Greed is...

Last month while on meetings in NYC, I had a free afternoon. The sequel to the movie Wall Street had just come out and even though I was hesitant about looking like some pathetic loser going to a movie theater alone, I walked over to the Zeigfeld on 54^th, grabbed some popcorn, a diet coke and sat in this huge cavernous place that seats over 1,000 and joined a handful of others who took it in.

What prompted me to comment on the movie here was looking at the fi360 blog by Blaine Aiken where he describes the impact of the original movie, contrasts the current one and how it plays into what’s taking place today with regulatory reform (link here: fi360-WallStreet Movie blog ). Like Aiken, this original Wall Street movie came out at an impacting time for me back in 1987. I had recently completed the final exam for my CFP, we had just endured “Black Monday” where the market crashed over 500 points or 22% over a couple days’ time, and the business was digesting the enactment of the Tax Reform Act ’86 that was the death knell to the limited partnership boon (remember those 20% loads?!). While even back then we were doing needs based selling using financial planning, some of my colleagues were making a mint promoting single premium life before the MEC laws came to be the following year. I had an organization of about 40 advisors in San Diego and I remember one in particular named Dean who epitomized the era of “Greed is Good”. Dean’s method for prospecting was both simple and bold. He bought a bright red Ferrari that cost multiples of the apartment he lived in, went to La Jolla and parked it next to other high end cars and just waited. When the owner of the other car arrived, Dean would step out of the Ferrari and say, “nice car” so as to engage in a conversation about their mutual interests. He had the gift of BS and almost every contact led to an appointment. Many of us who knew Dean thought this guy was going to be either the richest person in San Diego or end up in jail. I fired Dean over a compliance issue shortly thereafter and found out a couple years later that he ultimately ended up in jail. It turned out that greed was not so good for Dean after all.

So bringing it back current, earlier this month I had another set of meetings in NYC and met with a high level executive in financial services. We traded war stories and observations about the business. She is now affiliated with a quality Private Equity firm after having a career running some big businesses at the highest levels for Fidelity and most recently at Morgan Stanley. We both agreed that the transformation taking place in retail financial services now is swift, wide reaching, and will change the business and business models forever…hopefully in a good way. But she made one observation that struck me. She said, “At Fidelity, it really was all about the customer…they came first. But most recently at Morgan Stanley, it was all about the broker” We went on and talked about whether this time around, the regulators will get it right and force the broker centric cultures towards a customer centric one. Or will the culture of greed continue.

Every time someone says “this time it’s different” something later comes up to prove it wrong. Human nature and behavior are fairly predictable and usually revert back to the norm…good, bad or indifferent. So with that in mind, I do believe the right set of circumstances are in place to materially change the way financial services products and services are distributed. If the regulators/politicians get it right and plug their ears to the product peddlers making noise, they have an opportunity to come clean on the slogan, “change you can believe in”. Products will become less important and process then becomes the focus. Process driven Financial Planning has an opportunity to grow up as an industry and be recognized as a true profession. But as quickly as I become hopeful for meaningful change, I’m reminded of the waiver they gave indexed annuities just earlier this year.

Even though the most recent version of Wall Street was panned by many critics, I liked it. Just as the original came out after the markets had been whipsawed with Black Friday exposing the underbelly of the business, this one hit after our most recent market slam down where the ingredients leading up to the calamity were the same; Greed. And for me an irony of ironies happened as I walked out of the theater, again hoping to go unnoticed. Coming down the street walking past me on 54^th was a former colleague of mine whose behavior always seemed to be driven by greed. He was also a driving influence on my separation from my former firm that I had spent my entire career with. It caused me to reflect on those whose paths I’ve crossed who were driven by greed much like Dean from over 20 years ago and today with this former colleague who had just walked by. Those driven by greed often appear prosperous and successful in the short term but pay miserably in the end. Regulations can’t change a human trait that has existed since the beginning of time. But they can set in place conditions that don’t promote it. Let’s hope it really is different this time and they get it right.

“A Native American grandfather talking to his young grandson tells the boy he has two wolves inside of him struggling with each other. The first is the wolf of peace, love and kindness. The other wolf is fear, greed and hatred. "Which wolf will win, grandfather?" asks the young boy. "Whichever one I feed," is the reply.”

Matching DNA

Having just returned from the annual FPA (Financial Planning Association) conference where the issue of fiduciary standard was front and center in just about every discussion, it’s tough to get the subject off my mind. So naturally, I decided to opine on it here. One speaker at FPA observed that about 1/3rd of financial services professionals fall clearly in the ‘fiduciary for all’ camp, another 3rd in the ‘keep the suitability standard’ camp and the last 3rd really not tuned in to what’s going on and seemingly don’t really care…and that’s a career threatening mistake.

As time has evolved, the picture of what the financial sales and advice landscape will look like is beginning to become more clear. The SEC has been given authority to call the shots on this one. They’ve made it apparent about what they want and barring any unforeseen new epiphany from the study on the issue…that they are conducting…here is how I see it going down. Anyone, be it SEC fee only RIA or FINRA Registered Rep (or both) who gives “Personalized Investment Advice” will be held to a fiduciary standard. Personalized investment advice is anything that is particular to a client and covers any kind of recommendation. And yes, that includes pretty much all the activity of financial sales. Naturally, if brokers and advisors are held to the same singular standard, it stands to reason that the same singular regulator will perform the oversight….and that’s likely to be defaulted to FINRA. This basically rocks the worlds of both RIA’s and B/D’s alike. While the Dodd-Frank bill did say that earning a commission or having a limited product set (aka proprietary products) in and of themselves will not be a violation of a fiduciary standard, as a practical matter, it’s going to be more difficult. (See Investment News article: http://www.investmentnews.com/article/20101017/REG/310179992

That’s because advisors will be required to disclose potential conflicts in recommendations which includes commissions, benefits (medical/401(k) cont/retirement plans), expense reimbursement, conferences, overrides etc. It’s believed that this won’t be disclosure buried in a 300 page prospectus, but in plain English to be signed off by the client. Can you say “levelized commissions?”

Having grown up in the sales side of the business, I’ve often found myself having to defend the honor of those Registered Rep’s/Agents, etc. who have always placed their clients’ interests first above their own. Financial Writer Bob Veres wrote the lead article for Financial Planning Magazine’s 40th anniversary issue this month titled “What’s next for planners”  http://www.financial-planning.com/fp_issues/2010_10/whats-next-for-planners-2668883-1.html   where he does an outstanding job peeking into the future of the business with input from industry leaders. In his segment of the article about Fiduciary Standard, he quotes me several times and makes the observation “financial services consultant John Lefferts concedes that the fiduciary concept is not in his DNA”. I agree with most of what Bob has to say, but will respectfully differ with him on this one. Yes, those who are paid commission by the sale of a product do have an inherent conflict, particularly those who are representing the product manufacturer in an agent or employee capacity. But it cannot be assumed that even with a conflict, one cannot choose to hold their clients' interests first. Additionally, the principles based RIA heretofore has always held to this standard operating under a “just trust me” level of supervision. Just as I infer that despite the potential conflicts, most registered rep’s do the right thing, I also believe most RIA fee only professionals do the same. What’s going to be different going forward is they’re going to have to prove it through supervision by FINRA, something the majority of this group despise believing they are higher up on the food chain than the lowly salesman. But as a regulator pointed out in a breakout session on the topic, we can’t operate in an environment where we apply regulations to those we think may need them and give all the others a pass. Rules must be applied to everyone uniformly.

I’ve been somewhat conflicted knowing that many of my former brethren want nothing to change and to keep on keep’in on with their suitability standard. In the insurance segment of the industry, it has been observed that after they began requiring compensation disclosure, the agent headcount in the UK went down by 80%. I’m not sure if that translates to the same here in the US, but no question, there will be fallout across the entire financial services industry when this is done. Nonetheless, at the risk of alienating my former colleagues, and a couple of the multiple industry organizations/associations to which I belong, I want to state that I am in full support of a harmonized Fiduciary Standard of care. Here are 3 primary reasons why I see it this way:

1. Whether you sell a product or provide a fee for service, the client should always come first. A fiduciary standard insures this. Yes, there will be a great deal of fallout for the proprietary models, but in the net, the survivors will be those who earn the trust of their clients no matter what their form of compensation or how much they earn. And while I’ve cited that the majority of sales driven professionals should have no problem meeting this standard, the few who give the business a black eye will be very exposed and ultimately forced out. The cream will rise to the top creating a more professional perception of what we do to the outside world.

2. The financial services business is increasingly drifting towards fee based products and services and as such, many of us are “hybrids” as both Registered Rep and RIA’s. But, perhaps the most ridiculous thing is that we have to wear “two hats” advising with one set of rules under the SEC and then taking off that hat and putting on a FINRA hat to make recommendations. It is totally redundant and confusing regulation. And the consumer couldn’t care less so long as their interests come first. Good riddance to one of those hats.

3. While there are exceptions, many of the “fee-only” RIA’s I know left NASD now FINRA to get away from the burdensome, nitpicky regulations and oversight. It’s no wonder they throw a fit when being faced with FINRA back in their world again. But if not FINRA, then who? If, Mr./Ms. RIA, you believe your advice is without conflict and in the clients best interests, then prove it. If, Mr/Ms. Broker, you believe you are worth your sales commission, disclose it to your client why and how you get paid. For the hybrid’s, it will be a welcome change to serve only one master, as overbearing as they may be.

 

Is the proprietary product sale and business model doomed? For some, yes and for others, no. If the proprietary recommendation is framed within a financial planning process and with conflicts of interest fully disclosed, I think the proprietary models doing this will thrive at the expense of others. In fact, that’s what we were doing at AXA Advisors a decade ago with the fee-based financial planning process that has since been ditched for a product driven approach. It’s the hot product du jour (today being indexed annuities) where it’s appears to be a one size fit all solution that will be highly exposed.

 

 

So while the regulators and methods of compensation may have differed between RIA’s and Registered Rep’s, the DNA of honesty, doing the right thing and placing your clients interests first has always been the same. It’s time they be regulated and supervised the same. And for those who refuse to be held accountable to FINRA or cannot/ will not place their clients’ interests first, so be it. All the more opportunity for those of us who will.

Out of the blue

Late last week my little sister Carolyn called my wife (a CFP®), who happens to be her financial advisor, checking to be sure her life insurance was in order. It’s a funny thing about life insurance...most people don’t think about buying it, much less making sure the owner and beneficiary designations are in order. That is, unless they are close to a life changing event. Weeks before, Carolyn was diagnosed with invasive breast cancer and was about to go in for major surgery when she called. When I saw her last over a month ago, she was the vision of health and beauty without even a hint that something was going on. There was no family history or lifestyle issue that could indicate even the possibility of cancer. It literally came from out of the blue.

But Carolyn is very organized and one of the few who keeps her financial house in order. And she knows all too well the value of life insurance. In the early 90’s, she was the mother of a 2 year old (Michael) and into the third trimester of pregnancy with her second child (Katie) about to be born. Then she got the call that no spouse ever wants…her husband, a hard charging exec in the hotel business had died of heart failure that morning at his desk. He was in his 30’s, a health nut and other than complaining about a rapid heartbeat a few days before, had appeared in as good physical shape as anyone with a very bright future ahead. This happened like most unexpected and tragic life changing events occur; unforeseen and out of the blue. Without life insurance, the home with a large mortgage predicated on the breadwinner’s income is gone.The kids’ lives change dramatically and the dreams of living in affluent communities with top tier schools vanish along with any visions of a college education. Their lives would have been very different if not for the life insurance Carolyn’s Dad and Bro convinced her husband to buy a few years earlier.

Every year, the Life Insurance industry designates September as Life Insurance awareness month…but it’s not working. Statistics tell us that life insurance ownership is at its lowest level in 50 years and only 44% of households have it. Worse yet is that 7 in 10 families with kids under age 18 would be devastated if the breadwinner died. The financial press has done such a great job arguing that life insurance is a “bad investment” and a “rip off” that most, if they are given the opportunity to buy it at all, choose simply to pass. While everyone is focused on the cost or the kind of insurance, they fail to recognize the most important thing of all; to at least have some no matter what the cost/type/ company/ commission etc. . . . And believe me, when the proceeds are given to the beneficiary, it’s never enough and not once have I seen anyone turn it down.

With the good fortune of life insurance, Carolyn was able to
relocate to a beautiful home in an affluent beach community near San Diego where our parents live. She has since remarried, her son Michael is now a sophomore at Gonzaga University and Katie is an honor student at Torrey Pines High School looking at top tier colleges…to be paid for in large part with life insurance proceeds. She has built a successful business and done an outstanding job raising the kids with the help of her husband and parents. But now she is faced with perhaps an even greater challenge…beating cancer. With the peace of mind knowing that her financial house was in order, she had surgery this week and came through it like a champ (hey…she’s a Lefferts!). Every indication is that all is now clear and it’s a matter of recovery.

You hate to see bad things happen to good people, but none of us are immune to it. It’s even worse when the devastating results of bad things
could have been prevented with proper planning. I’ve seen businesses sold in fire sale fashion ending generations of a legacy, once close families become divided never to speak to one another again and kids on a success track go the other way, all because life insurance wasn’t in place when it was needed.

Growing up with my father in the life insurance business, I was always bothered by the stigma of the life insurance salesman. It wasn’t cool or “hip”. It was something they made jokes about and movies like Groundhog Day with. But as time goes on, the old man gets smarter and I’ve gained wisdom through life experience. It’s no longer uncool and is perhaps one of the most important and meaningful financial decisions one can make. We often hear and read about all the negative aspects of life insurance and frankly there couldn’t be a more misunderstood financial product. But when you see the results of a family or business when they have it, and when they don’t, you come to realize about the coolest thing you can do is buy life insurance.

Cultivating Cats

I’m a dog guy. My wife is a cat person. So as you may have guessed, as tough as it is for a guy to admit…we have cats. Nice, clean animals, but don’t even think about trying to get them to do what you want them to do. I call out, “here Penny, here Wiggly” (I didn’t name them either) and they run away in the opposite direction…very frustrating to one who loves the appreciation and delight a dog shows when being called by its owner. But cats, they’re highly independent and wired to do what they want, when they want to and where they want to do it. More on this later.



With the closeout of the SEC comment period on the fiduciary standard, everyone will have had their parochial say on the issue. Now it’s a matter of anticipating which direction Shapiro and Co. will take it. Will they water down the fiduciary standard to accommodate existing business models? focus on what the appropriate standard is for the client/customer and let the models emerge and evolve around them? or will they punt and do nothing at all? While they’re not showing their full hand as of yet, they have been dropping some hints. And that has each constituency in the business interpreting it to their favor. During this time after the comment period and before the final regulations are announced, you’ll be reading a great deal from each point of view as to how they think it will go down and why their particular model is the clear winner. Some will be right and most will be wrong. But I think one thing they’ll all agree on is that we are on the verge of seeing massive consolidation and convergence within the retail financial services business. With 70% of the RIA’s existing as one person shops, 4,700 broker-dealers with the vast majority unable to build or maintain an infrastructure to survive the coming new regulatory standards and many of the giant financial service distribution models stuck in their legacies, it’s not a stretch to conclude that the “roll-up” firms may rule the future landscape. Roll-up’s with the funding of large financials and/or private equity money could snap up fledgling RIA’s and B/D’s in Pac-Man style as advisors run into their welcoming arms for survival. Sounds conceivable and while I think this may be the case in certain situations, I can tell you in one word why I don’t think they will become the prevailing business model of the future. That word: Culture.


I’ve written about culture before (see: http://johnleffertsblog.blogspot.com/2010/02/culture-clash.html) and I’m not afraid to bring it up here again since I believe it is the singular most impacting factor in the success or failure of a business. Cultures take years, perhaps generations to build and are essential to organizational success. It’s made up of a combination of intangibles that, like the word culture itself (derived from the word “cultivate”) are often associated with words beginning with “C”; camaraderie, caring, character, commitment, communication, compliance, consistency, cooperation, chemistry, compass, continuity, confidence, congruity, codifying, cohesion …and for those of you who don’t buy into the importance of culture, we can add in “crazed conjecture, crippling conspiracy and crap!

The issue I take with roll-up’s we’ve seen thus far isn’t that they have bad cultures, but no real culture at all. They are generally pulled together and bonded not like the positive C words above, but by an advisors desire to monetize their practice yet remain decidedly separate and independent. The same could be said for certain independent broker-dealers. When AIG momentarily had their B/D’s on the block, I asked a CEO from a leading financial services firm (not my alma mater) if he was interested in pursuing them. His answer was, “yes, we did look at it, but in the end, we felt it would be like trying to herd cats fitting them into our cohesive culture”. This brings me back to the cat discussion above… think about a whole herd of cats and that’s what many roll-up’s and certain Indy’s are made of. If they have a culture, it is of independence and a desire not to conform to anything, particularly someone else’s culture. So while the roll-up’s in concept seem like they would work famously in a consolidating business, the greatest challenge is getting their advisors to think and behave in a way that takes advantage of the greatest benefits of a larger scaled firm and all the multipliers of those positive C words above. Rather than 1 +1=3 in an organization with a positive culture, it truly is 1+1=1, and in some cases, 0. After coming to this realization, particularly if there is no appreciable equity value in affiliating with a roll-up, they usually bolt like a cat dropped into a pack of dogs.


But do all independent advisors have cat like tendencies? Not really. I ‘ve found that many advisors who grew up in a strong highly supported culture and later opted for independence often long for that sense of belonging much like dogs are drawn towards packs. They miss the sharing, camaraderie, and support. While they may have originally left out of a desire to be more flexible in their product offerings, marketing, image and at times, payout, they find that being the front, middle and back office isn’t always what it seemed from the other side of the fence.

The business is definitely changing but not necessarily in the direction of total independence that has long been predicted. Yes, the proprietary product driven models will likely fade away, but it’s my belief that the larger scaled players that can build and leverage the multiplier effect of a strong culture by adding value in the form of middle and back office support will emerge as winners. Kind of a hybrid between the independent B/D, but with a more cohesive larger employee model feel. One relatively new player that has caught my eye is Hightower Advisors out of Chicago. They appeal to the desire of the larger wirehouse broker not to be told what and how much to recommend to their clients, but give the sense of support and belonging that plays to their professional needs. A hybrid cat-dog organization of sorts. If you were to extend this model out to all segments of the industry (RIA’s, Indy’s, Insurance, etc) I think the new model that survives the future will look a great deal like this one.


But, as you’ve probably already noted, this coming from a dog persons point of view while trying to train Penny and Wiggly to become more dog-like….we’ll see how that works out in time.

Dear Bob...

Back in June I wrote a post that spoke to the "Carnac's" of financial services http://johnleffertsblog.blogspot.com/2010/06/new-carnac-of-financial-services.html about the financial industry writers who are predicting the future. One of the writers I referred to was Bob Veres who wrote an excellent white paper on how he sees the future unfolding for the investment advisory segment of the business (see web site to download a free copy: http://www.bobveres.com. Last week I jotted down a response to Bob's paper and sent it to him. While we agree on most points, my point of view differs where it refers to the large retail sales oriented shops, largely due to my upbringing in the business. Anyway, in case you have a sleepless night and need some reading material, I thought I'd post my comments here:

Bob Veres

1804 Garnet Avenue, Suite 510
San Diego, CA

8/14/10

Bob-
Over a month ago I read your latest epistle “The future of the financial advisory business” and found it to be extremely helpful as we all try to anticipate where the business is headed. You’ve solicited feedback from your readers and I thought I’d give you my “two bits” here. The seminal event of the Great Recession has, as you pointed out, accelerated the evolution of the business. The business had already been evolving with trends towards the independent models and fees. Whether you call it a “Big Bang” event or a “Perfect Storm”, whatever name we want to place on this uniquely harsh recession, it has set in place drivers of change that will shape and mold the business in ways unforeseen or expected just a few years ago.

As a quick frame of reference, let me tell you about my background since I may not fit the typical mold of your readership who, from what I can tell, are highly academic, passionate about their fee only-RIA slice of the business and very protective of their sacred fiduciary turf: I started my career with an insurance based company, The Equitable, in the early 80’s in my hometown of San Diego. While I was definitely in a sales driven-product push system, I was drawn early on towards the needs based approach of gathering info-setting goals, preparing financial modeling to meet those goals and making recommendations across all lines of products to achieve the financial/life goals of the client. I guess today we would call that financial planning. I earned my CFP in ’87, moved to Texas to run a branch in the system in ’89 and secured my ChFC in ’90 and CLU in ’91. Through the 90’s I built a branch of 300+ professionals with the same needs based approach, albeit on a sales based platform. Then in the late 90’s, under a new moniker of AXA Advisors, LLC, I headed up a pilot program throughout the state of Texas to scale out “fee-based” financial planning changing our licensing from series 6/L&A to series 7, 65 and 24 for managers. We also changed their product set (asset management accounts/fees), recognition, compensation, and training away from the sales driven culture towards process based planning. I recall reading your newsletter back then in your “early warning“ section citing the apocalyptic event of a bunch of AXA insurance sales guys attempting to highjack the financial planning business. I knew we must be doing something right if we had hit your radar back then, even if it was less than complimentary.

Anyway, the planning pilot worked famously. We invested about $30 mill in huge state of the art (archaic by today’s standards) mainframe computer and operational infrastructure known as “The Financial Planning Center” to centralize the back-office and provide quality control. It was highly successful in Texas, so we decided to roll it out nationwide. A new incoming CEO asked me to come to NYC in ’01 to be Pres. /CEO of AXA Advisors and keep the ball rolling. But as we all know, a big event occurred on 9/11/01 that changed everything. The focus of the business moved from pursuing a growth strategy via financial planning to survival through cost cutting and re-focusing the field force on profitable products and services (read proprietary sales) during this challenging economic period. We spent the next several years taking down the planning infrastructure we had built with the marching orders to cut over $50 mill from the system. Some in the business think AXA dropped the Financial Planning strategy because it didn’t work…not so. It was dropped because it was an easy save in a post 9/11 environment while the CEO moved towards a more profitable product driven strategy, namely moving variable annuities through as many distribution channels as possible. Throughout this past decade, AXA has reverted back to the old days of product push (although there are some planning holdouts) and in ’09, I decided to separate as I no longer saw eye to eye with the leadership.


This past year I’ve been on the sideline observing and evaluating the business with the intent to “skate to where the puck is going”, to put it in hockey terms. Aside from reading everything I can find about the business and its direction, I’ve spent most of my time working with several NYC based Private Equity firms evaluating the possibility of a new distribution model that fits a post FinReg environment. Frankly, I’m agnostic as far as the financial services business models are concerned as my point of view is no longer driven from where my paychecks come(compensation definitely does drive behavior). But, I do have my life experiences that mold my point of view which is why I gave you a snapshot here. And while in your paper you intentionally come at it from the fee only RIA perspective, my feedback looks at the business on a more global basis encompassing not only RIA’s, but all other financial services business models such as Independent B/D, Wires, Insurance based B/D’s, Brokerage General Agencies (BGA’s), Fixed Insurance agents and the many combinations in all of the above. I think they are all inextricably linked, good, bad or indifferent. It’s my belief that over time, the business models will shrink in number, grow in size and cut across multiple disciplines (risk mgt, asset mgt, estate transfer, retirement planning, etc) as regulations will finally allow for them to evolve and develop on the same platform without regulatory silo’s.


You refer to Mark Hurley and his 1999 white paper a great deal. I was in Hurley’s office about a year ago to get his point of view on where he sees the business headed on my quest to peek into the future. He’s a freaking brilliant guy, but his ego would not let him admit that he may have gotten it wrong back in 1999. Like many, I bought into the vision that the business would converge into about 20 Citigroup styled players all squashing the little guys. As we now know, it didn’t happen and in my view, while the repeal of Glass Steagal opened the door for financial entities to play in one another’s backyard, the regulatory silos of FINRA, SEC and state insurance departments remained in place preventing any real change in the business models. Regulations remained the same where lines were drawn by product (securities/insurance/advice) that did not enable the convergence to take place as prior envisioned. But that’s all about to change…


Of all the drivers of change the Great Recession has ignited, none will be more impactful than the move to harmonize all those who give “personalized investment advice” to be regulated by the same entity under a fiduciary standard. If this goes down the way it appears to be headed, the wheels of change formerly locked by regulatory silo’s will be in full motion.


So with all this as a backdrop, let me say what I do agree with regarding the white paper:


The emerging landscape will be “alien to their business models”: I find it perplexing how few practitioners, whether they be fee only RIA’s or registered rep’s of large B/D’s, have little interest in and knowledge of the sea change about to occur. They are so entrenched in keeping their head above water to survive with their clients that they haven’t had the opportunity to take a breather and recognize the changing landscape surrounding them. They just keep on-keeping on in hopes that the world will change to fit their particular model since they don’t have the time or energy to transform. Most are simply “whistling through a graveyard” and paralyzed to make any adjustments at all.


The highly fragmented and micro-business element of the RIA world will change: I think I read where over 70% of RIA’s are one person shops. I know RIA’s don’t want to hear it preferring to use a “just trust me” approach, but they’re about to have a whole heap of regulations, paperwork, compliance manuals, etc. thrust on them. I know principal based is different than rules based regulation, but in my view, RIA’s will trend more towards rules based regulations albeit being held to fiduciary rules. These one person shops will either be forced to affiliate with a firm with the compliance infrastructure to handle this (and perhaps supervise it), or decide to close up shop. I agree with the comment “the sole practitioner could meet the same fate as the family doctor”


Where it was once thought that scale provided an advantage for technology, it is now a disadvantage: Totally agree. The $30 mill Financial Planning infrastructure we built in the late 90’s could be done today bigger, better, faster for less than 1% of that cost. Most large firms are handstrapped with legacy systems that don’t communicate with one another and are hesitant to write it off and start over. It’s actually an advantage to start-ups who can buy systems and support off the shelf.


The average age in the profession points to a “Great Transfer”: Not only are owners in these business models reluctant to sell, or give up control, but the business has done a very poor job of grooming the next generation. Frankly, there is hardly a next generation in place since many of the wires and insurance companies have decided to trade “sore arm pitcher” veterans and stop training rookies at an estimated to cost $200,000 per producer to get them to the 5th year successfully. I’ve seen estimates that nearly half of financial advisors expect to leave the business over the next several years. This will quicken the already increasing trend towards fewer and larger entities. But it also points to one of the biggest problems in the business; building the next generation of advisors.

Here are some areas where I have a slightly different point of view:


The demise of the wirehouse retail business model: It’s seems like the fee only RIA community views the large retail firms whether they are wires, insurance or B/D based as the “evil empire”. I totally agree that salespeople holding themselves out as financial advisors/ planners, et al. is wrong and should be curbed as part of the new regulations. The underbelly of the financial services industry bothers me like many others and just as ambulance chasers give the legal profession a bad name, those who operate under the guise of financial advisor while selling high commissioned products stain the entire industry. I think the politicians blew it by letting the states win out on the regulation of indexed annuities which are among the most confusing and misrepresented financial products offered today. They’re just one more 60 Minutes show away from being back in the SEC’s crosshairs...no doubt to happen soon. I think an inevitable outcome to better aligned regulation will be to shine light on the imposters and shrink their ranks. But, I don’t think the large retail firms are going away. This is where my upbringing in the business may bend my viewpoint a bit.


The business models that rely almost exclusively on the sale of proprietary products are the ones who are most at risk. This encompasses most sales forces owned by life insurance companies, including my alma mater. The entire value proposition for being affiliated in such a model goes away if one is unable to sell 70%+ of the company manufactured products. No benefits, no recognition, no stock options, no glue to stick around. I think mutual life companies will hang in there since they have always subsidized their field forces without regard to profitability, but the stock firms will more likely continue to starve their distribution platforms to death and end up solely as product manufacturers. The only unique exception to this may be Ameriprise. Unlike most insurance based B/D’s, they actually earn profit from their B/D and investment based platforms as they are self-clearing. And if an insurance company can move its field force towards fee based planning as we did at AXA (and as Ameriprise does), there is a shot at survival. But I don’t see that happening so far.


As for the large wires, yes, many of their producers will go the way of the dodo bird. These are the old timers who cannot adapt to change and are still transaction driven. And some of the large producer groups will continue to find independence more fitting to them as brand is no longer a draw. But most of the large wires catering to high net worth clients have already adopted fee based products and thus the IAA role as a fiduciary. Yes, some proprietary products and services will no longer be in their basket, but don’t underestimate their ability to throw money at a new initiative. My own experience at AXA tells me that this can be done successfully. And remember about 10 years ago when Merrill had fee based plans called “Financial Foundation” as the backbone for their field force requiring each advisor to do 10 fee plans a year. Like AXA, they dropped it since it was in the way of an easier sale, but with the situation being the boss today, it would be very easy for them to dust off that playbook and do it all over again, this time with more conviction and the backing of their banking partner to do it.


“Fiduciary Avoidance” on behalf of the wires”:It may sound like I’m trying to defend the wires…I’m not. It’s just that I don’t view them as the enemy as much of the RIA community does. While a decade ago they did fight and try to re-brand the investment advisory and fee business more to their liking, they’ve come a long way to acquiescing to the fiduciary standard and all that comes with it. With the insurance based B/D I recently left, most of the representatives were IAA’s with a requisite to have FINRA series 7 & 65. And FINRA not only oversaw their “suitability” styled transactions, but the compliance department was as militant about the rep’s adhering to SEC standards for advisory activities. Last year I paid a visit to the CEO of Ameriprise to get his perspective on the direction of the business and asked “Doesn’t the move to a fiduciary standard concern you?”. His response…“Absolutely not, we’re already doing it!”. I think you’ll find that most large FINRA regulated players have already evolved towards the fee business as the marketplace has been demanding it for some time now. I’m sure there is a large population of series 6 and series 7 rep’s with smaller firms that have no desire to move in this direction, but most of the biggies are already there. In my estimation, the large FINRA regulated firms are in a far better position to take on harmonized regulations than the majority of small RIA’s.


The marketing opportunity:RIA’s learning to live with less competition Similar to my points above, I think it’s naïve to think that the large retail firms will no longer be relevant and the net result is that the only model left standing is the RIA we know today, leaving a windfall of clients. The RIA’s as they stand today won’t survive either. Everyone has to change. A large majority of RIA’s simply charge fees for assets under management. As the large retail firms move their business further in that direction, what is going to differentiate the smaller RIA? It kind of sounds like Hurley back in ’99, but if the large firms move their focus entirely on the same asset under management approach as the RIA’s (and some are already there), then it’s going to be tough to compete with the level of support, research and service the deeper pocket larger firm can afford. There was a time where the independent RIA was able to differentiate themselves by providing true financial planning , but most have succumbed to the ease in capturing assets under management for a fee over the past decade. Why bother with fact finding, budgeting, setting goals, estate planning, insurance planning, tax planning, etc. when all you have to do is find another retirement account to roll? I think what can differentiate any one player for the future, large or small, is their ability to address the broad based needs of their clientele that includes asset management, but so much more… true financial planning.


Final thoughts: Bob, like you, I do see dramatic and far reaching changes taking place. But I guess I’ve been in the business so long, I tend to get somewhat cynical observing, as the old adage says “the more things change, the more they remain the same”. I hesitate to say “this time it’s different” but there really is a paradigm shift for everyone taking place. RIA’s will have to re-organize and become accustomed to supervision and all that comes with it. And FINRA regulated folks will have to step up their game to the higher standard of a fiduciary or risk spending a great deal of time and expense in court. In the evaluation of winners and losers, it’s not so much where one is positioned today, but their ability to change and adapt that will survive tomorrow. I suppose its human nature to see the landscape from one’s own rose colored glasses which makes for a lively debate. But at some point, we’re going to have to reconcile our differences within the business if we are to be viewed by the outside world as a true profession. I read the comments from Harold Evensky on the RIABiz site about how he believes it’s better to work together and help regulators get it right rather than split camps and risk confusing all. I couldn’t agree more. This isn’t about who wins and loses. Frankly the demand for quality financial advice at all levels is so great, there is no need to turf build. There are more than enough clients and needs to go around for everyone, more than the entire industry at all ranks has the capacity to meet. The professions that are recognized such as the accounting, legal and medical fields have professionals at all levels serving clients at all levels. It isn’t their regulator that differentiates them, but the quality of their service and value proposition offered whether they’re an enrolled agent, high powered attorney or a chiropractor. In fact, it’s the dueling regulators/oversight we now have with SEC, FINRA, State insurance dept’s, CFP board, American College, FPA, NAIFA, SIFMA, etc. that is complicating and confusing not only the general public, but those of us within the financial services business. I suppose that’s all a part of a growing and evolving business, but it’s no wonder the public is confused, because we are too! It’s going to take many variations of financial advisors to bring our industry to the level of professionalism that others have. We shouldn’t have to rely on regulators, but the consumer/clientele who we serve to define who we are as a profession. When we rise to the level of being made fun of with humor like “attorney jokes”, perhaps we may well have made it!


An Idealist would eliminate commission based financial sales and ban non-CFP’s from practicing in the business…wouldn’t that make the world a better place? I don’t know many in the business who really think that’s gonna happen. But it seems like the more some segments of the industry try to make it so, the more elusive the ideal world becomes. The CFP Coalition, while well intended, looked like some sort of extremist cult group in their efforts by visibly (at least to me) excluding the majority of the stake holders in defining the future of the business. I suppose the same could be said for other special interest groups in the business as well. I think that we all need to get real and move forward on what can get done rather than use a “scorch the earth” we win-you lose tact. Taking a “why can’t we all just get along” approach may prove just as elusive and a bit idealist in its own way, but I think erring on the side of inclusiveness stands a better chance of moving the profession forward.


If you’ve read to this point, thanks for hearing me out. I thought feedback from one of your non-traditional (AKA former sales guy) followers would give a varying perspective. Not that it’s right or wrong, just different. We can all attempt to predict the future but as you’ve cited with Mark Hurley a decade ago, it’s very tough to do. Unforeseen events such as 9/11, the housing bubble and resulting great recession greatly changed the outcomes. And I’m sure there will more major events in the coming decade that are equally unforeseen that will impact the business and our country. Thanks for your great work in writing the white paper. Like Hurley’s in ’99, I think yours will be cited for years to come. It will be interesting to watch and participate as the future unfolds.


All the Best,






John Lefferts, CFP, ChFC,CLU

I Can See Clearly Now...

Last week on one of my many treks to New York City, I was in mid-flight and glanced up at the video screen showing one of those time killing “Scene It” movie trivia games. It was the one where the screen starts out extremely blurry and it slowly comes closer into focus over about 30 seconds. The objective is to guess the image before it becomes clear. It’s been more than 30 seconds…actually 2 years, but I kind of feel the same with how things are playing out in the financial services business. Our worlds were rocked in the late summer of ’08 and the future looked like the Scene-It screen; one big blur. But piece by piece, things are starting to take shape and become more clear. The passage and signing into law of FinReg is the biggest clue yet in figuring out what the landscape of retail financial service distribution models will look like. The business has certainly been evolving over the years with a slow drift towards the independent models and a separation occurring between financial product manufacturers and distribution platforms. But this jolting event of the great recession seems to have quickened the changes already in motion while triggering some new influences that will define our futures. These are the 5 major drivers of change that are re-shaping the business as I see them:

Shift in consumer behavior: The savings rate hit an all-time low of about 0% just before the seminal events of ’08. As the consumer continues to de-leverage and savings rates get back to 50 year averages of 6%-8%, while not so good for the economy with less spending, it’s very good for the financial services business as money formerly spent on “stuff” is redirected to financial products and services. Additionally, there is more value today on professional financial advice with a willingness to pay a fee for it. I see greater demand for fee for service financial planning into the future. Not just fees for managing investment assets, but actual financial planning and modeling.


Paying for big government: If you’re like me, you think the less government involvement, the better. But that’s not the world we live in today. With the deficit numbers at staggering levels and an inability to grow ourselves out of it as Clinton was the beneficiary of in the late 90’s, tax increases and the closing of tax preferred items and loopholes will drive the business. This means the recent targets of off-shore accounts, private equity, hedge funds and executive compensation are just the beginning. To the extent that tax driven financial products can retain their current treatment (which is not a given), reasonably priced life insurance and annuity products will be all the more attractive.

Boomers entering the last phase of life: Just as boomers drove spending and mutual fund growth through the 80’s and 90’s, they have entered the phase of life where they need to turn their assets into income and work on transferring them to the next generation. Boomers over age 50 own 70% of America’s financial assets and represent over 50% of all discretionary spending…that’s huge! This segment of the population all entering the same stage of life at the same time looking for advice on retirement and estate planning points to the most unique period of time for the business. And with the peak year for boomer retirement being projected at 2023, we’ve got a good run over the coming decade.


Capitulation on distribution models: While it’s been evolving over the past 15 years, the era where the large manufacturer of proprietary products maintains their own “tied” sales force is in the twilight of their existence. If the economic blow the recession caused on revenues didn’t do it, then the coming financial regulations will. ING came to the realization early by selling 3 of their B/D’s to Lightyear Capital. Expect more proprietary models to separate. When will we stop calling them “major wirehouses”….when they get down to 1? (we‘re down to 4 today). The only thing keeping these models afloat was the ability to subsidize the costs through the sale of proprietary products. With that going away under FinReg, perhaps the only ones left will be a smattering of mutual life models whose ownership have no idea or even care about profitability. And it’s not just the proprietary models that will have to change. There are 4,700 B/D’s of which 95% have less than 100 producers, 11,000 SEC regulated Investment Advisory firms where 70% are one man shops and 4,000 BGA’s out there. Like the proprietary models, most of these are struggling to survive the loss of revenue from the economy, but when the new reg’s are forced on them, it’s a story of scale up or go home.

FinReg-The most material change in regulations in over 70 years: This is the biggie of all the drivers of change. You had SEC Advisors rooting for one thing and FINRA regulated B/D’s rooting for another. They both won and lost. Advisors won by holding anyone who gives “personalized investment advice”, which is basically anyone who makes recommendations, to a Fiduciary Standard of care...Yay for the advisors! But, who is going to supervise them, a new self-funded SRO? CFP Board? NAPFA?...uh-oh…looks like the only logical one is FINRA…Yay for the B/D’s! This is the rub on the proprietary sales model. At the very least, full disclosure of compensation and any differential benefit in recommending a proprietary product will make an already tough sale all the more difficult. And advisors who have claimed the moral high ground of being principle based will finally have to prove it…to FINRA. The “hybrid model” will no longer be hybrid, but simply the only model. No more “two hats” and down to one big one. Expect this new model to pop up in the independent space as it all plays out over the next year.

One could argue that they’re forcing the little guy out of business, particularly with the change in 12(b)-1 fees. Perhaps so. But I do think this will force some of the riff-raff out of the business. Yes, they can join their non-registered brethren and just sell 10% commission indexed annuities…until the next “60 Minutes” story breaks. I think this all lends towards the beginnings of a new era in the financial advisory/planning business. After the wait and see we’ve all been through the past couple years, it’s encouraging to watch things finally take shape and come into focus, even if we don't like all of what we see. We are entering a time where the demand for what we do has never been greater. And the supply to meet this demand is contracting and being re-shaped…a classic supply-demand story that works in our favor. For those stuck in the past, the screen probably still looks blurry. But for those who have the ability to reinvent themselves and their practice, things have never appeared more clear than they are today.

The New Carnac of Financial Services?

Legendary nighttime talk show host Johnny Carson had an act back in the day known as “Carnac the Magnificent” where he mocked fortune tellers with jokes about how he could foretell the future. He would start by placing a “hermetically sealed” envelope up to his head and before opening it, like magic he was able to recite the answer to the question. They were at times funny but usually so stupid the audience wouldn’t laugh but groan at the slapstick styled jokes. Then after the audience would push back, he would come up with a one lined curse.



Carnac: “Until he gets caught” then opens the envelope with the question “How long does a congressman serve?” Carnac: “What does an alligator get on welfare?” Answer: “Gatorade” Then the audience groaned and he would curse them-“May a love-starved fruit-fly molest your sister's nectarines” or “May a weird holy man with a rash play with your face” Like I said, they were real groaners...but funny.


Joking or not, attempting to predict the future is a business pastime. From economists to consultants to bloggers like me, it’s simply tough to resist. After all, if one were able to really consistently predict the future with accuracy, they’d be successful beyond all dreams. And while an analyst may successfully predict the next bull market run or economist predict the next recession, over time, they’ll get it wrong more times than right.

Whenever the business endures change, it seems to bring out the prognosticators. Just over a decade ago in 1999, Mark Hurley, then with Undiscovered Managers, wrote a white paper that created a stir in the financial business. Keep in mind the environment in 1999 was one where Glass Steagal was being repealed, anything that had “.com” in its name was a sure bet and most economists were saying how “this time it’s different” believing the economic expansion would never end. Hurley back then predicted unprecedented consolidation in the financial services/advisory business to be dominated by handful of giant mega-firms with the scale, technology and support the smaller competitors could not afford to provide (ie-multiple Citigroup/Travelers/Smith-Barney styled giants). At the time, it seemed like he had set out the vision for the future of the business and I recall reciting the findings in speeches and seminars to support my bias towards the large firm I worked for at the time. But as often happens, no one can predict the future with complete accuracy. I was in Hurley’s office last year to get his take on where the business was headed (he’s a freak‘in brilliant guy) and I asked him what he would change if he re-wrote the paper today. His ego, admittedly large, wouldn’t let him say he got it wrong. While he didn’t get it entirely wrong, not all has panned out as predicted. But you have to respect someone who has the cajones and respect of peers to put out such a paper so widely followed.

This last month, another white paper has surfaced written by Bob Veres, a financial advisory/planning industry journalist. Like Hurley, Veres is also a gifted visionary in the business. I’ve been a subscriber to his newsletter “Inside Information” http://www.bobveres.com/ since the mid-90’s and while I don’t always agree with his point of view, I always find them thoughtful and well written. His white paper “The Future of the Financial Advisory Business:Opportunities, Challenges and Trends in the Second Decade of the 21st Century” is extremely thoughtful and does an outstanding job outlining where we’ve been and where the future of the business is headed (you can access the paper on his web site link above). Veres takes it in a different direction than Hurley correctly identifying that being a giant actually has disadvantages in the form of legacy costs, technology and systems. He envisions financial planning and advisory professional firms developing on a national basis like large national law firms with partners in every major city. Sign me up!


Like I did with Hurley just a decade ago, I also find Bob’s vision one that I can see and believe. And again, like Hurley, more than likely, he won’t get it all right. But he does lay out a future vision for the business as we slog through the middle of an unprecedented period of time searching for the new normal. And I am careful not to say “This time it’s different”.


“May the bluebird of happiness make a nest in your navel”


-Carnac

Those who can...please teach!

There's an old adage that those who grew up in the trenches of entrepreneurial business often say... "Those who can't...teach". It was a reference to those who tried but never achieved any real business success, and left the risky and uncomfortable trenches for the perceptively cushy role of a consultant, trainer, or some position with a salary safety net and out of the line of fire. Clearly the saying was rooted in a bravado one must have to succeed in a high risk-high reward business environment. And just like many observations, this one too is often proven incorrect as there are quite a few people without successful "in the trenches" business experience who have done quite well. But, not so much to discredit the idea that having real life business experience often is an advantage over solely academic experience. Recent observations cause me to think that the saying should rather be said, "Those who teach...can't"

Events over the past couple years through the financial crisis, health care reform and now the financial services re-regulation being marked up this month have created a bright line divide between the public sector and the private sector. ..between the academics and the entrepreneurs...between government and business. Every time I hear Obama ridicule and ostracize business and business leaders, while some of it is deserved, it causes me to wonder if he and his administration really understand what they are throwing barbs at. Obama, while a great orator and politician, has never been exposed to life in the business trenches. Nor has 90% of his administration who are driving the agenda in DC. It doesn't make them bad people. They simply see the world differently than those who know what it's like to be an entrepreneur with a mindset of waking up unemployed every day. The solutions to problems from an academic public sector mentality will differ greatly from a entrepreneurial private sector minded person. This also plays out in finance where the economic academics always seem to overlook the fact that human behavior is a key driver in almost every economic outcome. Our academic leaders ascribe to a Keynesian public sector solution while those of us who have real life experience understand the power of the human element and a free market system. These differences have always been around, it just seems like the economic turmoil has exposed the glaring differences all the more. Needless to say, I'm a free market kind of guy.


I have tremendous respect for teachers. A real challenge we have nationally is a lack of high quality teachers. But, it's when the academics step over the line to both teach and run business through public sector driven solutions that gives me fits. We don't need any more government programs, handouts and overlapping regulation. We need more small business growth that has historically created 80% of new jobs. The recent political wave of free market candidates, particularly in California, are encouraging. November elections can't come soon enough. It's time for those who can...to teach!

A short rant...

Okay, I have a short rant so bear with me here...

It seems like now more than ever, we American's talk from both sides of our mouths. We want nothing to change, but everything to get better. In a modern era where we are supposedly more evolved having learned from our mistakes of the past, we find ourselves more politically polarized and paralyzed than I can remember. Everyone is fighting for their own respective status quo and seems to have chosen to align with a special interest group that has all of a sudden become a victim in some way or another. It's certainly not the spirit that made America great and it worries me about the future. As we have regressed from a responsible can do-pull yourself up by the bootstraps mindset to a somewhat pervasive victim minded society, there is a need to find blame for everything bad that happens. And lacking any obvious perpetrator, the default is to blame big business and government. While the majority of Americans say they want less government in their lives out of one side of their mouths, they blame government and hold them accountable out of the other. Then when something goes awry, naturally, government in turn launches sub-committees, investigations and everything possible in a highly counter-productive effort to deflect any blame. But a more pervasive thing also happens. The more we look to government for all the answers, the more we invite them to meddle in even more things in our lives. My point?....Let's stop looking to government for solutions when they have none...cuz they'll be certain to make one up!

There are quite a few things to get bugged up over these days and the never ending drip of media coverage through TV, Twitter, and Blogs make it all the worse. It's the height of cultural degradation when I see headline news being taken over with news about the supposed newscasters themselves. Beck, Olbermann, O'Reilly, Limbaugh, Maddow and others of their ilk would do us a favor if they kept their opinions to themselves and actually reported the news rather than making it up becoming the focus of the news itself. I suppose I should take them not as newscasters but entertainers. It's just that when I hear people recite the opinions of these brainwashers verbatim it bugs the @#&* out of me! The latest issue that has really gotten to me is this Gulf oil spill. It is quickly becoming one of the greatest disasters of our time and there is as much energy being wasted on blame and deflection of responsibility as there is in fixing the problem. You can't blame the government for the oil spill. But after initially distancing themselves, now that they're taking heat for that, they've gone to the other extreme of meddling in it all not with solutions but with blame. When questioned about what the Obama administration should do about BP's oil spill in the gulf, Boone Pickens was quoted as saying "I'd get my boot of their throats and out of their way. I'd tell them we'd assess blame after the problem was fixed. I'd tell them it's ok to take risks to get this cleaned up-now". I couldn't agree more.

What's this got to do with Financial Services? Well, I see the same problem with financial reform taking place. The government is falling all over themselves to get something passed so they can appear to have solved a problem caused by big bad Wall Street while all the time they have no idea what they're doing and the ramifications of unintended consequences. It was government as much as Wall Street who is responsible for the financial mess. If you saw parts of the senate hearings debating the reform, it became evident that it was more about scoring points with sound bites and blame rather than actually fixing anything. Like Pickens said above, I think the government should take their boots off their throats and let the minds that created the mess figure out how to fix it. Then we can assess blame when it's done.

If you've read this far, thanks for hearing (or reading) me out. I feel better now. I keep telling myself a quote I heard a few years back..."When times are good, they're never as good as you think and when they're bad, they're never as bad as they seem". We American's have taken our lumps lately but our spirit of overcoming obstacles and remaining optimistic has and will serve us well into the future. If we can just keep the government out of the things they know nothing about. Better yet, let's stop asking them!

Way Cool!

I wouldn't consider myself a technology guru by any stretch, but like some, I'm kind of a gadget guy. So when I bought the new home I'm still in back in late 2006, I had my A/V guy install what was at the time considered a state of the art audio/video system. And I hate to admit that I spent close to six figures on it. Then a couple of weeks ago, the component that holds all my music went on the fritz and broke down. It cost me $2,000 for the component in '06 and it was about to cost me another $500 to send it back to the manufacturer to have it fixed with only a prayer of retrieving the music on its hard drive (I hear you..."back it up you fool!"). Anyway, my A/V guy made a different suggestion. He asked, "you have an i-Pod don't you?". I replied, "not only do I have an i-Pod with all the music on it that we just lost, but I'm also the proud owner of a new i-Phone". He then told me the way to go would be to dump the $2,000 component and replace it with Apple TV for $200. Last week his crew installed it and as an admitted gadgetaholic, it's about the coolest thing I've ever seen. On the display screens scattered throughout the house, the Apple menuing system shows up and I scroll through it to select the music through the album art just like with my i-Pod... genre's, playlists and all. I can buy movies through it (see ya Blockbuster!), get internet radio or anything that an i-Pad can do, but played throughout the house interfaced with TV's and speakers. And when the music is playing, it scrolls family pics on the screens I happen to have turned on throughout the home in an artsy screensaver format. I can even start/stop, increase/decrease volume and change music remotely on an app from my i-Phone. I've already got my request into the kids that for Father's Day, an i-Pad would make me a very happy Dad. The A/V guy tells me that it makes sense to have a couple i-pads around the house to use as an oversized TV /music remotes while dualing as a book, newspaper and web-browser...way cool!

So, for 10% of the price of the now obsolete component that was "state of the art" 3 1/2 years ago, I get a much cheaper, faster, higher quality music/video system. Frankly, I paid far more for the reprogramming of the existing keypads and display screens than for the Apple TV itself. In hind sight, it may have been cheaper and functioned better just to pull all the existing components and replace them with new technology that works with Apple TV out of the box. But parting with stuff you've sunk your money into is hard to do. If not for the $2,000 component breaking down, I'd still be in my gadget ignorant bliss while technology advances continued to pass me by...like I said, I'm a gadgetaholic.


This experience causes me think about how technology can and likely will revolutionize the financial services business as we know it. Regulations being debated now will clearly have a big part in shaking the system up (can you say..Fi-du-she-airy?). But when that is done, hopefully sooner than later so we can move on, technology stands to be potentially the greatest differentiator out there. Products have become commodities. No one manufacturer of financial products has that much better offering than the other. And if they do, the advantage lasts months, not years like it once did. And clearly, the quality of financial advice from a highly educated and experienced advisor will matter. But I truly believe that the technology enabled advisor will have the greatest advantage. Technology today can replace what several administrative assistants and multiple filing cabinets currently do. When video conferencing takes hold at the household level, imagine it's application to client meetings and doing business from anywhere, to anywhere. And the pace of technological development is quickening.

There was a time when it was believed that the scale of the largest financial firms would be vital to compete since they were the only ones who could afford the requisite technology to spread the large costs throughout their respective enterprises. Today, I think being the large company with sunk technology costs and legacy systems may be at an extreme disadvantage to compete in the future. In my former life, over a decade ago we sunk about $10 mill into a centralized Financial Planning Center where advisors would transmit client data via the corporate network to develop comprehensive financial plans for a fee. I remember being so proud of the large air-cooled rooms full of huge mainframe computers. And I'll bet that today, better functionality and quality can be built for far less than 10% of the cost, similar to my Apple TV experience. It makes you wonder if it wouldn't be best to start over from scratch with a new financial services firm than try to make new technology work with legacy systems. Just like I paid more for the new technology to work with my old components, you see the same with firms unwilling to write off their old systems when new solutions can come cheaper off the shelf. Again, it's tough to part with stuff you've spend a fortune on, even if it's obsolete.


Change is difficult and most of the people in the industry I speak with realize that the world is changing around them, but they're unsure and almost paralyzed to change themselves and their firms because of a rear view mirror point of view. Had I not been presented with the opportunity to change my 26 year career with the same firm, I might have been (and was) in the same frame of mind. While having the past experiences definitely prepares one for the future, it's not so much that which will differentiate going forward as it will be the ability to let go of the past and adopt the new business practices/models that are fitting to a new reality. It's scary and exciting at the same time. And if it turns out to be anything like my recent experience with technology, all I can say is...WAY COOL!

Overconfidence or Incompetence...assigning blame for the financial crisis

"The financial crisis was not caused by incompetence, but rather experts who were blinded by their overconfidence." I just returned from a financial industry conference in Washington DC and one of my favorite book writers, Malcolm Gladwell (loved "Blink" and "Outliers") spoke about his observation of the crisis with the typical nuanced and human behavior twists he is known for. He explained that mistakes of incompetence are usually no big deal as they seldom rise to the level of influence of an expert (we could argue this point about our elected officials!). It's when experts with supposedly all the information and knowledge possible develop a can't lose mentality. When this happens, the world can change around them, but the expert will never see it. Case in point, Jimmy Cayne, former CEO of Bear Stearns. He was found at a bridge players tournament without access to communication while his firm was crashing and burning. His world was being destroyed around him and he just didn't see it. Then, after the crash is assessed, he denies doing anything wrong, typical of an overconfident expert. You'd never say you crashed your car because you're a good driver would you? Same with Dick Fuld at Lehman and others who crashed and burned. It wasn't their expertise, but their human nature that allowed for their respective firms' demise.

I watched parts of the Senate hearings with Goldman Sachs and not only was it evident that Goldman cannot admit they were wrong (they're the experts...right?), but the Senators made it obvious they have no idea what's going on. So you have both Goldman expert overconfidence sparring with Senatorial incompetence, very entertaining...but not very productive. Politicians always seem to be focused on their rear view mirror looking for a villain to blame while the opportunity to effect positive change passes them by. Like Gladwell, I really don't think there is any singular entity or person to point the finger at for this crisis. Frankly, people at all levels had their hand in this deal. It was one big casino and Goldman was simply one of the more visible bookies among others who were placing bets on behalf of those for and against the deal while making some bucks on the vig. They even placed some of their own bets on the deal. The finger pointing, blaming and vilifying has run its course and is becoming destructive. But the government continues to look for the perpetrators (blaming Bush for everything has run its course) like a dog chasing its tail and looking very foolish in the process.

I'm not saying that Goldman is pristine as they would like us to believe. Similar to the other bookies in the business, they were simply doing what the system allowed them to do; make money for their clients and themselves even if it meant taking advantage of the system. But clearly, they weren't alone. Earlier in the decade, I knew a couple mortgage brokers in Southern California who were not only making money...but obscene money. I'm talking private jets, multiple high end vacation homes, etc. These were relatively unsophisticated folks who were basically just So Cal surfer dudes liv'in the life. I always thought it strange that guys like this could be knocking down the big bucks. Now I know. They were part of a chain of people from the high school drop-outs with no income flipping homes in So Cal all the way up (including the Government) to AIG's unregulated financial products division. They all believed they couldn't lose and after they did, each denies that they had a hand in it. They were all overconfident experts who couldn't see the world changing around them.

So as I'm prone to do, I'll end with a couple quotes:
" Two things are infinite: the universe and human stupidity; and I'm not sure about the universe"
         -Albert Einstein

"Nearly all men can stand adversity, but if you want to test a man's character, give him power"
          -Abraham Lincoln


Combine stupidity and power, and you have a prescription for disaster. If only those up and down the chain would fess up to their part in the crisis so we could get past these silly hearings and get on to the business of fixing our economy. But as much as we each intellectually know this, human nature trumps it all. Again, entertaining, but not terribly productive.