John Lefferts' Blog

Wednesday, September 1, 2010

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: 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.

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