A term that went into the financial vocabulary in the early 1930s is no longer suitable for today's very different industry, the author of this article says.

From time to time it seems wise to ask whether to junk a term used for decades in financial services. The editors have heard there is a case for dispensing with the very term “private banking” because financial privacy appears to be fading in the face of relentless pressure from government tax collectors. (This may be a premature conclusion, however, because the need for privacy remains as vital as ever, and not just for high net worth persons.) Also, terms such as “active” or “passive” investing, to take another case, are questioned because, for example, it is said that any form of investment, even one that involves replicating an index, involves a human decision to act in a particular way, so that “passive” is misleading. Another case is when terms such as "family office" are used to describe organizations that have little resemblance to one, but where the expression is used for some sort of elite branding appeal, perhaps. And so it goes: the lexicon of financial services is seldom static. We wordsmiths also have a habitual dislike of “industry-speak”. 

As regulations overturn traditional business models, an term that practitioners might erase is “broker-dealer”, an expression dating back to the years of the Great Depression and FDR. So, at least, is the contention of James Poer, the chief executive of US-based Kestra Financial. In these comments, he argues it is time the term was placed firmly into retirement. 

The editors of this news service are pleased to share such views with guest contributors and invite readers to respond. As always, we don’t share all the views of contributors and publish such thoughts as stimulus to debate. Email tom.burroughes@wealthbriefing.com

When my son got his first iPhone, he mentioned that it came with the “phone app.” He didn’t think of the device as a phone. Goods and services are usually developed to serve a purpose relevant to a specific time. Cell phones were created so people could make phone calls on the go, but times have changed. Today, cell phones are high-powered computers used to surf the internet, conduct business, play games, post on social media, take pictures, and text messages. Occasionally, people still use their cell phone to make calls. 

It’s been 83 years since the term “broker-dealer” entered the lexicon of our industry, and without context, it conveys an outdated way of conducting business. Our segment of financial services has evolved just as dramatically as the cell phone.  I firmly believe it’s time for our industry to adopt terminology that represents the modern role of independent financial service firms.

When the Securities Exchange Act of 1934 created the term broker-dealer, the U.S. was in the throes of the Great Depression and Franklin Roosevelt was in his first term as president. Back then, broker-dealers personified the very terms “broker” and “dealer”: a person or entity that conducted a transaction but didn’t give advice. The first independent broker-dealers emerged because brokers wanted freedom to choose the best way to serve their clients. These same independent-minded entrepreneurs forged the evolution of what is now fee-based wealth advice. 

At the same time, on a parallel path, firms became sophisticated financial service platforms. Unfortunately, the nomenclature hasn’t progressed with the business model that firms adopted to keep pace with modern times. In an environment where the term “broker” is often viewed as synonymous with not serving a client’s best interest, this is the only segment still called broker-dealers. It’s time to leave that term in the history books and reflect the true value we provide the financial services industry and investors by coming up with a new genre.

Today, the firms classified as independent broker-dealers are actually financial services platforms. Of the top 20 firms in the space ranked by total revenues, 10 derive roughly half their revenue from fee-based/registered investment adviser (RIA) business. If you consider that a large percentage of the commission revenues are trails on legacy business, the vast majority of new business flows are fee-based.

These so-called “independent broker-dealers” are actually some of the largest RIAs in the country; yet, these firms don’t make it on the lists of the top RIAs. 

The reality is that most broker-dealers are not simply broker-dealers, and defining them so narrowly is disadvantageous, especially when they offer technology, due diligence, financing, back-office and middle-office support, investment research, practice management education, and networking support. And if you happen to need a broker-dealer - they have one. 

Our nation has $100 trillion in household wealth and $34 trillion in investable assets. Aligning our community to serve investors’ needs is critical. To do so successfully, we have to execute on three key fronts:

-- Lead the industry in providing technology, education, and compensation strategies that serve investors well; 

-- Work closely with regulators to evolve our business models, investment options, and industry regulation; and 
-- Educate Gen X and Y about the benefits of independent advice before they inherit $34 trillion in investable assets.

These efforts must start with establishing a common ground with regulators, the press, and our peers to better define who we are and what we do. 

The world of today is nothing like it was in 1934. I propose that we remove the term “independent broker-dealer” from our vocabulary and instead refer to these firms as “independent financial services platforms,” a classification that better reflects all that we do now and will do in the future to serve financial advisors and investors.