John Lefferts' Blog

Wednesday, April 14, 2010

“Do or do not... there is no try.” -Yoda

"It is what you learn after you know it all that counts"

-John Wooden


I had the privilege of hiring John Wooden to speak at a conference I was heading a few years back. He'll be 100 years old in October and when he was with us, he was well into his 90's. He sat as he spoke and the audience was hanging on every word as he delivered his wisdom in Yoda-like fashion. The quotes above and below are some of my favorite lines that he spoke.

"Things turn out best for the people who make the best of the way things turn out."

As I've written before, this past year has been a unique and rewarding experience for me. After taking my little sabbatical , I've come to see myself, the industry in which I've spent a quarter century, and it's participants in a whole different light. With my new found time I've taken the opportunity to attend multiple industry conferences, speak to many CEO's and leaders in the financial services business, and study the trends that are shaping the future. Clearly the business has evolved somewhat over the past several decades, but one thing that everyone seems to agree on is that change in the coming years will be in multiples of what we've seen before. The key dynamics driving it are new regulations, the boomer segment retirements and transfers of wealth and the new economics of the business forced by the "great recession" with the expected changes in tax law to pay for it all.

Yes, we all acknowledge that change is happening, but few are changing their business models to survive much less take advantage of the opportunity change invariably presents. It's business as usual as if the industry participants are closing their ears, shutting their eyes and covering their mouths hoping the threats all go away if they just wish them away. Every segment in the business wants the others to change fitting their desire not to...similar to the definition of insanity. Fee only advisors want everyone held to their fiduciary standard. B/D reps want everyone to answer to FINRA like they must. Insurance folks are fighting both. And the politicians who are deciding the fate of this issue could care less about any of them preoccupied with playing to the public opinion in demonizing bankers, their compensation and their "too big to fail" employers.

Think about it...If 12b-1 fees go away, the vast majority of already thinly margined Independent B/D's become totally unprofitable and unsustainable. Further, if the Indy brokers lose their independent employee status with their B/D's as is being discussed in Washington now, it pretty much implodes the Indy B/D model as we know it. Wirehouses keep bleeding brokers now that we're down to 4 majors with momentum to keep shrinking. It seems the allure of brand and glue of culture no longer apply while the only thing that keeps their brokers in the system are the unsustainable musical chairs game of upfront bonus money. Then you have the insurance based distribution models whose only economic reason for being is to sell proprietary manufactured products. When (not if) the fiduciary standard is applied and all products must be supported and compensated on the same basis, you guessed it, this one also economically implodes (unless they chose to view their sales force as loss leaders...and some do). Next you have independent RIA's who have seen their revenues pounded by market losses while they are facing increased regulatory burdens and costs never seen before. All this while every channel is pushing an average age of 60 with too few successors to keep each respective enterprise going much longer. Pretty much bad news for everyone, right?

Well, not really. Do I think all those things listed above are going to happen? Some will, but then, some won't. I've learned to never underestimate the inertia and human desire to keep the status quo. Additionally, the story line of this business has never been brighter for the future. It's a simple story of supply and demand. The demand for financial advice has never been greater than it is now and will only increase as demographics evolve. Add to that the declining supply of advisors to meet that increasing demand and econ 101 points to this being about the best business to be getting into bar none. The greatest challenge the industry faces is creating a distribution model that will survive the new economics. One that seems to be gaining traction is Hightower Advisors out of Chicago picking off high end wirehouse teams using a hybrid platform while maintaining a semblance of belonging to something unlike the typical Indy B/D. A model like this that diversifies past the wirehouse broker and can further attract the high end insurance professional and Independent RIA seems to me to be the one that is positioned to flourish. It doesn't exist today in a scalable form, but I suspect you may be seeing something like this soon.

I'll leave you with a couple more quotes from Wooden; "Failure is not fatal, but failure to change might be." Those choosing to stay the course and do business as usual are at risk now more than ever before. Another is "The most important key to achieving great success is to decide upon your goal and launch, get started, take action, move." This one speaks to me personally. I've taken enough time to survey the landscape, build a business plan and prepare for the future. I may not know it all, but I can tell you that I've learned a great deal over the past year. It's almost time to launch. Stay tuned...

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