Unlocking Real Value Blog

More Potential Bad News For The Wirehouses

In FundFire’s recent survey of industry participants, the highest percentage of respondents indicated that they felt that revenue-sharing agreements – or the amount of money that fund companies pay to sponsors for promotion and support – were the most important determinant of whether or not a fund company gets on that sponsors platform. In other words – pay for play.

Investment philosophy came in as the second most popular answer, followed by the wholesaler’s relationship with the gate keepers. Why might this answer be bad for wirehouses?

The answer is that it indicates that the perception is that money speaks louder than anything; if true, this phenomenon hurts smaller mutual fund companies that don’t have the financial resources to compete. It would also limit client and advisor choice.

I say perception because while I agree this might have been the best answer a few years ago, I would agree with the management of wirehouses who would dispute this is still the case in today’s market. Especially following a large settlement a number of years ago against Edward Jones, the wirehouses have been reluctant to let revenue-sharing dictate their actions.

But since perception is reality, this type of issue, if publicized further, would be another black eye for the wirehouses. In the midst of the continued debate over the fiduciary standard, perceptions such as this become reality if used by RIAs and others who compete with the wirehouses; these competitors would argue that not only are wirehouse advisors not held to the fiduciary standard, but their firms limit their product offerings due to monetary issues, with the loser being the client.

My advice to the wirehouses is that this issue should be added to the list of perceptions that need to be proactively addressed head-on so that their advisors can compete.

Today, the financial services industry is losing the external public relations war (wall street v. main street). The wirehouses are losing the internal war to the independents. The war is far from over and the wirehouses will survive. But the sooner they start getting their case heard, the better off they will be.

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