Ep 2: How The Financial Industry Has Changed In The Last Decade

On This Episode

Things are changing in the financial world, and they’re changing for the better. This week, we’ll look into how advisor fee structures have changed, and we’ll talk about why more and more advisors are becoming independent fiduciaries and separating themselves from the larger wirehouses. We’ll also explain the difference between the suitability and fiduciary standards, and discuss why holistic planning is becoming so popular.

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PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:

Marc Killian: Hello, and welcome in to another addition of Retirement Planning Redefined with the team from PFG Private Wealth. Joining me on the program is Nick McDevitt, as well as John Teixeira. Guys, welcome in. How are you?

John Teixeira: Good. How you doing?

Marc Killian: I’m doing very well. Hope that you guys are doing pretty good. Anything interesting going on since the last time we did our initial podcast? Anything exciting or new to talk about?

John Teixeira: Nick, you got anything going on?

Nick McDevitt: No, just getting ready for the summer.

Marc Killian: Well John, are you sleeping? Because, I mean the last time Nick made some comments about you trying to get some sleep with the little one.

John Teixeira: I’m … I’m not sleeping. Last night was pretty rough, so for an interesting day. But yeah, no sleep last night, but I’m up and running.

Marc Killian: Yeah, there you go. Well they’re good for that when they’re little, but they’re also got a lot of little fun things happening there too. So, it’s interesting being new parents, that’s for sure. But listen, guys I want to talk over the next couple of podcasts. We kind of kicked off our first one just to get to know you guys a little bit and get to know the corporation, the company a little bit, PFG Private Wealth a little bit. You guys are an independent RIA. You are serving the folks here in the Tampa Bay area. And I wanted to talk a little bit on this podcast just kind of about the industry, a few things. Kind of an overview if you will. And just get your thoughts on some of these things.

Marc Killian: And of course, folks, if you want to subscribe to the podcast, check us out, moving forward we’re going to be doing more of these. Go to pfgprivatewealth.com. That’s pfgprivatewealth.com, and of course as always, you can always call them if you have some questions or concerns. Before you take any action, always talk with a qualified professional like John and Nick, 813-286-7776. That’s 813-286-7776.

Marc Killian: So guys, let’s talk a little industry overview here. Just in the past decade, how’s it changed?

Nick McDevitt: Well, so typically we work with people that are 50 and up, where things are kind of starting to get a little bit more serious as they approach retirement. And one of the common things that we’ve seen is they come in, whether it’s to one of our classes, or they come in for a consultation, is that they’ve had multiple people in their life that have helped them with maybe specific financial decisions. They’ve had a person that they’ve bought life insurance from. They might have a mutual fund account somewhere else. They may have bought a few stocks from a different broker, something like that. And what they haven’t done is sat down with somebody that can help them look at it strategically and look at it from a broad base viewpoint.

Nick McDevitt: And so, that’s been the biggest change where things have become more planning focused versus maybe just focused on the stock market or returns in the market, that sort of thing. And as part of that, there’s really been a huge shift in how the industry… And there’s a lot more room left for the industry to grow that way. But the sort of transparency that the industry has from the standpoint of what our client’s actually paying for.

Marc Killian: Got you.

Nick McDevitt: From a fee standpoint, really how are the advisors compensated, that sort of thing. And there’s been a big shift where more and more advisors are breaking off from your Morgan Stanley, Merrill Lynch, wirehouse sort of structure, to an independent sort of structure. So, those have been some of the big changes for people.

Marc Killian: Okay. And I want to talk a little bit more about that in just a second. But I wanted to ask John a question to kind of chime in here. What about fiduciary versus suitability? Now, for some of our listeners John, they may have heard these terms before, they may not. So real quick, tell us what they are and then give us a little bit of a difference on these.

John Teixeira: Yeah, so this is … goes in line with what we were talking about, the industry changing. And the industry’s really going more towards a fiduciary basis versus suitability for clients. So, just to define those for people that don’t know what it is, a fiduciary has to do what’s in a client’s best interest and has to put their own interest aside. I mean, it’s funny to kind of say that, but [crosstalk 00:03:47] fiduciary has to do what’s in the client’s best interest, compare all options, disclose any conflict of interests that may happen in the result of planning. Someone that’s working on a suitability capacity basically has to recommend to a client what is suitable. So it might not be the best thing for them. So example, if you work for a particular company, and they had very good products and investments, and you said, “Well this is suitable for this individual, but there are some other ones that are better, would better serve them. But I’m recommending what’s suitable, so this will be just fine.”

Marc Killian: Got you. Okay. And so as you guys, as fiduciaries, you obviously are doing what’s in the client’s best interest. And so is that just something that … I mean again, it does sound weird to say, right? But you would think that just should be the norm. So I guess it is good that the industry’s moving more that way. And is there any kind of particular reason behind that? Or just something I think they feel that they should do?

John Teixeira: I think it’s a lot of transparency, and something that really … Dealing with people’s retirement’s very serious. You want to make sure that people are doing the best thing for their retirement, getting the best advice. And kind of going into what Nick was saying, a lot of people are leaving the Merrill Lynch’s and stuff like that and Morgan Stanley’s and going more independent. Being independent really allows you to be a fiduciary, where there’s no proprietary products that you have to sell. There’s no quotas to hit. There’s no one kind of looking over your shoulder and saying, “Hey, what are you doing for us today? Did you sell this particular product? Or did you push this investment?” Things like that, so-

Marc Killian: Got you.

John Teixeira: All that … Being in an independent space allows us to be a fiduciary and do what’s best for the client.

Nick McDevitt: And another maybe simplified example of that is … Let’s say we kind of go through and we develop a plan for somebody and based upon their plan, the client has decided that they would really like to have some sort of guaranteed income. And so they say, “Which ways can I get guaranteed income?” And we go through the options with them, and they decide, “Okay, well we’re interested in some sort of annuity” and so, maybe somebody that’s working in a suitability…from the suitability stand point, they have a broker dealer in a company that they work for that says “Okay, you’re allowed to show your client these three options for them to purchase that annuity but, we’ve restricted you to these three options” versus somebody that’s in a fiduciary capacity they could go out into the market place and look at everything in the marketplace and maybe there’s ten options and that really allows them to come up with the best option for the client. So, that’s kind of a basic example that might help add some clarity.

Marc Killian: So, you’ve got a little bit more of a smorgasbord there going on, things you can kind of look through. I always kind of make the analogy when I talk to people across the country and host different shows that in a lot of ways with some of these big boxes, if you will, it’s almost like sweaters. For example, when seasonal stuff changes they start pushing the stuff they want to get rid of, right? So, they can clear it out for the next thing to come in and so sometimes you might see that in some of these bigger box chains where they’re saying “Hey, we really want to push this particular product versus that,” even if it’s not always the best fit. We might refer to that as the cookie cutter plans, right? Where it’s just kind of a one size fits all and is that what you were talking about, Nick? When you were mentioning that independent versus the wirehouse?

Nick McDevitt: Yeah, so, a good way to…some good examples of that, and this changed even more as we went through the recession…’08, ’09, and there was a lot of consolidation. So, let’s say for example somebody walks in to a Bank of America and they want to open up an account, like an investment account at Bank of America. Bank of America purchased Merrill Lynch so Merrill Lynch is owned by Bank of America, and they will have an office inside of the bank that’s just supposed to be for Merrill Lynch and the rest of the bank is supposed to be for Bank of America. And so, at the same time, those Merrill Lynch advisors that are in that bank may have certain quotas to hit. So, for example, if somebody is going to open an account with them they may also have quotas from the standpoint of saying “Well, what are you doing with a line of credit, do you have a line of credit on your house, do you need one? What about a credit card?”

Nick McDevitt: And so, [crosstalk 00:08:03] it gives to all these other lines of business that in our mind from an independent stand point create conflicts of interest for the client and puts them in a position that may not be best for them. So, as an independent, when there’s not proprietary products and you’re able to act as a fiduciary and you know that you don’t have any quotas to hit at the end of the year. The matter if you are ethically a, an extremely ethical person and you really do try to put the client forward, there are just conflicts that are out of your control, no matter as an advisor if you’re trying to do the best that you can, eventually you’re going to be put in a position that may make it difficult for you to do that. And so, that’s really where that difference [crosstalk 00:08:45] comes to play.

Marc Killian: That makes a lot of sense and I think that kind of helps things. That’s why we’re kind of talking and named the show here Retirement Planning Redefined, that’s what you’re listening to. The podcast with John and Nick, financial advisors at PFG Private Wealth and of course check us out online at pfgprivatewealth.com and I guess I’ll ask one kind of final question here to kind of wrap up our podcast here around the industry overview. Hopefully, you’ve found a useful nugget or two of information in there, and that’s around fee structures. So, if things have changed a lot over the last decade, and we talked about some of these things, how has that changed, what are you talking about when it comes to fee structures?

Nick McDevitt: Yeah so, again going a part of the change, I’d say when I first started back in 2006 and the investment world was really geared toward commissions. For example, you would sell “Hey, Marc, you want to buy some Bank of America stock?” I’d trade it and then make commission off of that.

Marc Killian: Right. Okay.

Nick McDevitt: Where now it’s going more towards just a flat fee. So, if I’m managing a client’s portfolio, let’s just say it’s half a million dollars, I may charge X amount and it’s that for the year. So, it’s just much cleaner versus the commission focus. We found a lot of clients that have come to us we’re leaving their advisors because they were only hearing from their advisor when there was a stock trade. And it’s like “Hey, this is the new buy, let’s go ahead and buy this.” They generate a commission, wouldn’t hear from the person until they was ready for another commission that was coming their way.

Marc Killian: Right.

John Teixeira: Where the fee based it’s really just ongoing advice on the assets so it’s just much cleaner and in reality when you’re charging a fee to manage someone’s portfolio, you really want a long term relationship with the client. It’s not a one and done. So, you, let’s say, you work a little bit harder to make sure that the client is going to stay with you. And that’s just kind of on the stock basis but, the same thing goes for mutual funds where, especially, when I first started in ’06 it was all these A shares where basically someone would buy into a mutual fund family, let’s just say American funds and there was almost a five percent sales charge in to it and the person would stay within that fund family. Negative to that was, American funds is good at certain thing but they’re not the best at everything. So, some of these people were kind of stuck within that fund family where a fee basis you can kind of use all the best funds available to manage someones portfolio.

Marc Killian: Okay. I got it. It makes sense. And, a lot of times we do hear those kinds of questions from folks, they feel like…and that sometimes maybe the difference between just having a broker and an advisor is you only kind of hear from that person when they’re trying to move you in and out of a different product whereas an advisor, a financial advisor, one that you’re building a long term relationship with, you can kind of turn to that person and say “Hey, here’s what I’m thinking about for the future, here’s what I want to plan for, here’s this, that, and the other” and you kind of pull all those facets together, is that kind of how I’m reading that?

John Teixeira: Yeah, and I would say as well that a couple of the buzz terms on that are that, so, when things were, when trades were commission based or almost load based, what would happen is that the conversations would be “Hey, it’s time to make a change to your portfolio” and because those changes would often incur expenses, clients started to kind of get a little bit reticent to, like….is this actually good for me? And so, that communication made it harder for the advisor to do their job, and then for the client to trust that they were doing their job. So, with the fee based management where the advisors team typically operates on what’s called a discretionary basis, so in other words, if things are happening and changes need to be made, that agreement has been made up front. And, because there aren’t additional competition towards the advisor incurred on those changed, the client, typically from the feedback that we’ve had, they feel more comfortable that those changes are being made proactively because they’re not a cost being generated to them. So, it increases the communication which ultimately ends up with their being a better relationship between the advisor and the client.

Nick McDevitt: To jump in on that, we find a lot of clients actually like the fact that there’s invested interest in their account going up. So, they say, we hear things like, “Oh, so, when my account goes up you make more and if my account goes down you make less” So, we find that’s [inaudible 00:12:53] hear that quite a bit.

Marc Killian: And we’re going to touch on that a little bit more on our next podcast episode, we’re going to talk about how the things have changed over the last decade from the advisor role. We kind of talked about the industry overview here a little bit today on this podcast with Nick and John and so we’re going to touch on that the next time. So, make sure you tune in, make sure you subscribe to us and go to pfgprivatewealth.com again while you’re there you’ll be able to… we’ll have this coming here pretty soon, you’ll be able to click on podcast and subscribe to us on iTunes, Google Play, Stitcher, various different outlets, whatever one is the one of your choice. And as always, reach out to the team if you have questions or concerns about anything before you take any action give them a jingle at 813-286-7776, again 813-286-7776 to talk with John Teixeira and Nick McDevitt at PFG Private Wealth, an independent RIA, serving you in the Tampa Bay area. And guys, thanks for your time, I look forward to talking to you in a couple of weeks when we talk about advisor roles and how they’ve changed over the last decade. Thanks for your time guys.

John Teixeira: Thanks, Marc.

Nick McDevitt: Thanks.

Marc Killian: We’ll talk to you next time here on Retirement Planning Redefined.