We have received a lot of questions over the past month about what it means to be an “independent financial advisor” affiliated with LPL Financial, the nation’s largest independent broker/dealer. We thought that we would take a few moments to address some of these questions…
What is an independent broker/dealer?
At heart, an independent broker/dealer is defined by not selling proprietary products and services to their clients. A goal of this model is to avoid conflicts of interest around the products and services that are recommended, whether those are investment products, banking solutions, trust services or anything else. Additionally, independent broker/dealers have more fully embraced the idea that advisors need to have freedom and flexibility to work with their clients without a lot of heavy-handed mandates and complicated compensation structures.
What is a "wirehouse"?
In today’s industry landscape, the term “wirehouse” has become synonymous with the four national broker-dealer firms that are owned by large banks: Merrill Lynch, Morgan Stanley, Wells Fargo, and UBS. These firms provide an array of both proprietary and non-proprietary products and services to their clients through their various corporate affiliations.
As a historical aside, the term “wirehouse” stems from the days when national broker-dealers’ home offices were connected to their various branch offices with dedicated telegraph and telephone lines.
What are some comparisons that might help me understand how an independent broker/dealer operates?
In a nutshell, an independent broker/dealer does not “manufacture” any of the products that they sell to clients. One analogy mentioned by a client recently is to compare an independent broker/dealer to a mortgage broker that can represent many lenders to find the best product for a client versus being a captive mortgage banker representing only one lender. Another example would be going to a travel agent or an online travel site to find the best deal on flights versus going directly to a particular airline’s website.
How has the market changed for financial advice over the last decade?
The industry has seen a significant shift of advisors moving from traditional wirehouse settings to various independent options, which includes independent broker/dealers like LPL Financial as well as RIAs and hybrid RIAs that custody assets with discount platforms like Charles Schwab or Fidelity.
According to the 2021 report “New Realities in Wealth Management” by the market research group Aite-Novarica:
The wirehouses have steadily lost market share in the past decade, shrinking from 33% in 2010 to 26% in 2020. Aite-Novarica Group estimates that their share will continue to fall, declining to 22% by 2025.
What has driven the movement of financial advisors toward independence?
In our opinion, the biggest reason driving the move toward independence is the expanded access to resources that advisors now have outside of the wirehouses. There was a time when advisors needed to be affiliated with a wirehouse to have access to top-tier investment products and technology, but that has changed dramatically over the last several years. In the last 15 years, there has been a significant expansion in resources available to independent advisors, most notably access to cutting-edge technology. The leveling of the resource playing field has created the opportunity for a true evaluation of the pros/cons of each affiliation model.
For example, advisors affiliated with independent broker/dealers like LPL have the freedom to choose the technology and software that they use to support their clients versus being tied only to firm-mandated systems that may or may not be right for them. They also have access to a broad array of investment products and ancillary services, which often can be more comprehensive than what is found at the wirehouses. Additionally, they have the freedom to advocate for their clients with any institution to help them implement credit, banking, trust, insurance solutions and other services.
What has allowed for this expansion of resources that are available to independent financial advisors?
Two primary things. The first was the Great Financial Crisis, which eliminated several big players in the wirehouse world and severely damaged the reputations of others. As the ensuing 15 years have unfolded, clients and advisors have increasingly placed a diminished value on the brand name of these institutions and have been more open to new options.
The second is technology. Even small advisory firms can now access robust technology and investment platforms that they could not access in prior eras. The proliferation of this technology has been driven by massive private equity investments in FinTech (Financial Technology) where significant opportunities for market disruption have been repeatedly identified. This has filtered through the entire financial industry. For example, many small and mid-size banks have comparable mobile sites and online technology to their larger mega-bank counterparts, which was not the case until the last few years.
Does an independent broker/dealer still provide the same level of oversight to protect my accounts?
Absolutely. The exact same rules for oversight and safeguarding client assets apply to both independent broker/dealers and wirehouses. Both are regulated by FINRA and the SEC in the same way. Both independent broker/dealers like LPL Financial and wirehouses participate in SIPC (Securities Investor Protection Corporation) which protects against the loss of cash and securities held by a customer at a SIPC-member brokerage firm.
Does ownership of a brokerage firm by a big bank provide additional layers of protection for investment assets?
No. Brokerage assets are held by the brokerage firm…not the bank that owns them. They are protected in the same way through SIPC whether the brokerage firm is owned by a big bank or not. There are no additional layers of protection for brokerage assets simply because the brokerage firm is owned by a bank versus being an independent company.
In fact, in light of the recent struggles in the banking sector, it can sometimes be a detriment and a distraction for a brokerage firm to be owned by a bank.
The bottom line is that there has been a significant movement of financial advisors away from wirehouses and towards independence over the last several years. While every advisor has their own reasons for seeking independence, the common themes are the ability to be more nimble, to access more diverse and potentially better resources, to not be tied to one institution for products and services and to avoid the heavy-handed culture of the wirehouse.
We are looking forward to showing our clients all of the advantages that we can bring to them at Carnegie Private Wealth in partnership with LPL Financial, the nation’s largest independent broker/dealer.*
If any of this raises additional questions, please let us know and we are happy to set up a time to talk by calling us at (704)733-6880 or by emailing us at info@carnegiepw.com