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.