John Lefferts' Blog

Tuesday, December 8, 2009

Horoscopes, Fortune Cookies and Market Timing

As mindless entertainment, every once and a while I browse at the daily horoscope that pops up on my web home page. I admit, I don't really understand astrology much less believe it. But the one in twenty or so times it is remotely applicable to me and in a positive way, somehow, I take it as being spot on. The same is true with fortune cookies. If the message is not fitting or positive, I think we all tend to accept the reality that it has no basis in fact. But if it happens to say something like "You have great wisdom and will soon be richly rewarded", somehow, I suspend reality and actually start believing it may be true. I show my family at the table my good fortune to have picked up that particular cookie and can't wait for my rich rewards!

Lately, I've been seeing a fair amount of discussion in financial periodicals and blogs about "Buy and Hold" versus "Market Timing". Flipping channels (sounds like I have a lot of free time these days) I invariably stumble on CNBC and Jim Cramer. I admit, he can be entertaining if you're in the mood for obnoxiously loud, fast talking and pompous middle aged balding guys. Like most of these guys who pitch their systems, strategies and books, they make you feel like a stooge if you adopt the boring, time tested asset allocation based upon your time horizon, risk tolerance level and tax circumstances. They imply that it's buy and matter what, without regard to rebalancing. But I don't buy their "this time it's and hold is dead" chants and neither should the vast majority of investors. These market guru-prognosticators make quite a few predictions. And the one in 20 times they're right, the gullible media and unknowing public lock onto it. Never mind the majority of their prior predictions being failures.

Smart investing is counter-intuitive. It's as much about managing our own human nature as it is all the factual data available today even to the most novice investor. The pro's in the business who have all the experience, market data and resources behind them cannot beat the market averages the vast majority of the time. Yet the one time someone hits a market prediction right, the media and herd of investors flock toward them. My father, who is as colorful as he is brilliant, has a fondness for horseracing. He says, "I'd rather put my money on the ponies than the stock market. At least when I lose my money, I get the excitement of watching them run around the track!" As it relates to market timing, I think he's right.

The greatest benefit of a financial planner/advisor is not to choose the #1 ranked investment for their clients, but to keep them from acting on irrational emotion...keep them from hurting themselves. The financial crisis hasn't changed human nature and it hasn't changed the time tested buy and hold-asset allocation strategy in favor of market timing. But like the horoscope and fortune cookie, on the rare occasion the market timers hit the mark, our human nature is to suspend reality. And the reality is, market timing is fools play.

Thursday, October 29, 2009

Two Hats and Two Faces

The entire financial services industry has been waiting for what has been termed “sweeping” regulatory change for close to a year since the fallout of the financial crisis began. It reminds me of the old Heinz ketchup commercial set to the tune of “Anticipation”. You know the lyrics…”Antici-pay-ay-tion...It’s making me late…keeping me wa-a-a-iting”... while the commercial shows nothing coming out of the ketchup bottle as it is shaken. It kind of feels the same with regulatory reform. We’ve been shaking the proverbial regulatory bottle, but nothing is coming out. And there's been a great deal of anticipation. Finally this week, it appears that we’re at last seeing the regulatory bottle start to give us some drips.

Naturally, everyone is attempting to evaluate how changes will affect their particular business, whether they be SEC or State regulated advisors, B/D Reps, insurance professionals and financial planners. From comments made by Mary Shapiro this week, it’s clear we’re headed towards a harmonized and not watered down fiduciary standard for all who give investment advice. Isn’t this what the fee only advisor has been arguing for and the B/D’s have been fearing? Well…not really. The fee only crowd had thought that by fiercely arguing to keep to the highest fiduciary standard, it would somehow repel B/D’s and FINRA, the 900 pound gorilla that regulates them. The objective?...keep them separate and as far away from the advisory business as possible. But I'm afraid for them that this may have been a gross miscalculation.

While in New York recently, I visited a CEO of a large 12,000 registered rep organization to hear his perspectives on the regulatory issue among other things. I asked, “Aren’t you concerned about the effect a fiduciary standard will have on your field force?” His response may seem surprising except to those of us who have been under the thumb of FINRA for some time. He said, “As a large highly visible organization, we’re already held to the highest standard. A harmonization will actually give us a competitive advantage and make our business easier”. I’m fairly sure CEO’s and distribution heads of the country’s largest FINRA regulated organizations feel the same way. While on paper, one would assume that a fiduciary standard is more restrictive and consumer focused than the suitability standard of care, in practice, not so much. And so I don’t completely lose and offend my fee only friends, I’m not saying a fiduciary standard is a lower one, just that there is little in place to hold one accountable to that higher standard.

In the late 90’s, I headed an initiative to transist a national field force into fee based financial planners. This involved re-licensing and retraining an entire sales force numbering in the thousands, while changing their product offerings, compensation and recognition. Because the lawyers had an absolute fear of the field force holding themselves out as planners but really only acting as salespeople, our process built a Chinese wall between advisory activity (the planning) and the implementation of the plan (product recommendations). One would think that the fear would come from the SEC who is to hold investment advisors to the higher standard…right? Nope, the SEC was no where to be found. The fear was from FINRA which not only breathes down the necks of registered reps, but also rep’s who offer advice. A product recommendation (aka sale) couldn’t even be made until the client had signed off on a final plan which took up to 3 to 5 separate meetings, often resulting in no product implementation. In this sense, it was viewed that we were wearing two hats. First the investment advisory hat while planning, and then the Registered Rep hat while making product recommendations. But we all knew, the only regulatory body holding us accountable was FINRA for all our activities. And it’s my bet that the fee only investment advisor knows this. While RIA's will pontificate about not wanting to be watered down to a standard and regulator set up for salespeople, what they’re really thinking is how ominous it would be to have a regulator hold them to ANY standard. Enjoy the benefits of the public perception a higher standard gives, but have no serious accountability for doing so. It looks kind of two faced to me.

So, while the regulatory changes unfold, I think the impact will be far greater on the non FINRA registered RIA who heretofore has had very little accountability and not on the large FINRA regulated firms already held accountable to a very high standard. The FINRA rep’s will be happy to toss one of the two hats in favor one big hat. The challenge will be fitting that one big white hat on two faces.

Friday, October 9, 2009

Extreme Arrogance

Belief is a powerful positive force. It can open prior closed doors, bring out talents one may not have thought they had and can help overcome obstacles that previously seemed insurmountable. With such positive outcomes from belief, it's easy to believe to an extreme at the exclusion of all else. But in this world of ebb and flow, yin and yang, summer and winter, few things are absolute all the time, except, of course, death and taxes.

After a trip to Capitol Hill this week to meet with senators and congressmen about Financial Regulatory Reform, it is clear to me and others that the atmosphere is more polarized between Democrats and Republicans than ever before. An attitude of "if you're not for me, you're against me" prevails. All yin and no yang. Belief can be a good thing, but belief without humility can turn into arrogance and extremism. Extremism in politics, religion, business or really anything can be a powerful negative force. Perhaps it's my inherit skepticism that one can be 100% right, 100% of the time that has shaped my relatively moderate views on many things, including politics.

At this unique and transformational period of time in the financial services business, I see the same levels of extreme views being taken within the industry. Speaking with a congressman this week, he made the comment, "perfection is the enemy of the good". In other words, in our fight to make everyone see things perfectly and absolutely our way, nothing gets done. He also said, "in politics, civil war is fatal". By this, he meant that infighting should take place and be resolved behind closed doors and in private. Not doing so in a public civil war risks an outcome that no one can live with. In the effort to get the "I win-you lose" scenario, they end up getting the lose-lose. This is exactly what concerns me about the financial services industry as 26 year old staffers write and mark up legislation that will materially affect our business and livelihood.

With the issue of "harmonization" the lines seem to be drawn to one side being the SEC regulated fee only investment advisor-"don't associate me with a salesman" group, and the other being the FINRA regulated registered reps. While the FINRA RR group is concerned about how and when the fiduciary standard will be applied they have acquiesced to being held to a fiduciary standard. The SEC advisors seem to have taken the extreme position unwilling to bend in any way. In fact, one investment advisor was so bent about being remotely associated with a salesman that he wrote an article in this week's investment news espousing his extreme views.

He arrogantly infers that FINRA regulated rep's are akin to used car salesmen, and I don't think it was meant in a good way. Let's see,...there are roughly 650,000 FINRA registered reps and about 11,000 SEC regulated investment advisors. It has been cited that a full 1/3rd of all Ponzi schemes come from the RIA's. Simple math tells me that short of 2% of the population between the two are producing 33% of the Ponzi schemes. Does this mean that all investment advisors are crooks? No more than one can infer that all FINRA RR's are unprofessional used car salesmen. Each discipline has it's bad eggs and fortunately they both have far more professionals who are very good at what they do.

In hind sight, It's unfortunate that the various segments of the industry didn't work together before publically waging their civil war protecting their respective turfs. I'm hopeful that as uninformed much of congress is about this issue, that they'll be able to see through the arrogance of a vocal minority protecting their sacred "advisor" turf and find a win-win solution that meets the needs of the American consumer. And as importantly, that the minority of investment advisors who take the extreme view find some humility for the future credibility of the industry.

Friday, October 2, 2009

Be careful what you ask for...

After a summer of simmering and debate, the Financial Regulatory Reform is finally gaining some traction and showing signs of taking shape. Paul E. Kanjorski (D-PA) has prepared a draft piece of legislation authorizing the SEC to make and enforce "harmonized" rules. Apparently it imposes a "fiduciary duty for brokers, dealers, and investment advisors in providing personalized investment advice to act in the best interest of retail customers without regard to the financial or other interest of the broker, dealer or investment advisor who is providing the advice". The draft legislative language also empowers the SEC in other ways under this new standard of conduct by: (1) giving the agency authority to examine and prohibit sales practices, conflicts of interest and compensation schemes the SEC deems contrary to investors' or the public interest; and (2) increasing its resources and providing rulemaking authority for enforcement purposes.

This is the first piece of legislation to bring the highly anticipated regulation of Investment Advisors and Registered Reps under a single harmonized roof. As part of my financial services industry involvement (I'll be at the Financial Planning Assoc meeting in OC later in the month), I'm headed to Washington DC next week on behalf of AALU to get a better "finger on the pulse" of proposed regulation and perhaps influence some senators and congressmen with some more balanced points of view. I don't know about you, but the increased government involvement in everything has me more than a bit uncomfortable. While initially hopeful that an Obama election would bring needed change, it seems the only thing he has done is stick the governments fingers into everything we do with trial attorneys and labor unions in his back pocket. I think he is a gifted orator and has favorably changed the international perception my folksy neighbor "W" portrayed, but he has empowered certain politicians, as well meaning as they may be, who could be on the path to destroying the "American Dream" as we know it. I had hoped for better.

Without question, the regulations in the financial services industry are outdated, misaligned and in serious need of reform. I, along with others have been calling for better aligned regulations, not necessarily more. But in the "be careful what you ask for, you may just get it" department, I'm afraid in laying the responsibility for re-regulation in the hands of well meaning, but misinformed politicians, what we may get is worse than what we've had. A copy of a speech AALU sent me done by UK insurance producer Tony Gordon is very instructive and provides a window into what could be our future. His comment, "The greatest risk to your business today is government interference with it, excessive regulation." is more true now than ever. Try this link for the entire speech:

It provides insights into what the future could look like in the US as they have been more progressive with financial services regulation than we have been over the past decade. And it isn't pretty.

Yes, we need re-regulation and now is that time. But bigger and more is not better. In fact it is a potential nightmare scenario for the financial services industry and the American people it serves.
I'll write next week upon my return from DC about my perspectives. Stay tuned...

Friday, September 25, 2009


Change. That's the word that seems most often used in the financial services business today. In fact, it's the operative word I've heard used throughout my 25+ years eaking out a living in this business. But what has really changed? Frankly, not much. It reminds me of the quote, "Our dilemma is that we hate change and love it at the same time; what we want is for things to remain the same, but get better" As we all know, expecting change without doing anything different is the classic definition of insanity. I, for one, prefer to keep my wits.

But somehow this time it does seems different. Forces of economics, regulation, demographics and psychographics are in motion like never before, all at the same time. It's tempting to say that it's the "perfect storm" for change in the financial services business, but that has been said too many times before. While some of us are hopeful that this time it really is different, the majority are equally optimistic that nothing changes and everything remains status quo. Each regulator is protecting their respective turf, wirehouses keep swapping brokers with unsustainable signing bonuses, insurers keep paying huge upfront commissions, bankers are trying to cook up the next derivative to cash in on and the independents stick with their relatively less productive and highly fragmented advisor corps. There is a great deal invested in keeping the status quo from all parts of the industry. In The Prince written nearly 500 years ago, Machiavelli wrote, "there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things, because the innovator has enemies all those who have done well under the old conditions and lukewarm defenders in those who may do well in the new"... How true this is even today!

Nonetheless, I remain in that hopeful camp...hopeful that this time it really is different and the forces of change will overcome the basic human desire to cling on to what is known and familiar. Here is why:

Economics: The economy, while somewhat stabilized, is nowhere out of the woods as of yet. When it all hit the fan a year ago, major brand names were falling like flies and those who remained were forced into survival mode by downsizing as much as possible like bailing water to keep the boat from sinking. Then after the 1st quarter of this year, most companies that remained afloat had downsized as much as could be done, and basically paralysis set in. No strategic plans, no deals...nothing, just paralysis. But doing nothing is not a sustainable business model and it's my bet that as stock values keep improving, debt becomes more available and balance sheets can no longer hide, the scene is set for major consolidation within the financial services industry amongst the survivors of this financial fiasco. Financial firms will be forced to become strategic and decide what they want to look like on the other side of the crisis.

Regulation: The "Great Recession" has ignited several forces of change, the most impacting being the re-regulation of financial services. While the Fed, Treasury, FDIC and Capital Hill keep arguing the too big to fail-super regulator issue, the componenent of Obama's 6/17/09 Financial Regulatory Reform proposal that seems to have momentum and a likelihood of getting done is the move to a universal fiduciary standard for SEC/state regulated investment advisors and FINRA registered reps alike. The impact this will have on distribution models, product pricing and sales processes range from mild tweaks to a "turn it on its head" transformation of the financial services retail distribution business. There will be winners and losers as a result. It'll be interesting to see how this one plays out.

Demographics: The segment of the population that owns 70% of Americas financial assets and represents 50% of discretionary spending, the boomers, have not gone away. If anything, this crisis has caused them to place a greater focus on their finances with a need for advice making them all the more meaningful to the financial services industry. As this generation continues to move into retirement, estimated to peak in 2023, their interests shift from asset accumulation to asset distribution, protection and transfer. Demand for risk management products (aka-life insurance and annuities) appears to be on the front side of a fairly good run.

Psychographics: Ever since Reaganomics was born in the 80's, through to the beginning of this financial crisis last year, the savings rate has been on a steady decline from 10% to 0% and "conspicuous consumption" through debt became the norm. But just as the Great Depression made an indelible impact on the financial behavior of the generation that lived it, so too has the behavior changed today. As Americans deleverage and increase their rate of savings, the beneficiary of this shift in behavior will be the financial services industry. In particular, it will be the firms and practitioners who can lead with advice rather than a product pitch, who will find themselves in the greatest favor.

Now that we are past the "shock and awe" stage and the paralysis begins to lift, the financial services industry will no doubt go through a much needed transformation. The only debate is how far reaching the change will go. Many will continue to fight to keep things the same. But the forces of change seem far more powerful now than ever before. As one who leans towards being an innovator of change, I think it's time to bust up the status quo and align the interests of the business with those who make the financial services business possible, the American people who so desperately want and need quality financial advice.

Wednesday, September 2, 2009

5 steps forward without #5

In his recent blog post "failure to resonate" Investment Advisor Magazine writer Bob Clark correctly identifies a sad reality...Financial Planning is a very fragmented industry and not very well defined. This fact is clearly an obstacle in evolving the practice of financial planning into a legitimate profession. And it is the high-jacking of financial planning by the investment and asset management industry that will continue to prevent it from ever happening. This leads me to ask, "When did Financial Planning become synonymous with Investment Advice?" Perhaps it's because financial planning and investment advice are both regulated by the SEC under investment advisory laws written in a different era for different reasons than today. Somehow they have evolved to be viewed by most in the profession as inseparable and one in the same. And why is this?...follow the money. It is estimated that 90% of compensation for SEC regulated investment advisory practitioners which include financial planners, are derived from asset management fees, not billings from financial planning services. If you can cloak what you do (Investment management) under the moniker of financial planning to avoid the more stringent regulations placed on FINRA regulated registered reps essentially doing the same thing as you, why not. It's worked for nearly 70 years, right? In efforts to retain their turf as fiduciaries, separate and away from FINRA oversight, the Financial Planning Coalition, as well meaning as they may be, are dooming the profession of financial planning to be little more than a sales process.

Out of the CFP web site, the defined "process" of financial planning includes 6 steps:

1. Establishing and defining the client-planner relationship.
2. Gathering client data, including goals.
3. Analyzing and evaluating your financial status.
4. Developing and presenting financial planning recommendations and/or alternatives.
5. Implementing the financial planning recommendations.
6. Monitoring the financial planning recommendations.

There is one step in the process that is keeping the practice from becoming legit and I bet you know which it is....that's right...#5. Personally, I believe that no plan is complete until it is acted on. Just as no trust is complete without titling assets under the trust, no financial plan is complete without implementing its recommendations. But financial plans must be funded with the recommendation of insurance and investment products and services, all of which have multiple regulators. The CFP Board is very misguided if it thinks it can regulate the investment advisory business and I'm fairly sure the ultimate decision makers on this issue of re-regulation think the same. The industry has given up a golden opportunity to redefine and legitimize financial planning on par with the legal and accounting professions. Current industry leadership is so blinded by their investment fee turf protecting that they can't see the proverbial forest through the trees. This financial crisis has forced the change argued for by the industry for years, yet leadership is intent on fumbling it all. What, be called a salesman? Oh, the horror!

It's probably too late and the CFP Board is so invested in preserving their investment advisory constituents interests that little is likely to change the current course. But in my view, here is what should happen. I readily admit, there is little chance it will come about, but here it is anyway, in 5 steps:

1. Get the CFP board out of investment regulation debate: The CFP board and all others wanting to legitimize financial planning should step out of the fiduciary argument with the SEC and FINRA. This war has already been won. Regulations to "harmonize" the fiduciary standard are all but a done deal, and for good reason. And no regulatory body is in a better position to oversee this better than FINRA. Done deal. Move on and fight a battle that can be won.

2. Eliminate "implementation" from the planning process: The CFP Board should eliminate #5 from the financial planning process, clearly focus on the practice of financial planning and get out of the investment/asset management business. While we can all agree that plans must be implemented, it confuses the public and invites multiple regulators into the planning process by combining the two. If a practitioner derives most of his/her compensation from investment advisory fees, guess what, you're an investment advisor, not a financial planner. Trying to tie together investment/asset management with planning process waters down and compromises the profession of financial planning.

3. Separate Financial Planning from Investment Advice. Let's face it, whether you're a FINRA regulated broker or an SEC regulated advisor, too much of financial planning currently being done is as a means to an end. And that end is a product sale. I don't care if it is a broker selling a loaded mutual fund/variable annuity, or an investment advisor selling an managed account, it's a sale. How one is paid for the sale whether it is an ongoing fee, commission or combination of both, should not drive how it is regulated. It's about what one does that should drive regulations, not what they call themselves or how they chose to be compensated for what they do. Investment management is not financial planning. The advisory community should be applauding the regulators for getting it right holding everyone recommending investment products to a fiduciary standard and stop defending their sacrosanct advisory turf in a giant game of keep away. Again, separate implementation from the rest of the planning process and regulate it accordingly.

4. Consolidate, simplify and streamline investment product regulations and regulators. Regulation should be simplified and streamlined rather than retain the current patchwork that creates unmanageable administration and leaves gaping holes large enough for Credit Default Swaps and Ponzi schemes to drive through. It'll never happen this way because of politics, but if there were one regulator that oversees all investment products and services, including non-casualty cash accumulation insurance products (life and annuity), everyone including the investing public would be better served. Answering to state securities, the SEC, FINRA and multiple state insurance regulators is ineffective and a waste of time and money.

5. Allow financial planners to become licensed to sell and be compensated for recommending investment products and services. Once the CFP board has placed a focus on the practice of financial planning much like the AICPA does for the accounting profession and the State Bars do for the legal profession, a new profession of financial planning can emerge and become legitimate. I know the word "sell" is foul to many in the business, but let's call it what it is. If a planner wants to recommend and sell investment products and services, they must do the same as CPA's and attorneys do when they want to recommend and be compensated on the sale of financial products-they must become licensed and disclose it.

Arguing to preserve investment and asset management as being one in the same as the financial planning process risks a lose-lose scenario. Not only will the industry lose credibility and risk becoming legitimate as a profession, but the inevitable oversight by FINRA or a like kind organization is going to happen anyway. Unfortunately, the status quo typically wins out when politics and money are involved. And in the financial planning business, there's a great deal of both to go around.

Tuesday, August 25, 2009

Show Me the Money!...or not

Conventional wisdom tells us that salesmen are bad. Further, salesmen who earn a commission are even worse. And salesmen who sell the most and make the most commission...very very bad! The financial crisis has placed a focus on compensation and perhaps for good reason. Without question, compensation does drive behavior and at times, bad behavior. But the generalization that one who makes his or her living on commissions is somehow devious or less than professional is absolutely ridiculous.

In high school and during college summers , I worked at Nordstrom for one primary reason; they paid the highest commissions and as a result, highest compensation for those of us who were good at what we did. To this day, I prefer to shop at Nordstrom for nothing else than they employ the most knowledgeable, service minded and attentive salespeople in the business. Why?...because they pay their people performance based compensation-a commission. When I drop into a store where the "salespeople" are not paid on performance based commissions, not only is it difficult to find someone to help, but when you do find them, you often wish you hadn't.

Having grown up in the financial services business and being paid commissions, fees, bonuses, incentive comp, non-cash comp, salary and multiple combinations of each, by far the most transparent and performance based form of compensation was commission. And perhaps that is part of the perception problem. A commission is highly visible and easier to distinguish than most other forms of compensation. And when a scoundrel gets caught for misrepresenting, overselling or manipulating a client into the wrong product, it is very easy to point to commissions as the motivating factor. Contrast that to the esteemed professions of law or accounting. If they misrepresent, oversell and manipulate their client by padding their billable hours, it is very hard to detect. It's less visible. An article in this week's WSJ titled "Billable Hour Under Attack" cites that Pfizer who pays $500 million a year in "billable hours" expects to reduce their legal expenses up to 20% by moving to a flat fee arrangement which will result in a savings of $100,000,000 a year. Were the law firms dishonest with Pfizer to the tune of overcharging $100 million? No one has even called that into question. But had it been a commission...

My point is that there are scoundrels in every profession and it's unreasonable to paint a broad brush across an entire field as a result of a dishonest few. The Financial Planning industry is doing its best to gain legitimate footing as a profession on par with Doctors, Attorneys and Accountants. And they are distancing themselves from FINRA regulated brokers and "salesmen" choosing to be perceived as more noble. But with 1/3rd of the Ponzi schemes hatching under the lightly regulated investment Advisor model with the vast majority of them charging fees for assets under management, not providing real financial planning services, it's a tough argument to defend. Frankly, I see little difference when a Merrill broker lands a client by selling a managed account and an Investment Advisor lands a client to manage his/her financial portfolio. And neither does the investing public.

I agree that the financial planning industry is legitimate and should be viewed on par with other professions. The data gathering, cash flow analysis, budgeting, modeling and coaching clients in reaching reasonable financial and personal goals is noble and the professional who does this should be paid a handsome fee for the service. But when a financial planner crosses the line and offers to manage the clients assets for a fee, I'm sorry, you've entered the financial sales business and should be regulated accordingly. The hubbub recently
about those in the Investment Advisory world getting bent over a FINRA regulated broker who gave bad advice in the sale of FINRA regulated products is laughable. Are they really arguing that her dishonesty should be protected from big bad FINRA because she is also an investment advisor? If there ever were a case FOR FINRA to take over SEC regulated advisors, this one is it. It makes the investment advisory community look just plain dumb.

Look...I want financial planning to be a legitimate profession. But those in the business who simply de-register from FINRA, but continue their asset management practices while claiming they are "holier than thou" compared to brokers are doing all of us a disservice. I personally believe we need to separate the regulation and activity of real financial planning services from the asset/investment management services. This is the only way Financial Planning will become legitimate and separate themselves from the blowhards who simply don't want to be regulated for what they do. You see, it's not how you are paid that should dictate the regulations, but what you do. And I'm willing to bet that for every rogue broker who sells an unsuitable product just for the commission, there is an investment advisor who pads his/her fees to pay the monthly bills.

Friday, August 21, 2009

ING Seeks PE Money for BDs

ING Seeks PE Money for BDs
More evidence that Private Equity will play a lead role in breaking up the deal making paralysis and get the consolidation games started....stay tuned.

Wednesday, July 29, 2009

Two private-equity firms close in on AIG Advisor Group - Investment News

Two private-equity firms close in on AIG Advisor Group - Investment News

As expected, Private Equity has come in to break the logjam in deal activity for the Broker-Dealer space hopefully ending the paralysis that has set in. Once the price gets fixed on this deal, expect many more to follow setting the stage for widespread industry consolidation as we head towards year end. It will be interesting to watch this along with re-regulation as the entire landscape of the retail financial services business changes.
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Monday, July 20, 2009

Finally...a balanced suggestion on reform

Ever since Obama unveiled the Financial Regulatory Reform white paper calling for "harmonizing" B-D and RIA regs to the fiduciary standard, the special interest groups (including the regulators) have been angling and positioning to save their respective turf as is. In fact, the "fee-only" camp has even taken to a "holier than thou" approach just after their primary trade group, NAPFA, had their former president locked up for investment fraud. The link here is the first balanced suggestion I've seen and it makes a fair amount of sense. I'd be curious to hear what you think about it....

What, exactly, does fiduciary really mean? - Investment News

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Compensation: SEC mandate called too broad - Investment News

This is the game changer feared by most in the business. At least directionally, this may be where we're headed. Stay tuned....
Compensation: SEC mandate called too broad - Investment News

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Wednesday, July 8, 2009

The S curve

A concept I was exposed to early in my career was called "The Sigmoid Curve" also known as the S curve, which was developed and coined by European management guru Charles Handy. It is the simple yet profound way to describe personal, professional and organizational growth/decay. It can be ascribed to relationships, careers, product life cycles, company life cycles, etc. Best explained in graphic form, below is an example of the S curve.

As it relates to one's career, it starts out slowly as they take on a new challenge and growth is slow in the "learning curve". But as they gain competence and confidence, a stage of growth begins up the curve. However, the growth plateaus and is at risk of decline if a new S curve is not started to begin the cycle again. The theory is that what was once new and challenging becomes stale and stagnant and a renewal of sorts is needed to begin a new S curve. If properly planned, Handy suggests that you should begin the seeds of a new S curve near the height of the current cycle you're in as illustrated below:

The plan is for you to develop your new career renewal plan while you are cruising along in growth mode so as to avoid ever being pulled into a decline. And if done right, one's career would be a series of S curves (illustrated below)throughout their I said, this is a concept, not necessarily reality.

Obviously the trick is the timing of when to start a new curve since it's counterintuitive to change something when it's going well. What if GM or the Republican party had the foresight to change their old ways to become new again? Don't relationships and marriages get stale needing renewal? When you think about it, the concept can be applied in numerous situations.

Personally, I have had the good fortune to develop career renewal for my entire tenure at AXA-Equitable. For me, each S curve seemed to last for 5 years and then I would take on an new challenge. It was a great 25 years, but at year end 2008, I found myself at the end of an S curve with no opportunity to recreate one within the AXA corporate structure. So the handwriting was on the wall, it is time to start a new S curve elsewhere...haven't started it yet, but getting close.

Another blog that does perhaps a better job explaining the S curve is this one:

Where are you on your personal or career S curve?

Friday, July 3, 2009

Insurance-affiliated brokers face major changes under Obama plan - Investment News

Insurance-affiliated brokers face major changes under Obama plan - Investment News

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John Lefferts' Blog: "Whistling Through A Graveyard"

John Lefferts' Blog: "Whistling Through A Graveyard"

"Whistling Through A Graveyard"

The Financial Regulatory Reform whitepaper released in June has produced some interesting responses from the retail financial services business, depending on which breed of player they are. The business is fragmented to say the least, which is exactly why reform is needed. There are the "holier than thou" fee only advisors who claim to adhere strictly to the fiduciary standard and view themselves not as salespeople, but professionals. This while a full 1/3rd of Ponzi schemes come from the thinly regulated RIA model as the majority of them have given in to the easy money of investment management acting more like sales people than, well...salespeople. They don't want to be lumped together in regulation with salespeople because that would frankly blow their cover. Then there is the non-FINRA registered insurance agent who is so far under the regulatory radar, they aren't even required to give fingerprints to their state regulator in most cases. Selling 12% commission annuities will be tough for these folks to justify in a fiduciary world. Then there is the wirehouse broker who, if not for selling their financial souls for high upfront signing bonuses, would prefer to be somewhere else. Merrill's distribution head was recently quoted saying, "brokers who leave give up a global brand identity"...was he serious? Next are the insurance based broker/dealer brethren who can read the writing on the wall: in a regulatory world holding to a fiduciary standard, the proprietary insurance distribution model has no economic reason for being. Then the Independent B/D's, the vast majority of them lacking the scale, resources and technology to remain in business. With revenue sharing deals likely to go away or at least become less rich, it leaves most financially under water-not a sustainable business model.

Most of us can see that change is coming and that it is much needed. But I'm reminded of the quote, "Our dilemma is that we hate change and love it at the same time; what we want is for things to remain the same, but get better" We want everyone else to change so that we don't have to. But as we know, it doesn't work that way. Everyone is simply "Whistling through a graveyard" knowing change is coming, scared of it, but moving on in the same way not changing a thing.

Here's what we know; the financial crisis and multiple Ponzi schemes uncovered has exposed cracks in the regulatory system, and it is going to change. And the Obama administration set it in motion in June with the blueprint for regulatory reform which clearly states:

The SEC should be permitted to align duties for intermediaries across financial products. Standards of care for all broker-dealers when providing investment advice about securities to retail investors should be raised to the fiduciary standard to align the legal framework with investment advisers. In addition, the SEC should be empowered to examine and ban forms of compensation that encourage intermediaries to put investors into products that are profitable to the intermediary, but are not in the investors’ best interest.

Every financial intermediary and special interest group has its own interpretation of what this means. And their interpretation and argument is, you guessed it, not to change anything wanting everyone else to change so they don't have to; an unlikely scenario. The SEC has been given broad powers here. And the SEC under Mary Shapiro, who has long lobbied for all financial sales/advisors to be regulated under the same regulatory roof, presumably FINRA, will more than likely get their way.

So here we are, playing a giant game of "who's your daddy" . Let's face it, the 900 Lb Gorilla is FINRA. Whether we like it or not, that's where the financial sales and advisory business is headed as regulations are harmonized. It's time we, regardless of which breed of financial services player we represent, stop arguing against inevitable change and start becoming part of the solution in helping mold the new regulations so they don't end up worse that what we've had before. Let's place the focus where it should be, on the consumer and clients, and develop the distribution models and regulations around them.

Friday, June 19, 2009

Let the games begin!

With the financial services firms fighting for survival in the Fall of '08 (some survived-too many didn't), it seems like they all went into hibernation during the winter months of this year. We've been waiting to see what the new rules of the business would be in the form of new and hopefully improved regulations. Well, the Obama administration came out with its' plan this week...let the games begin!

Change has an interesting and defining effect on people and organizations. Many firms will take the stance as being victims taking their time blaming whoever/whatever for the condition they're in. Some will stay the course in hopes that business will get back to normal -a head in the sand approach. But a select few will take control and view the change as a stimulus to anticipate, adapt and seize the opportunity. We are in a defining time for the retail financial services business. A favorite quote of mine states "The future belongs to people who see possibilities before they become obvious". Well, now is the time to look for the possibilities.

There will be winners and losers out of the Financial Regulatory Reform. That is unfortunate, but simply a fact of life. As I read through the 88 page outline on reform, I expected to see a lot of misguided political partisan rhetoric from people who simply don't get it. But instead, I found myself thinking as I went through it, these guys DO get it: it's all about the consumer.

While there are multiple proposed items that will effect the industry, there is one above all that will have the greatest material impact on the business models going forward. It is buried near the end of the 88 page document, but it's impact and meaning for the business is HUGE. It says,

2. The SEC should be given new tools to promote fair treatment of investors.
We propose the following initiatives to empower the SEC to increase fairness for

Establish a fiduciary duty for broker-dealers offering investment advice and harmonize
the regulation of investment advisers and broker-dealers.
Retail investors face a large array of investment products and often turn to financial
intermediaries – whether investment advisors or brokers-dealers – to help them manage
their investments. However, investment advisers and broker-dealers are regulated under
different statutory and regulatory frameworks, even though the services they provide
often are virtually identical from a retail investor’s perspective.
Retail investors are often confused about the differences between investment advisers and
broker-dealers. Meanwhile, the distinction is no longer meaningful between a
disinterested investment advisor and a broker who acts as an agent for an investor; the
current laws and regulations are based on antiquated distinctions between the two types
of financial professionals that date back to the early 20th century. Brokers are allowed to
give “incidental advice” in the course of their business, and yet retail investors rely on a
trusted relationship that is often not matched by the legal responsibility of the securities
broker. In general, a broker-dealer’s relationship with a customer is not legally a
fiduciary relationship, while an investment adviser is legally its customer’s fiduciary.
From the vantage point of the retail customer, however, an investment adviser and a
broker-dealer providing “incidental advice” appear in all respects identical. In the retail
context, the legal distinction between the two is no longer meaningful. Retail customers
repose the same degree of trust in their brokers as they do in investment advisers, but the
legal responsibilities of the intermediaries may not be the same
The SEC should be permitted to align duties for intermediaries across financial products.
Standards of care for all broker-dealers when providing investment advice about
securities to retail investors should be raised to the fiduciary standard to align the legal
framework with investment advisers. In addition, the SEC should be empowered to
examine and ban forms of compensation that encourage intermediaries to put investors
into products that are profitable to the intermediary, but are not in the investors’ best
New legislation should bolster investor protections and bring important consistency to the
regulation of these two types of financial professionals by:
• requiring that broker-dealers who provide investment advice about securities to
investors have the same fiduciary obligations as registered investment advisers;
• providing simple and clear disclosure to investors regarding the scope of the terms
of their relationships with investment professionals; and
• prohibiting certain conflict of interests and sales practices that are contrary to the
interests of investors.

I found myself saying after reading this piece, "Yes!-finally!"

Now we know the framework of the new rules of the game. It's time to move out of hibernation and now that summer is here, get out and make things happen. Much will be written about what this Fiduciary standard will mean, one I found of interest was written last month in Invetment News (link here:

Let's hear it for those who see the possibilities!

Friday, June 5, 2009

The Village Idiot

A joke that has given me a chuckle over the years goes like this. A mob guy visits the village idiot on his regular "milk run" of extortion. He meets him in his driveway and says, "Hey idiot, pay me the money you owe me". Idiot says "I no pay!". The Mob guy is visibly agitated and asks again, "I'm telling you one last time, if you don't pay me the money, I'll knock the bejeebers out of your car over there with this baseball bat". The village idiot says again, "I no pay the money!". So, the mob guy draws a circle in the driveway. He says "Idiot, I want you to get in this circle while I destroy your car and if you so much as even think about stepping out, 'll destroy you too!". So the idiot stepped into the circle and mob guy proceeds to start bashing the car to bits. Taking a short break in between swings of the bat, the mob guy looks over at the idiot expecting him to be devastated watching his car being destroyed, but the idiot is laughing out loud hysterically. Confused, the mob guy walks over to the circle and says, "Hey Idiot, I am destroying your car and here you are laughing uncontrollably. What gives?". The Idiot says, trying to speak through his laugh, "While you were over there, hee-hee-haw-haw...I stepped out of the circle 3 times!

Okay, maybe it isn't the funniest joke you've ever heard, but it illustrates a point I want to make. It's very much in vogue to say that buy and hold investing is dead and a new era of a traders market has begun. At least that's what the traders lead you to believe. But those of us in the financial services business know better. The universe of traders in the overall individual investing community are miniscule. And even for the pro's in the business doing it full time, few if any can effectively time the market which is basically what traders attempt to do. The poor investor who had enough of the market volatility in March and cashed out at the lows is now being told by the traders (Jim Cramer/TD Ameritrade, etc) that now is time to buy stocks only to be told to jump out the next day, then back in and so on. So not only did these poor saps lock in a loss when they sold out, but they're jumping on a band wagon of trading that is a sure bet to lose even more money. All the time, those who had the advice from a professional financial advisor who placed their clients in a diversified portfolio using asset allocation predicated on their time horizon and taste for risk...have ridden the markets back up.

Buy and hold is not dead, which brings me to the joke above. I liken the traders to the village idiot and the car to their nest egg. While they're having fun trading (i.e. stepping out of the circle 3X) their nest eggs are being destroyed just like the car. But they won't realize it until it's too late. They'll keep laughing and trading not even realizing the damage being done to their assets.

It's been proven over many decades and generations that trading for most people is a fool's errand. Don't be a village idiot!

Wednesday, May 13, 2009

As the Smoke Clears...

As the Smoke Clears...
Written by John M. Lefferts, CFP,CLU,ChFC

This past week, I had the opportunity to speak with some Congressmen and Senators on "The Hill" while in Wash DC for an industry conference. Intuitively, I've always known that politicians will be partisan as is the way with politics. But I was struck by how extremely polarized each side has become leaving little room for compromise. In the spirit of full disclosure, my political views tend to be fiscally conservative and pro-business while being socially moderate. Unfortunately, it seems that politics these days force you into either the camp as being a truck with gun rack driving and bible thumping red neck or a dope smoking, tie dye gown wearing hippie dancing with hands flailing in air. It doesn't seem like those who connect with both sides of the aisle have any representation at all. And it's this "all or none" mentality that causes me to wonder how anything ever gets done in Washington. That brings me to the central theme of this writing... We are in a unique point in time in the financial services industry where there is an opportunity for new regulations to truly re-shape the landscape for the benefit of consumers and the business. Not only is this long overdue, but we have the chance to align regulations closing the gaps that enabled the multiple Ponzi schemes to exist for decades and Credit Default Swaps to go virtually unregulated destroying much of the US economy. But as they say, never underestimate the status quo, which is a threat to getting anything meaningfully done at all. It's my hope that new regulation will be well thought through and eliminate the current patchwork of regulatory silos (SEC, FINRA,State Securities Dept's, State Insurance Departments, CFP board, etc). But then again, the status quo would lend to simply placing a new layer of "systemic" regulation on top of the existing regulatory patchwork not only keeping a bad system in place, but making it worse by having to answer to yet another regulatory body.

I've written before about why now may be the time to anticipate "where the puck is going" and how regulatory and economic changes are potentially reshaping the financial services business and business models for good. The company/individuals who have the foresight to get this right and act on it would be in the driver's seat to take advantage of the growing boomer demographics' financial needs as the economy eventually recovers. Let's not forget that even with the economic downturn, the amount of "money in motion" will reach all time highs in the next several decades as boomers retire and transfer their wealth to the next generation. It may be too early to call from what we know today, but the smoke on this crisis is beginning to clear and the resulting factors effecting the financial services business are starting to take shape. There are 3 primary factors driving change in the business. They are: 1) Updated regulation 2) New economic realities of business with beaten down balance sheets and 3) A shift in consumer attitudes and behavior. So, I'm going to go out on a limb and give it my best shot at what I see smoky as it still remains.

Changes in regulation
It's been well chronicled how we got into this financial crisis and I won't rehash it here. But the other day I heard one politician (admission: I was watching the financial porn channel CNBC) proclaim with relative certainty that it was the repeal of the Glass Steagall Act allowing banks, insurers and investment banking walls to fall that caused this crisis. What a bunch of baloney! The repeal of Glass Steagall, which was built in a different era for different reasons, was not the cause of the mess. If you examine it more closely, you'll see that while the silo's between financial intermediaries came down, the regulatory silo's remained in place. It was this misalignment of regulation that caused many bad things (i.e. Madoff, CDS, Hedge Funds, Mortgage excess, etc) to slip through the cracks. What should have happened along with the repeal of Glass Steagall into a new era of financial services was a new era of financial regulation. Talk of a systemic regulator is about a decade too late. Meanwhile every regulatory body is lobbying for their respective relevance and survival while the consumer and those of us in the financial services industry stand by and watch. The quote, "The more things change, the more they remain the same" comes to mind which is why I fear that the ultimate solution of a total regulatory overhaul will give way to the status quo in more of the same.

Nonetheless, there is sufficient demand for at least some change that has momentum to get done in short order. One part I think will happen is that the life insurance industry will finally get differentiation from the Property and Casualty Insurance business and get the federal oversight they so desperately want. This will be a big win for the life companies who have had barriers to competition and are hampered with unnecessary costs as they've been hand-strapped by a mishmash of state insurance regulators. It's also a win for consumers with an opportunity for simplified and less costly products while additionally eliminating the seedy side of the insurance business selling 15% commissioned annuity products to all too trusting seniors. But in the "be careful what you ask for, you may just get it" department, FINRA and SEC Chief Shapiro have been making noise about "harmonizing" the regulations between Investment Advisors, Broker-Dealers and yes, Life Insurance. Further, there has been much talk about these new "harmonized" regulations holding Advisor/Broker/Agent to a Fiduciary standard of care. This is still being duked out in Washington, but think about the ramifications should this come about. And whether or not this happens, at least directionally it is where regulations are headed over time. It's a consumer centric way of looking at it. The customer doesn't know or care which hat an advisor/broker/agent is wearing when they present a financial solution. Much of what is being recommended today resembles professionally managed portfolio of securities in its purest form. But, if it is wrapped as an annuity, the states regulate it. If there a fee for advice is paid, the SEC regulates it (more or less). And if it's wrapped up as a mutual fund, FINRA regulates it. All the while, the consumer has a tough time distinguishing one from the other... they all look the same to them.

So, as a fiduciary, full disclosure is a requisite. That means the advisor/broker/agent will have to disclose all fees and commissions, not to mention the benefits of any alternatives. Think how red-faced that will make insurance agents when they must disclose in writing that close to 100% of the first year premium paid is gone. Without question, this will definitely lead to product design changes and a movement towards fee based products and services across all disciplines of financial services. This will also place the distribution models that are economically built on the sale of commission based proprietary products at a tremendous disadvantage since the financial solution won't always be one dimensional as is often the case today. Fee driven business will be the wave of the future.
Shift in Consumer Attitudes and BehaviorIt's been cited before that the average consumer spends more time planning their vacation than they do their financial futures. I think that changed In April when everyone opened their quarterly account statements and gasped at the balance. They (myself included) have been going through the range of emotions beginning outward with anger to blame to resentment then moving inward to acceptance. I hear people say, "I was too trusting" or, "It's all so complicated" or "I thought everything was taken care of"...Not anymore. As this crisis moves towards recovery, and there are signs that we are beginning that process now, the consumer will take more control of their financial futures. They will demand to understand what they are investing in, how it works, what the costs are and all the potential outcomes. The mystique of hedge funds, Madoff, Stanford and all the other "high brow" schemes will no longer be alluring. Regulation will require and consumers will demand to know what is in the "black box" of financial products. The veil of secrecy that the "Hedgies" enjoyed was the basis for their success. But with the light being shed on their practices, they'll scatter like certain insects (can't bring myself to say it here) do when exposed to daylight.

Having said that, as simple and transparent as financial products and services can get, the vast majority of the population will still need the help of a financial professional to assist them in sorting through it all. At the end of the day, American's have neither the time, training nor temperament to get their financial houses in order. While the doors may be closing for the transaction driven product hucksters, it appears to be opening for process driven financial planners. Financial Planning is a relatively new profession still trying to find its footing and gain acceptance on par with CPA's, Attorney's or medical doctors. Wall Street has summarily thumbed its nose at the profession relying more on their investment acumen with charting, timing, and all else that is typically confusing to the investing public. They viewed the planning segment as a whacky touchy-feely underworld that lacked the sophistication of Wall Street. (Yes, the emperor has(d) no clothes) But now, the consumer wants help and no segment of the financial services world is in a better position to give it than a financial planner who can coach, counsel and hand hold while caring less about a sales commission because they receive a fee for their services. While there is much talk about the end of Wall Street, there is little attention being paid to the part of the financial services business best positioned to take over the throne: Fee based or fee only Financial Planners.
New Economic RealityWe've almost become numb to the staggering news that comes at us daily to recognize the magnitude of what has happened in the financial services business over the past year. If we step out of the box and take ourselves back a couple years, who would have believed that the "thundering herd" of Merrill would be subservient to Bank of America, The largest insurance company in the world, AIG, is being sold off in parts to raise money for the government and household names like Bear Stearns, Lehman Brothers, WAMU and Wachovia cease to exist as stand alones. As Will Farrell says in one of his spoof movies, "It's mind-bottling". The shift in the financial powerbase from Wall Street to Main Street has only just begun. Over the past 6 months, most financial firms have been simply positioning for survival and living off TARP money. The damage caused by the subprime mortgages and all the various ways it was packaged is already legendary. But as commodity, equity, debt and residential real estate values have plummeted, it is widely thought that there is one more shoe to drop. That is commercial real estate. As commercial real estate becomes the last bubble to pop, a new wave of firms, many insurance companies, will need access to capital or risk government intervention, which as we know, is not a good thing. The key driver here is leverage which works great going up and is devastating going down. Investment Banks were the worst employing up to 30X in debt to equity. Next have been the commercial banks who were hovering around 20X. Life insurance companies have been relatively safe at 10X, but those with large commercial real estate exposure will have trouble. The least leveraged of the bunch appears to be Property and Casualty companies who have had roughly 5X leverage. Once we get over this period of downsizing and fighting for survival, and I think we're about at that point now, then I think we'll see the consolidation games begin. Once they have cut all that can be cut, the Financial Firms will have no choice but to begin to move from being reactive to more strategic. "Strategic Reviews" such as what ING used to decide to sell their Broker-Dealer business, will be the new phase. What you will see is firms shedding all that is "non-core" as companies retreat to their respective silo's where insurance manufactures insurance products, banks provide banking products and investment companies provide, surprise!...investment products. Then within each respective financial services silo, the consolidation games will begin as the balance sheets and equity values rebound. Mid-sized or regional firms, heretofore under the radar, may emerge as players in the consolidation of the businesses as the giants are still staggering from the blows they have taken and continue to deal with their legacy costs not to mention the requisite in paying back the government first.
As the Smoke ClearsSo the smoke is beginning to clear and we can see the rough shapes taking form. New Regulation will force transparency, full disclosure and a fiduciary standard across all financial disciplines. This forces a move towards fee based lines of business. Consumers will demand simplicity and actually make attempts to get their financial houses in order. This forces a move towards financial planning. Financial institutions will be forced to "stick to their knitting" and do what they do best which is to manufacture products and services in their area of expertise. So I think you can probably guess what my conclusion will be. Financial firms will manufacture products and distribute them through fee based and/or fee only financial planners driven by new regulation, changes in consumer attitudes and the new economic reality caused by the great recession of 2008. Does this mean that stockbrokers and insurance agents and other financial services specialists will become extinct?...of course not! As I mentioned at the start of this piece, I'm suspect of any extreme position and tend towards moderation. But the stage is set for financial planning to play a much larger role in the financial services business as the evolution takes hold. Who, how and when will this happen...I'll save that for another chapter...and as the smoke clears.

Thursday, May 7, 2009

Lefferts view on retail financial services today

Skating in Boiling Water
Written by John Lefferts, CFP,CLU,ChFC

"I skate to where the puck is going, not where it is"

-Wayne Gretzky

This often used quote seems to have new meaning to those of us in the retail financial services business as the unprecedented volatility and market declines have shaken what we know as "where the puck is" to wonder "where the puck is going." For years, it has been thought that the current retail financial services models whether they be wirehouse, insurance agency, banks or independents would have to inevitably change as a result of evolving economics and convergence. But there were never any major lasting events to force this to happen. Yes, 9/11 did shake America's psyche and the markets roiled afterwards for a while, but we rebounded shortly after. The depth and spread of this financial crisis is unlike anything we've seen in modern history, yet the retail financial services industry seems to be doing little to respond. It's like the crude, but true description of placing a frog in a boiling vat of water. (please don't try this at home). It's feels the heat and jumps right out. But if you place a frog in a vat of lukewarm water, it swims around like everything is okay. When the heat is turned up, it happily stays. Then, when the heat brings the water to a boil, it continues to stay and boils to death. Frankly, this example, as repulsive as it is, can be applied to the retail financial services industry models we have been operating under for the past several decades where there has been no material structural change. Yes, there has been a drift towards the independent advisory model, but there is no bona fide evidence that this is a panacea either. And the economics of this meltdown and eminent re-regulation of financial services have changed the game for everyone.

So, I pose the questions, will the retail financial services distribution models continue in their present forms while the environment around them is essentially boiling?... Are they adept enough to see that if they stay in their current structures, they will potentially die a slow and agonizing death?... Or will they figure out that now, unlike ever before, it is time and perhaps even a unique opportunity to make long overdue structural changes for future survival? Answering these questions are not as simple as saying, "just get out of the boiling water!" We know that the current environment is forcing a change, but then, what to? Where is the puck going? In this paper, I'll explore what I see evolving from my vantage point.

The Opportunity
For the longest time, the careers of financial advisor and financial planner have been ranked as the leading professions to enter based upon a growing need for quality financial advice given the complexities of products and the economy. But more so, it is the "pig in a python" baby boomer demographic that is evolving and aging needing help like never before. In their early years, it was easy... Get a job, buy a house, save for college education and hopefully have enough left for retirement. So for this huge segment of the population, financial planning was relatively easy...just save money. The focus was on accumulation of assets which is how the mutual fund industry exploded over the past several decades. But now the kids are out of the home and educated, the house can no longer be viewed as the nest egg it once was and the 401(k), once joked to be a 201(k) is now more like the 101(k)...not very funny. Folks need advice more on how to protect what they have, how not to outlive their assets and if they're lucky enough to have anything left over, how to efficiently transfer it to the next generation. It's a sad irony that now and for the next decade, there has never been a greater need for quality financial advice and advisors at a time when the industry is least prepared to provide it.

The rules for retail financial services distribution models have been re-written as a result of the confluence of events ignited by the bursting of the real estate bubble and resulting fallout, the aging boomer demographic and an actual decline in the supply of advisors to meet the increasing need for advice. Add to that an expectation of widespread financial regulatory overhauls, a shrinking universe of players (Where's Bear, AIG, Lehman, etc?), tax law changes and the expectation of convergence/consolidation in financial services gaining momentum, it can be a "head hurter" to try to figure it all out. But in change there is always opportunity for those adroit at reading the tea leaves, or being able to "skate where the puck is going." And if the size of this economic crisis is any indicator, the opportunity has never been greater.

The Current State of Affairs
To decode this coming opportunity, it seems logical to me to lay out what we know so far. The best way I can break it down is identifying and sorting out the two key components of the business; supply (financial services providers) and demand (the financial services consumer). With their faith in the financial system rocked by Madoff, Stanford and their account statements at values less than over a decade ago, the average consumer is paralyzed with their financial matters. They're highly dissatisfied with where they are, but are confused and afraid about where else to go. And there really are few places to go. But time heals, and when the smoke begins to clear in the financial markets and with customer loyalty being at all time lows, you can bet there will be more money in motion than ever before. It will take some time, but it will happen. Every piece of research tells us that with the exception of a small segment of "do it your-selfers", most consumers don't have the time, desire or aptitude to shop for financial products. They simply want to look a competent, reputable and honest financial advisor in the eye to tell them what to do. And further, they don't want the inconvenience of having multiple financial services providers, multiple account statements and multiple tax reports. They want one place where they can confidently trust that it's all taken care of. And it's been estimated that at least 50% of the financial services clientele is up for grabs. Big change-big opportunity.

How about the supply to meet this coming demand? That is a great deal more complex. With the deregulation and modernization of what was formerly Glass-Steagall in the late 90's, it was thought that the walls between banks, insurance and investment companies would come down and a new model of a financial services supermarket would evolve. Citigroup was thought to be the model of the future with the banking entity coming together with Travelers Insurance and Smith Barney Investments. But the horizontal integration didn't ever materialize as planned since the cultures between each entity never blended together. The brokers remained transaction driven, the insurers process driven and the banks service driven. Today, the Citi model appears to be going down in flames. Despite the politicians trying to blame deregulation for the current economic crisis, it wasn't the removal of the outdated separation of banks, insurers and investment firms enabling this mess so much as it was the continued misaligned web of regulation that missed the oversight of complex leveraged financial products...products that Warren Buffet described as "financial weapons of mass destruction". How can an insurance company regulated by a state insurance department, issue complex investment products like Credit Default Swaps and get away with it? ...misaligned regulation. Between state insurance departments, state securities departments, FINRA, SEC, FDIC and virtually no regulation of the mortgage business, the rocket scientists of the financial services product development business found an opening that fell between the cracks of the outdated and over-politicized regulatory bodies. Repeal of Glass-Steagall changed the game for financial intermediaries to enter a modern era in financial services, but regulations remained unchanged and stuck in the past. It's unfortunate that we needed a crisis to realize it's time to align the business models with the proper regulations.

Let's take a closer look at where each silo'd model within retail financial services is currently positioned...

As the water continues to boil, the insurance companies will be forced to stick to their knitting and manufacture insurance products. For those with their own sales force, they will have to reach a decision on the sustainability of maintaining their owned distribution that makes its profits only if it sells the products it manufactures, something that flies in the face of today's market reality. If an insurer can find a way to make profit margins from non-proprietary lines of business, it has a shot at sustainability with its owned distribution. But the dynamics of the marketplace today appear to be dictating that insurance manufacturing needs to be separate and distinct from insurance distribution much like the commercial insurance brokerage distribution firms have done. Additionally, the high-low commission structure of the insurance business will undoubtedly come under scrutiny as regulations force disclosure of compensation. If the economics of the products force a flattening of the insurance product commission structure, it will have dramatic implications for the Insurance based B/D. Mutual insurance companies can temporarily hide under their dated "black box" structures but will be challenged to compete in a consolidating and converging marketplace lacking the currency of equity to participate once the games begin.

The wirehouses, having lost the consumer trust and throwing good money after bad by giving huge upfront signing bonuses to has-been brokers, will potentially fade away over time since they've stemmed the recruiting of new blood and the vets retire or leave after their deals are up. Top producers will no longer be willing to stay with the wires giving up compensation and payouts for the privilege of using a tarnished brand. Much like the proprietary insurance distribution models, the stockbroker who once peddled proprietary stocks from its parent company market-making investment banking arm no longer exists with the recent demise of investment banks as we know them. And with their compensation models publically exposed and the shift of power from Wall Street to main street, we may have just witnessed the end of an era. Greed, as it turns out, was not so good.

Independent B/D's
As prior mentioned, Independent B/D's have been steadily increasing in size over the past decade at the expense of the wirehouse and Insurance B/D models. But a shift occurred last year that hadn't happened before...more were leaving the Indy model than entering. It comes down to 3 things, or the 3 "C"'s. Compliance: Indy's have a need to increase their expenses to prepare for the coming increase in regulation, something that will place a strain on their already thin profit margins. Cost: With increased need for technology platforms and the general cost of doing business on the rise, Indy's lack the scale to spread these fixed expenses around. Camaraderie: Many advisors who left the larger firms with their traditions and culture find themselves lonely, particularly in this economic crisis. The increasing trend in teaming has placed a strain on the lone independent producer model. However, the greatest threat to the independent B/D model is the classification of their advisors as independent contractors. It is believed that the Obama administration favors a tightening of the classification of independent contractor towards employees. If this happens, it would be the death knell to the Indy's as the costs of maintaining employees would be too great to survive. Bills have already been submitted on this and it will be interesting to see how it plays out.


Then commercial retail banks, who have neither the depth of talent (paying for performance is counter to the culture) nor the know-how of insurance and investment products, have "missed the ball since the kick-off". They have had the greatest opportunity of all, but lack the leadership to execute on a fully integrated financial services strategy favoring a passive self-service strategy. Unlike famed bank robber Willie Sutton who figured out that banks are the place to go because "that's where all the money is", bankers haven't realized they're sitting on a financial services goldmine seemingly because they're unwilling to pay for the skill that knows how to get it. As the more exotic lines of business become regulated away, perhaps banks will wake up to their tremendous opportunity held within their existing clientele...stay tuned.

De-Reg to Re-Reg
Needless to say, re-regulation is coming, and it will serve as a primary driver in the evolution of the retail financial services industry... where the puck is going. The need for a super-regulator that oversees all financial intermediaries, including the mortgage business, has never been greater and all indications are that this will happen soon. And the angle for FINRA brokers to give up their licenses to enter the more thinly regulated financial advisory business,...the end to that strategy will be coming as well...thanks, Bernie!

The politicians and several regulators would love to go back to silo's as banks separate from insurance companies separate from investment companies turning the clock back to the era of Glass-Steagall. It's what they know, understand and frankly can point at to assign blame for the crisis. However, we cannot effectively undo what has already been done without creating more calamity in the markets. The best option is to have a single regulator that cuts across all financial intermediaries aligned in the modern era of a global economy. This would eliminate the inefficiencies, redundancies and holes in the current web of overlapping and misaligned regulations that let credit default swaps happen and Bernie Madoff exist. For those who are currently overregulated such as insurance companies with state insurance and multiple securities regulators to answer to in every state in which they do business, updated regulation will be welcome. But for those who have been flying under the radar, such as investment advisory firms, or hedge funds, you are now in the cross hairs of the feds and their coffers are being filled to launch warfare. This regulatory leveling of the playing field is something to pay attention to as we try to anticipate the future.

Suitability versus Fiduciary Responsibility
Once the regulators have financial products distributors "on the same page" the next question is, what page will that be? With what seems like a new Ponzi scheme uncovered each day, the government will be focused more than ever on protecting the consumer. And the consumer has no idea what regulations their advisor/planner/agent/broker/financial professional, etc are being held to. To the general public, they all look the same, but nothing could be further from the truth. There appears to be momentum in correcting this confusion with former FINRA head Mary Shapiro now leading the SEC. Her view that all financial product distributors should be held to the higher standard of fiduciary responsibility could drive towards uniform regulations for all providers. Just as the definition change of independent contractor to employee would be devastating to the Independent model, a move towards fiduciary standards could likewise impact the product driven distribution models that are economically built on selling "proprietary" products and services.

Business Economics
In addition to sweeping new regulations, another factor influencing the future of retail financial services are the economics of the current business models. With a cost of around $200,000 per trainee only to lose 80% of them after 4 years, it's no wonder most financial firms have dropped their recruiting of new blood for in favor of essentially buying veteran talent. Add to that the likelihood that the 20% who do survive will likely be recruited away for the "greener pasture" someday, and it doesn't take a brain surgeon to figure out that the model of grow your own is seriously fractured in its current form. I personally believe that under a new and updated model, a grow your own strategy can be successful, but changes in training, compensation and recognition are a pre-requisite. Additionally, eliminating new advisor recruiting in favor of experienced producers can be a suckers bet. Seldom do they meet the requirements that their "signing bonuses" were predicated upon and in the net, they simply roll existing customers from firm to firm rather than create new ones which creates a huge compliance liability. So, if the large national firms are flawed, one might surmise that the independent model would be the natural wave of the future. But with the coming increase in regulation, the increasing costs of doing business, their lack of scale combined with increasingly thin margins are the greatest challenges to the survival of the independent producer. And as prior mentioned, the classification of independent contractor to employee is looming out there over the head of the Indy's.

Will anyone survive?
So here we are. Trying to anticipate the inevitable re-regulation of the financial services business while lacking a current business model that appears to be economically sustainable. Where is future for retail financial services and who will be successful? When I ask myself that question, the raspy voice of my linebacker coach comes to mind as he yelled "shoot the gap!" In a environment where silo's no longer need to exist between banks, insurance and investment, combined with rationalized and broad regulatory oversight, cutting a new path down the middle, a space currently open for the taking, screams out to me as a potential solution. By evolving and improving on the poorly executed concept of CitiGroup, but integrating it into a single culture with scale, absent the product driven underpinnings of insurers or wirehouses, there is a light at the end of the tunnel. That is by taking the best aspects from independents, investment, insurance and banking models into a fully integrated, scalable organization. I think Citi had the concept right, but was simply too large and silo'd to pull it off. The chassis of this evolved model could have its roots in the wirehouse, bank, insurance or independent models. It will be the entity that can organize in anticipation of the coming regulatory, legal and tax law changes while meeting the greater share of a customers' needs that will have an opportunity to become the breakaway model for the future. Most leaders in the business I've spoken to generally acknowledge that change has been forced upon the industry and there is no turning back to an era gone past. With the forces of the economics and sweeping new regulation, now may be the opportune time.

It is still somewhat unclear as to how all the change will shakeout the retail financial services industry. New broad based regulations, new tax law, employee status changes, and the continuing erosion in the economics of the business will be key factors in shaping the future. While certain retail financial services models will die in the boiling water environment because they are either paralyzed and don't know what to do or simply choose not to make any changes because change is uncomfortable, there is an opportunity like never before for a new model to emerge in the direction of where the "puck is going". And whoever gets this right, will be the victor to the riches of the coming economic recovery and demographic evolution of the baby boom generation. It will take vision, leadership and the ability to execute on a plan to make it happen, something that at the moment is difficult to find in the financial services industry. It will be interesting to watch this evolve and witness who survives and thrives as the new realities of the marketplace create the opportunity for better, more evolved retail financial services models as we "skate to where the puck is going" and out of this boiling water market. e to make changes rather than have changes forced upon us.

If you have any comments on this article, please send them to John Lefferts at his e-mail address:

Saturday, May 2, 2009

Lefferts Professional Beliefs

Lefferts 10 Core Professional Beliefs
1. As a Financial Professional, it is incumbent on me to be a student of the financial world and to stay current on product, industry and economic trends in order to provide added value to my client and professional relationships.

2. Financial Planning is not so much about investment returns and the product of the day as it is about shaping, directing and coaching investor/client behavior.

3. Financial Success will not be achieved by the temptation of purchasing last year’s number one ranked product, but through adherence to a plan/strategy and being invested in the proper asset classes fitting to one’s goals and risk tolerance, over long periods of time.

4. Over the long run, a diversified and professionally managed common stock portfolio has outperformed any other asset class. This understanding and belief is core to our philosophy in not falling prey to “get rich quick” schemes, but to grow wealth slowly through proper asset allocation.

5. The greatest cost in an investment is not a sales load, expense charge or management fee. The greatest cost is taxation and lost opportunity by investing too conservatively, too risky or not investing at all.

6. A client is best served by a team of financial advisors who are “interdependent” using a holistic and comprehensive approach towards asset and risk management with total independence from any one product manufacturer or provider. The client is not well served by a broker/agent/advisor who is tied to and supported by a single product manufacturer beholden to the highest fee and/or commissioned product du jour under the guise of objectivity.

7. Over time, the firm/advisor from which one buys an investment product, insurance policy, annuity or mutual fund is relatively meaningless if first a well thought out financial plan with a qualified independent financial professional is not in place.

8. Most customers do not have the training, temperament or time to shop for or learn the necessary details about financial products and services. They simply want to look a competent professional in the eye and know that they can trust him/her to give advice that is in their best interests and guide them towards making the most appropriate decision.

9. Counter to conventional wisdom, Financial Planning is more than investments. At its foundation is a proper risk management plan with adequate life insurance and up to 1 year of liquid emergency reserves on hand. Having these core strategies in place first gives one the foundation on which to build a balanced and appropriate financial plan.

10. One’s finances and/or career are rewarded by hard work, persistence and the repetitive act of performing the basics with self-discipline to stay the course, despite the temptations to do otherwise.