Good-bye to independence?

The independent planning firms are stepping up and becoming responsible but, in the process, they are turning themselves into the institutions they were erected to oppose, according to the more than 400 reps who responded to Investment Executive’s second annual Planners’ Report Card. To some, this development is long overdue but the price it is exacting is reps’ autonomy and independence. And, at the end of the day, it’s not clear whether the client is better served.

In our survey, reps talked about their firms’ efforts to take greater control of their businesses. For an industry that grew up as the alternative to the tightly regulated world of banks and brokers, this mainstreaming is not going down smoothly. With reps focusing on freedom, it’s no surprise then that Burlington, Ont.-based Berkshire Investment Group Inc. came out on top of our rankings.

Berkshire topped the survey by doing just about everything well — especially freedom and payout. One Berkshire rep from the Maritimes says the best thing about Berkshire is: “The freedom — there’s no contract, no recommended list, no pressure to sell our own products.” Reps are clearly coming to value the features that were once common but are now disappearing from planning firms. Berkshire’s advisors aren’t “pigeon holed,” the rep brags.

Life isn’t as easy elsewhere. Firms are getting big and bureaucratic, bringing a corporate culture to a grassroots business. There’s a growing sense of alienation that comes from working for a large firm based in Toronto, rather than at a small shop, which used to dominate the local marketplace. A rep from CMG-Worldsource Financial Services Inc. in Eastern Canada says the worst aspect of his firm is, “being 1,800 kilometres away from Toronto. It would be nice to be able to walk down the street and see these head office guys.”

As those “head office guys” fall out of touch with the reps, they are also starting to crack down on reps. It was once common for the chief executive at a planning firm to be running a book, meeting clients and even answering his or her own phone. Now invariably they are full-time managers and strategists with a phalanx of bureaucrats around them. The further removed the managers get from the business the easier it becomes for them to get tough with the frontline troops. A Dundee Securities Corp. rep in the East describes his firm’s compliance department as “oppressive.” Another Dundee rep says the firm isn’t trying to interfere with his book, but “they are definitely trying to control my business” — in his case, by forcing him to abandon a home office and put on a suit.

To a certain degree these crackdowns are good. With the Mutual Fund Dealers Association on its way and increased oversight of planning firms inevitable, firms are tightening compliance. Reps don’t always like this, and there are surely some draconian compliance officers out there, but it’s important the industry do a better job of keeping practices onside.

However, as the planning firms change from a loose collection of independent offices into more rigid, systematic institutions, they aren’t just adopting stricter compliance; they are also adopting some of the tactics of the big institutions. Some reps feel that their firms are pushing reps to abandon the traditional middle-class mutual fund buyer in favour of the ellusive high-net-worth client that the banks and brokers covet. An Ontario-based rep from Financial Concept Group says her firm is “forgetting about smaller clients.”

The clients the reps do keep are being pushed to buy the firm’s in-house product. “Freedom is there, but we are encouraged to sell the proprietary products,” says a rep from Financial Planning Group on the Prairies.

The firms are developing in-house products largely because they are finding it hard to make money just on distribution. To help bolster the bottom line, the planning firms have gone into the higher-margin business of manufacturing. While this may make the firms more viable, it is a doubled-edged sword for advisors.

The emergence of proprietary products at the planning firms has naturally led to pressure, whether real or imagined, to sell those products. For reps that were fed and reared on pure freedom, including a wide open product shelf and maximum payout, insidious pressure to deal from the firm’s inventory is cramping their style, but it is quickly becoming the party line.

Proprietary product isn’t all bad for reps. On the upside, it allows reps and their firms to customize product for their client base. It also allows them to create a brand, to bolster marketing efforts. But against those rather sketchy positives there are pitfalls. The very existence of house funds arguably compromises the objectivity of reps who’ve built their books on the promise of independence and quality advice. However, with most of the major firms moving that way, it’s a case of “if you can’t beat ’em, join ’em” for many reps.

The financial-planning firms are also institutionalizing their reps by making them shareholders. On top of the usual methods of persuasion, making reps into shareholders aligns the advisor’s interests with the firm’s bottom line, which may not always converge with the clients’ best interests. If the firm makes more money from house funds, and the rep has an interest in boosting the share price, then a subtle control of the reps’ books is introduced.

Not only does this new model of house funds and rep-shareholders push reps to follow the firm’s line, it also ties them more tightly to the firm. Traditionally, planning firms offered a place to hang your hat and some support, but they kept their hands off your clients. It’s becoming that much harder for reps to move firms, and the firms are intent on getting greater control of the reps’ books. “I’m a shareholder, and they make it virtually impossible to move firms once you’re a shareholder,” says an Ontario-based FCG rep.

If it sounds like reps are starting to feel trapped, that may well be true, but the evolution toward a more institutionalized industry also presents opportunities. The same forces of competition that have been driving the institutionalization of fund sales — the banks in the wealth-management business and the growth of Internet-based self-serve distribution — are also pushing firms to add value by offering true financial planning.

The greater institutionalization of the planning business is also turning it into a more credible “planning” business. To stay competitive, the firms are becoming more professional. Reps are being pushed to improve their qualifications. At Investors Group Inc., for example, new reps have to earn the CFP designation within a prescribed period, and other firms are imposing similar minimums.

“There needs to be a required education program, but most of the industry is unqualified so they’re not going to push this,” says an Equion Group rep from the Maritimes. Instead, the firms are doing the pushing. By raising the bar and bringing some quality assurance to the planning side of the business, firms are doing what they can to make planning into a more credible profession.

The planning business isn’t yet as homogenized as banking, but it’s heading that way. Competition is making the industry buckle down to business. Reps are understandably leery of this new uniformity, and as the firms become bureaucratic and impersonal, they risk becoming like that which they hate most — the banks. If they fall into this trap, the banks will have pulled the slyest trick of all — by convincing the planners to kill their competitive advantage.