What is Wealth Management: ‘Independent’
Welcome to What is Wealth Management, where I take a topic that wealth managers love to use, but most of the general public has no idea what it means. I call it demystifying the world of wealth management.
These are quick stories about a term or expression that no doubt, you or people on your team, love to use. While I can’t stop you from using the term, I can help explain it. So this post is for you – you can share this with your clients or prospects to help them make sense of the stuff we say all the time.
While I can’t stop you from using the term, I can help explain it. So this short podcast is for you – you can share this with your clients or prospects to help them make sense of the stuff we say all the time.
Today we are talking about the term “independent”.
The Term "Independent": How RIAs Can Talk About What Really Matters to Clients
As Registered Investment Advisors (RIAs), you operate under a specific regulatory framework that distinguishes you within the financial services landscape. You’re often proud of your "independent" status, and rightly so. This concept has deep roots in the evolution of financial advice. However, relying on the word "independent" when talking to clients is often counterproductive. It's industry jargon, not client-centric language.
Let's explore why the term creates confusion and how you can communicate the true value of your structure in a way that resonates with the people you serve.
A Brief History of "Independence" - From Investment Counsel to Modern RIAs
To understand the current landscape, it helps to look back. The concept of "independence" in financial advising began to truly take shape in the 1970s with the rise of financial planning. This emerging profession centered on providing client-centric advice, moving away from the prevailing model focused on product sales and commissions. The formal establishment of the Certified Financial Planner (CFP) credential in the late 1970s helped solidify this approach, promoting a fiduciary standard and comprehensive planning.
The regulatory foundation for independent advisors was laid much earlier with the Investment Advisers Act of 1940. This act provided a framework for regulating investment advisors, who at the time were relatively few in number and often referred to as "investment counsel". The law essentially codified the business practices of the leading firms and was seen as a "patch" to regulate those falling outside the structures for banks and broker-dealers. Advisors willingly accepted this federal regulation and kept a low profile initially.
The emergence of the modern registered investment advisor industry took another four decades. While large financial institutions were undergoing rapid consolidation, independent RIAs grew slowly but inexorably. Their appeal lay in their smaller "Mom and Pop" structures, access to owner-principals, implied independence, and a strong adherence to a fiduciary duty of care and loyalty to their clients. This cultural ethos of client allegiance stood in contrast to larger public companies often part of a "manufacturing and distribution complex".
Several factors fueled the acceleration of independent RIA growth. The advent of the personal computer and improved data communication capabilities provided crucial technology tools for portfolio management, financial planning, and customer relationship management, enabling firms to scale. Regulatory changes also played a role. The SEC's abolition of fixed brokerage commissions in 1975 was particularly impactful. This opened the door for the discount brokerage industry led by firms like Charles Schwab. Discount brokers introduced concepts like open architecture, allowing clients to aggregate investments from various sources, not just approved lists. They also facilitated price discovery on commissions and empowered "do-it-yourselfers".
Crucially for independent advisors, discount brokers like Schwab became the back-office platforms providing client trading, custody, and account reporting services. Schwab further disrupted the market with its no-load mutual fund marketplace, which was initially inconvenient for financial planners. However, planners found a way to access it for clients, often via powers of attorney. Schwab noticed this and serendipitously realized it could build a business by inviting independent advisors to custody client assets. This pioneered a marketplace Schwab still dominates today.
Thus, the historical path involved regulatory frameworks, the evolution of financial planning focusing on client needs, technological advancements, and the rise of custodial platforms supporting advisors operating independently of traditional large institutions.
The Problem with "Independent" - Why Clients Don't Get It
Despite this rich history and the genuine distinctions it represents to those within the industry, the term "independent" is problematic for clients.
From a communication perspective, saying "I'm independent" makes the advisor the hero. It's an inward-facing statement about you, not about the client or their situation. The client is often left wondering: "So what? How does that benefit me?".
Furthermore, the term assumes too much knowledge on the client's part. Most people outside the industry don't understand the regulatory or operational distinctions between different types of financial firms or advisors. They don't know what "independent" actually implies in terms of business structure. They might even think, "Isn't everyone 'independent' now?".
Ultimately, using the word "independent" in client conversations creates confusion, not clarity. In effective communication, clarity wins. Ambiguous terms like "independent" fail to clearly explain how you make the client's life better or easier.
What "True Independence" Actually Means (From an RIA Owner's Perspective)
Within the financial advisory world, there is ambiguity around the definition of “independence”. It's not just about whether you receive a W-2 or a 1099 tax form. The sources outline four main advisor models:
Broker-Dealer Employee (W-2): Advisors directly employed by firms often called "wirehouses" like Merrill Lynch or Morgan Stanley.
Broker-Dealer Affiliate (1099): Non-W-2 advisors who operate as contract employees affiliated with broker-dealers like LPL or Raymond James. They may use their own DBA names but are still tied to the underlying broker-dealer.
RIA Affiliate: Advisors running their business through a centralized "corporate" RIA.
RIA Owner: Advisors who own their own Registered Investment Advisor firm.
According to the sources, only the "RIA owner" model confers full independence.
Why? It comes down to ownership of the ADV. The Form ADV is the primary document filed with regulators that outlines how an RIA is organized, conducts business, engages with clients, its ownership, employees, business practices, affiliations, fees, conflicts of interest, and disciplinary information. An advisor without control or immediate influence over their ADV is not fully independent.
Advisors affiliated with broker-dealers or corporate RIAs, while sometimes labeled "independent," are effectively still "captive" in many respects. They don't have full control and must do business as the "house dictates". This contrasts with a fully autonomous RIA that can be built and managed according to the owner's vision.
Why Your Structure Matters to Clients - The Real Benefits of Your Independence
While clients don't need to understand the nuances of Form ADV ownership, they do benefit from what that structure enables. Owning your RIA allows you to act as a true fiduciary for your clients. This is a critical distinction; advisors have a fiduciary obligation to put client interests first, whereas broker-dealers have historically only needed to ensure recommendations were "suitable". Although recent regulatory efforts like Dodd-Frank have pushed towards a standard for broker-dealers "no less stringent than the standard applicable to investment advisors," the fiduciary standard remains a point of public discourse and debate.
Beyond the fundamental fiduciary duty, your true independence means:
Tailored Advice: You can design your services and marketing efforts to specifically serve a niche or specialty demographic, rather than being confined by a monolithic firm structure.
Broader Solutions: You are not stuck with proprietary products or limited technology, investing, or lending platforms designed for a lowest common denominator. You have less limits on accessing a wider range of solutions for clients. This extends to ancillary services like tax preparation, estate planning, and insurance.
Transparency and Alignment: You have the freedom and incentive to provide transparency about your business affiliations, compensation structures, and fiduciary commitments, helping clients understand the alignment of interests.
In essence, your independent RIA structure provides the framework to prioritize client needs and build a business focused on client allegiance and comprehensive service. The range and complexity of services offered by wealth managers today are largely a function of the greater needs of highly affluent families, but the core essence is comprehensive financial planning, regardless of client wealth level.
Speaking Your Client's Language - Alternatives to "Independent"
Given that "independent" is inward-facing and confusing, how should you talk about the advantages of your structure? Frame it in terms of the client's problem and the resulting benefit.
Instead of saying "We are an independent RIA," try phrases that highlight what that means for them:
"We don’t work for a bank or brokerage, which means we don’t have sales quotas or product pushes — just advice designed to serve you". This directly addresses potential client fears about biased recommendations and positions you as being solely focused on their needs.
"Because we’re independent, we can choose from the entire marketplace to find what’s best for your goals — not someone else’s bottom line". This emphasizes the freedom to access a wide array of investment options and solutions, directly linking your structure to their benefit of having unbiased choices.
"You get advice that’s conflict-free, because we’re not owned by a Wall Street firm or insurance company". This speaks to the fiduciary commitment and separation from product manufacturers, highlighting a key advantage for clients seeking trustworthy advice.
Using these alternatives makes the word "independent" the background—the means to an end. The client hears what they truly care about: freedom of choice, fewer potential conflicts of interest, and advice that is truly designed for them.
Conclusion
The journey of "independence" in financial advising is rich with history and regulatory context. For advisors, particularly RIA owners, it signifies a distinct operational model centered on fiduciary duty and client allegiance. However, the term itself is jargon that fails to communicate value to the client.
As you advise clients on their financial future, let's commit to clarity over jargon. Instead of simply stating you are "independent," articulate what that independence enables you to do for them. Focus on the tangible benefits: unbiased advice, a wider world of options, a structure built around their needs, and a relationship grounded in trust and fiduciary care. By speaking your client's language and focusing on the "why" behind your structure, you build stronger relationships and truly differentiate yourself in a crowded marketplace.