E/O insurance is carried by my practice.

$1 million per incident, $1,700 per year premium pade, per partner. Not
expensive at all.

C

Ours is a little more, around $2000/partner/year. Not that expensive compared to being linked up to a B/D.

Now you've got me to put down "review E&O insurance" on my 2007 Business plan.

planrcoach's picture
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Joined: 2006-12-13

Sweet.
Do you feel your personal liability exposure is limited. I understand you have the LLC structure, along with the E & O, so do you feel as safe at RIA as you might with b/d affiliation?

AllREIT's picture
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Joined: 2006-12-16

planrcoach wrote:Sweet.
Do you feel your personal liability exposure is limited. I
understand you have the LLC structure, along with the E & O, so do
you feel as safe at RIA as you might with b/d affiliation?

Yes, your liability exposure is pretty limited if you manage your
practice right, keep a paper trail, keep everyone on the same page, and
structure your affairs properly.

In fact I feel safer as an RIA than at B/D, since I am not pressured to
do questionable things like sell A-shares or Annuities. My business is
purely investments.

planrcoach's picture
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Joined: 2006-12-13

At broker dealer, both the rep and b/d are responsible. I think from client's point of view, there is an extra layer of protection. Even though you keep $1m E&O, b/d can settle to protect their reputation, where client has a legitimate claim that is not strictly covered by the insurance.
I guess anything beyond the E&O, your clients get to sue your LLC, and I assume cash just flows through that structure.
How long have you been at RIA. My concern would be, even though you document nw, goals, risk - in a down market, misunderstanding can occur.
And then I guess you have an attorney on retainer. Let's hope you don't need to use a lot of her time.

AllREIT's picture
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Joined: 2006-12-16

planrcoach wrote:At broker dealer, both the rep and b/d are
responsible. I think from client's point of view, there is an extra
layer of protection. Even though you keep $1m E&O, b/d can settle
to protect their reputation, where client has a legitimate claim that
is not strictly covered by the insurance.
Who says I can't settle? You are grasping at straws to defend an obsolete though workable business model.

If you run this business in prudent manner with good faith inside of a good business model you will not be sued.

Quote: How long have you been at RIA. My concern would be, even
though you document nw, goals, risk - in a down market,
misunderstanding can occur.

It's not about documentation, its about client education.

Quote:And then I guess you have an attorney on retainer. Let's hope you don't need to use a lot of her time.

The B/D has attorney's on retainer as well.

planrcoach's picture
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Joined: 2006-12-13

Who says I can't settle? You are grasping at straws to defend an obsolete though workable business model.
If you run this business in prudent manner with good faith inside of a good business model you will not be sued.
Maybe. Point is, from client's point of view, you have your little setup and they take their chances, just like anywhere else. You don't have deep pockets.
Maybe there are not any problems, or if there are problems, you stay in business. Or maybe not.
I don't really know. My point is, you gave up the level of broker dealer protection (for a higher payout), limited your liability and apparently eliminated a level of protection for your clients, and then you attack broker dealer affiliates for being unethical for having other conflicts of interest.
It is nice that you educate your clients, I am thinking from their point of view.
I also know that under the consumer laws of some states, you have personal liability apart from your LLC.
You may be right or wrong, or half right or wrong, it is not clear to me. Anyone has any new insight, it would be appreciated to help clarify the liability/protection question.
 

dredpiraterobts's picture
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Joined: 2007-02-14

Allreit,
You are amazingly stupid!
I have never been sued for any of the work I have done for my clients over my 20 years in the business.
BUT, I do know that pretending that I will never be sued because I do everything right is inanity (which is much worse than insanity!).
Do what you want, but, please, know that the rest of us look at your juvenile scribblings as something you should be embarrassed by.
DPR

AllREIT's picture
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Joined: 2006-12-16

planrcoach wrote:Maybe. Point is, from client's point of view, you
have your little setup and they take their chances, just like anywhere
else. You don't have deep pockets.

Clients who care about my ability to defend or sustain a lawsuit are not the kind I want.

You can quickly figure this out, by talking about recent financial
windfalls, and mentioning legal judgments. For example, I've declined
to invest a $125,000 award for slip n' fall "victim".

Quote:You may be right or wrong, or half right or wrong, it is not
clear to me. Anyone has any new insight, it would be appreciated to
help clarify the liability/protection question.

Perhaps the "protection" of the B/D's legal department encourages
RR's to be less ethical since there is a good possibility that the
B/D's lawyers will settle away or sucessfully evade legal actions from
disgruntled clients?

planrcoach's picture
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Joined: 2006-12-13

Perhaps the "protection" of the B/D's legal department encourages RR's to be less ethical since there is a good possibility that the B/D's lawyers will settle away or sucessfully evade legal actions from disgruntled clients?
Well, let's just leave it at that, then. At least I understand your point of view better. I've sure seen a few unethical advisors taking advantage of b/d "protection". And I've seen flash in the pan pie-eyed '49 ers come out West panning for gold.
The world in a grain of sand.
Thanks for being generous with your ideas. The perspective helps me keep focused on what is really important for now - being an ethical, solo shop broker dealer affiliate generalist who services the heck out of his fee based clients, and gets out to the golf course to make new friends, as often as possible.  
 

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