John Lefferts' Blog

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.