John Lefferts' Blog

Monday, December 12, 2011

Pie In The Sky

Christopher Columbus discovered that the world is round. Sir Isaac Newton established the theory of gravity. Albert Einstein founded the theory of relativity. Dr. Harry Markowitz created modern portfolio theory (MPT). Each of these are long known immutable truths that transcend all time….well, maybe not that last one.

Ever since I earned my CFP designation in the mid-80, I have viewed the investing world through the lens of Modern Portfolio Theory. It was as true and evident as the earth being round or gravity causing the apple to fall to the ground. Depending on one’s appetite for risk and time horizon, investors could fit nicely into one in a set of asset allocation pie charts that span the most conservative to the most aggressive. And other than rebalancing the portfolio once a year to fit back into the chosen pie chart, you could pretty much forget about it and let your asset allocation do it’s magic. Buy and hold. Clean, easy and to the satisfaction of Chief Compliance Officers, suitable. But as the past decade has shown, it’s not that easy anymore.

A year ago, I wrote a blog post that was inspired by the movie “Wall Street”, both the 80’s original and the recent sequel about the greed and excesses in the business. I’m often surprised and flattered that anyone reads my stuff. My own wife, a CFP, doesn’t even read it! But I was contacted by a guy who had read this particular post and could relate with it. He called and wanted to meet while on a visit to Dallas. Like me, he had lived the excesses of the bubble in NYC and was even the poster boy for these excesses in a New York Observer article about stockbrokers. It was not exactly the kind of article you would want as reprints for your clients and prospects. Anyway, we shared war stories and have kept in touch. And as I have shared my experiences with being in NYC during 9/11, Lee had a similar life changing experience and packed up his bags 4 months later to start a new back home in New Mexico.  Lee Munson is about as bright as they come in the business with real world experience, wit and a bit of irreverence that makes him very interesting to talk with. The reason I bring him up is that I just finished his new book called “Rigged Money” which debunks some long standing immutable truths in the business, including Modern Portfolio Theory. Similar to a reformed smoker, Lee is a reformed stockbroker with the same level of zeal and contempt for his former lifestyle. Lee now runs a successful fee only RIA firm called Portfolio LLC and is a regular “talking head” on CNBC’s Kudlow. While many of us in the business, myself included, have been questioning the old theories that we’ve long accepted as law in the business, reading Lee’s book, I am convinced that all the assumptions and basic “truths” that went into what we were taught growing up in the business have changed.

With chapters titled “Buy and Hope-The Scam” and “Lie of the Pie” you can imagine how it positions against the old school of thought. But it caused me to think how much the rules really have changed. The products, the tools and the speed at which information moves and trades are made today bear little resemblance to what we were dealing with just a decade ago. In 2000 there were 106 ETF’s. Today it’s pushing towards 5,000 with over 200 introduced this month alone. When Markowitz came out with MPT in the 50’s, there were not even 100 mutual funds. Today there are about 7,500 funds. This is not to mention the nano seconds that high frequency computer trades dart in and out of positions, the great impact options, derivatives and hedge funds play today and the multiple world markets that drive the US financial business all day and night. What correlated and non-correlated assets were a decade ago no longer holds true today. It's not so much MPT being dated (it's tough for me to shake the religion!) as much as the way the industry has applied it. The rules have changed.  Asset classes act differently than before. The simple set of pie charts that seemed to work into the 90’s are now more like a pie in the sky; something good that is unlikely to happen.

So now what do we do?...become day traders and market timers? No; doesn’t work and don’t have the time for it. What it does tell me though is that the investor can no longer rely on his or her “financial professional” to address their portfolio through a simplistic and outdated set of pie charts to recommend the hottest mutual fund du jour that the wholesaler told them to sell during a free lunch. I think we need now more than ever to rely on professional money managers like Lee who spend their entire being studying and thinking about this stuff all day, every day. I really don’t think an advisor can prospect, service and interact with their clients while at the same time being a successful full time money manager. This also tells me that the business models that worked up into the 90’s no longer work, yet they still exist. You cannot successfully be a one man band in this business anymore. You have to be part of a team and a larger organizational infrastructure that offloads the administrivia and compliance work as well as turning the investment management to a pro while the advisor takes time to….well, advise.

The speed of change is getting faster and faster. It is estimated this speed doubles every two years. While some may be thinking, “Stop the world, I wanna get off!”, others will adapt and survive. It’s those who adapt to change who will thrive in the future. Regulations and regulators are changing. Products and technology are changing and what were decade long tenets and truths in the business have been turned on their head. The question is, has your business process and business model changed with it? As we prepare for the coming year setting goals, budgets and business plans, this issue is more important now than ever. The coming year will reward those who adapt and bury those who are stuck with their heads buried in the status quo.

“The individuals who will succeed and flourish will also be masters of change: adept at reorienting their own and others’ activities in untried directions to bring about higher levels of achievement. They will be able to acquire and use power to produce innovation”

Tuesday, November 8, 2011

Financial Fitness

In Dallas, there is a world renowned medical and fitness center called The Cooper Clinic founded by Dr. Kenneth Cooper who has been credited as the “father of aerobics”. It’s set in a beautiful campus with trees, ponds and running trails interspersed. A few years back, I went there for an executive fitness check-up and it made a lasting impression on me. It is essentially a one stop shop for best of breed medical care. My day there began by meeting a primary physician who started by asking multiple questions about my health and reviewing my medical history. He was essentially the “quarterback” of the process helping me set fitness and health goals. Then he sent me out to spend nearly the entire day beginning with blood work then progressively down the halls for EKG, treadmill, nutritionist, psychologist, dermatologist, BMI, fitness consultation, etc. And for those over 50, there are some more…ahem…invasive procedures. In each medical discipline, the specialist was about the most competent in their field as there are in the area. At days end, I met back with the primary physician and we reviewed the results of the day together, discussed any adjustments needed and set up a plan of action. The following week, I received a very professional personalized bound book full of the results, what was discussed and a reinforcement of the plan of action.  

I frequently think about how efficient and professional this set-up at Cooper Clinic was. One singular location and one day dedicated to my fitness and health, being seen by the most competent professionals working and collaborating with one another all for what is in the best interests of me, the client. Since that experience, I have often wondered why we haven’t seen this form of business model applied to financial services. But then again, I think I do know why….regulatory and manufacturing silos that have walled off collaboration and coordination among various financial professional disciplines that have driven the disjointed business models we see today.
Most folks have their tax accountant in one part of town (I’ve kept mine in San Diego for 20 years), their estate planning attorney in another, their life agent in yet another, their P & C agent in another, and their investment broker/planner/advisor (circle one or more) in even another. Multiple locations, numerous appointments likely spanning years to get done, if done at all.  And while they should, the likelihood of each of these professionals coordinating or even sharing information is slim at best. In fact, it’s more likely that they’ll be giving conflicting and competing advice. While not as efficiently set-up as Cooper, most medical practices are in a medical center setting where there is access to other specialist and professionals in the same building. Not in our business. The silos won’t allow it. We have FINRA for brokers, State Department of Insurance for agents of multiple varieties and the SEC for Investment Advisors, each held to a different standard, oversight and regulations. And just try to house a practicing attorney or accountant in a FINRA regulated branch…it’s almost impossible. Further entrenching these silos, we’ve historically had a predominance of product manufacturers maintaining their own distribution platforms often to the exclusion of objective alternatives. Fortunately for the consumer, there is a ray of hope that we’re on the cusp of some dramatic change, whether we as an industry are ready for it or not…and I suspect the consumer is more ready for it than we are.

Over the past decade, there has been a slow but steady shift from proprietary manufacturer based models towards independence. Many smaller insurance and investment product manufacturers have already given up owning a B/D or sales force in favor of 3rd party distribution run through multiple channels (aka silos). But from my vantage point…you ain’t seen nothin’ yet!
It has gone from a question of “what would happen if” a couple years ago to “what’s going to happen when” as it relates to harmonization of regulations and regulators. When all who give personalized financial advice are held to a fiduciary standard and that standard is overseen by a single SRO, the silos will begin collapsing. I think the next couple years will see more change, the majority for the better, in the following ways:

  • FINRA Brokers will be held to the higher standard as a fiduciary causing the pace towards independence, open product architecture and fee based compensation (away from commissions) to quicken. This will include FINRA registered insurance agents
  • RIA’s may become overseen by FINRA as their governing SRO forcing most to join a scaled partner for supervision and shared economics, most likely resembling a hybrid B/D-RIA model.
  • Elimination (hopefully) of “two hats” (1 for advice-1 for product recommendations) for investor simplification into one big harmonized hat.
  • Product Manufacturers will find it economically impractical to maintain a proprietary distribution sales force and most will divest or sell their B/D’s currently set up as an accommodation to the sale of their products (most true with insurance co owned B/D’s with exception being a handful of large mutual life co.’s)
  • The move by the DOL towards applying fiduciary standards for IRA’s will greatly impact the current retirement rollover market away from commissions towards fee based comp placing even more pressure on commission based sales models.
  • Small Independent B/D’s (the vast majority today) will be squeezed out of business with already thin margins due to increased compliance expenses, decreased revenues from vendors and a further move towards fees.
  •   While there will continue to be some movement away from the 4 major wires towards independence, most of the movement will likely come from insurance B/D reps and Indy B/D Reps who currently find themselves affiliated with a firm not prepared to survive the changes.
  •  A quickening of new models launching to meet the needs of the marketplace similar to what we’ve recently seen with HighTower for wires, United Capital for RIA’s and Lion Street for elite life producer groups.
Where the door is being closed on certain business models, at the same time the door is being opened for new, more current ones. With the silo’s coming down over time, the landscape will have finally been set for a Cooper Clinic type model for Financial Services to exist. Imagine this, going to a professional office park setting to meet with your advisor/planner (the quarterback) to complete a full fact finder and financial history, set goals and objectives, etc. Then spending the rest of the day meeting with tax accountant, estate planning attorney, life agent, P&C agent, asset manager and at the end, tie it all together with a plan of action with your primary care planner. Each professional handing off to the next with a fully coordinated and integrated financial game plan. It does exist in certain pockets today, but it is the rare exception. Removal of the silo’s will allow multiple disciplines in the financial services business to work with one another for the benefit of the client within a singular business platform as opposed to the often conflicting and uncoordinated product push we see today. And just to clarify, a fee only RIA who offers only asset management for a fee is involved in “product push” as much as the salespeople they go at lengths to discredit. While RIA’s are fighting the change towards an SRO and Registered Reps and insurance firms fighting the fiduciary standard, there is a small segment getting to work on developing a new business model to thrive into the new era. It would behoove most advisors to take a hard look at their current affiliation and weigh their options. Better to make a well researched change yourself rather than have it forced on to you when you are least prepared.

"Life is like a combination lock; your job is to find the right numbers, in the right order, so you can have anything you want." — Brian Tracy

"Change is hard because people overestimate the value of what they have—and underestimate the value of what they may gain by giving that up."
— James Belasco and Ralph Stayer

Tuesday, September 20, 2011

Aussie Déjà Vu

  Beginning in July of next year, commissions will be banned on all investment products being sold and there will be the introduction of a statutory fiduciary duty so financial advisors must act in the best interests of their clients. All compensation must come from the client and not a product manufacturer. There will be complete transparency and each client will know exactly what their costs are and will have to opt back in on the fee arrangement every two years in writing. There will also be a ban on soft dollar benefits (as in 12-B1) to advisors/firms in excess of $300 per benefit. And beginning July of 2013, prospective up-front and trail commissions for pension related products and investments will be prohibited. Sounds pretty radical, right? Not for Aussies. These are the changes being implemented by the regulators as a result of the Future of Financial Advice reforms finalized in 2010.  Read interesting blog post by Aussie here

I just returned from the annual Financial Planning Association (FPA) conference in San Diego where the issues of SRO’s, FINRA and a harmonized fiduciary standard were front and center. And to the FPA leadership’s credit, the major theme was not being divisive by pitting salesmen against advisor or fees against commissions. The focus was simply placing the interests of clients first. It’s all about the process, not the product. They made a point to state that they are model and compensation agnostic and it matters not how one is paid; fee only, commission only or hybrid, so long as the clients best interests were served. I think they hit the mark as most other industry organizations, many to which I respectfully belong, are focused on protecting their primary product and form of compensation.

One of the better breakout sessions was titled “Life without commission-Life without conflict?” organized in a panel of three including a fee only practitioner from the US, a practitioner from the UK and the Director of Advice Based Distribution for AMP from Australia. Like Australia, the UK has been undergoing a new regulatory scheme that seems to change every several years, the most recent being the “Retail Distribution Review” (RDR) issued by their SEC equivalent, the FSA  Read Telegraph article bout RDR here. The RDR will ban advisor commissions beginning in 2013, a move that has many in the UK believing the advisor force will drop by over half when enacted. A movie coming to a theater near you?

The AMP Director had an interesting perspective and one that was a bit of a  déjà vu moment for me. AMP, founded in the late 1800’s and one of Australia’s largest and most respected financial services firms with about 3,000 advisors was recently merged (acquired) by AXA. The Director explained that they made the decision to cut away from commissions and go to 100% fees last year, a full 2 years before the July ‘12 deadline. He went on to explain how they went through an initiative to retrain their field force, move to a financial planning process, change their product set and transition towards fee compensation. It was déjà vu for me because just after the former Equitable, founded in the late 1800’s was rebranded as AXA, I headed an initiative to retrain the field force, move to a financial planning process, change their product set and transition towards fee based compensation Read FP Mag article on the AXA initiative in 2000 here .

The Aussie Directors’ findings were the exact same as mine albeit over a decade ago. While there was a great deal of trepidation about such radical change, what he found is that the clients were far more accepting initially than the advisors. In fact, there were a couple AMP advisors in the room who vouched that after moving from commissions to fees and financial planning that their compensation actually increased, the same that we found a decade ago here in the US with the Financial Planning initiative. While we rolled out the initiative nationally with some success, it eventually ended up dying as a necessary expense cut, not because of its viability as a strategy, but because fees were inconsistent with the primary form of profitability for the firm, namely selling commission based insurance and annuities manufactured by the mother firm. Had there been a gun to our head with new regulations as are taking place in Australia and the UK, I’m certain AXA-US would be a full decade into a successful transformation. But instead they have digressed back into a proprietary product manufacturing driven distribution platform facing a potential gun to the head event with new regulations on the horizon. (With most sincere apologies to my former AXA colleagues…just calling it the way I see it)

A recent CNBC poll showed how Australians are most optimistic about their financial futures while here in the US, I don’t recall there being a time with more uncertainty.  CNBC poll article here . One wonders if the confusion and regulatory uncertainty is lending to the American angst. Do the Australian regulators have it right by moving retail distribution to fee only? Time will tell. Will the US follow suit and move towards a similar set of regulations? I think the chances are far greater that we trend in their direction than they towards ours. AMP is to be commended for taking the leap towards financial planning and fees well before it was required. Will any of the large retail distribution firms in the US have enough vision and motivation to do the same? I can say that in a different time with different leadership, at AXA Advisors we made it work. But today it has yet to be seen, even with the proverbial gun to the industry business models heads. Time will tell.

Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~John Kenneth Galbraith

Not until we are lost do we begin to understand ourselves. ~Henry David Thoreau

Thursday, September 1, 2011

Life is a balancing act-my 9/11 life lesson

Sometimes in tragedy we find our life's purpose - the eye sheds a tear to find its focus. ~Robert Brault

We're approaching the 10th anniversary of the 9/11 attacks and are sure to relive those events at this milestone through multiple mediums, this one included. Those who know me well wouldn’t exactly describe me as an “open book” as I seldom disclose personal information publically and tend to be “all business” and buttoned up to the outside world. But since this is a web log (blog) and the 9/11 anniversary is weighing on many people’s minds, mine included, I thought I’d tell my story with perhaps more personal info than you really care to hear about. I promise there is a business moral to my story that I hope will resonate if you can read that far.

Throughout my career I’ve always been a fierce competitor and goal setter placing major goals into 5 year segments. Starting my Financial Services career at age 25, my first goal was to be a branch manager by age 30; check…then million net worth by 35; check…then earn 7 figures annually by 40; check…then be Pres./CEO of a financial services company by age 45. I was the consummate workaholic as the first one in and the last one out even working both Saturdays and Sundays. Vacations?... The company conferences would cover that, right? Balance?...That’s for wussies, so I thought. In Feb of 2000, the financial editor of the Dallas Morning News wrote an article about me in the business section of the Sunday paper telling my story. One line in the article states, “He’s enjoyed a rather charmed life with just enough challenge to make his story believable”. But frankly, I really hadn’t endured much challenge at all up to that point…Then came the unbelievable events of 9/11/01.

In August of 2001, I had achieved my latest 5 year goal being offered the role of President and CEO of AXA Advisors, LLC based in New York City by age 42, earlier than my plan called for; check. A requisite for accepting the role was to relocate my family from Dallas to the NYC area by year end. So wife Cindy (now ex), and I spent Labor Day week house hunting while I was to start my first day in the role on Monday, 9/10/01.  The morning of 9/11, I said goodbye to her as she was heading to Dallas from LaGuardia on a morning flight to get back to our 5 year old triplets being watched by my Mom while we were gone. It was a perfect fall day in New York City with crystal clear blue skies, pleasant temps and light winds. I recall thinking that even for the country’s worst “on time” airport, even LaGuardia couldn’t screw up this perfect day and the flight was sure to be a smooth one. Then, in the 9:00am hour, just like all times when you remember exactly where you were and what you were doing when a tragedy occurs, I was holding a meeting in a conference room and our head of marketing came charging into the room saying, “you have to see this on CNN…one of the twin towers is on fire”.  No one really knew what was going on, but everyone suspended whatever they were doing to watch the news. Then it was reported that an accident had occurred in first tower. At this point, I was still thinking it was a fire since it wasn’t in the realm of anyone’s reality that a plane would purposely fly into a building. Cindy made it across the bridge just before it was closed en route to LGA looking back at Manhattan and seeing the initial destruction without really knowing what had occurred. I tried to call her cell phone, but nothing would go through as all the lines were jammed. As the morning unfolded, panic began to set in. My office was in Rockefeller Center and we would hear fighter jets patrolling the city skies as we were all wondering if our area would be hit next. Once everyone comprehended what had just actually happened, the fight or flight instinct kicked in and needless to say, everyone was running for the exits as fear took hold. It was like something out of the terror movies you see like in “War of the Worlds” with panic and anxiety everywhere. I was in mid-town and can only imagine what those who were around ground zero were experiencing.

Cindy had just checked her bags at the curb and then found out that the airport had been closed. This was a time before smartphones, texts and twitter, so those at the airport were busy traveling not really knowing what was going on. But word traveled fast and like in the city, everyone made a run for the exits once they learned what had happened. She was at the curb, alone without luggage obviously looking helpless and then a limo pulls up, the back door opens and a man motions for her to get in. It happened to the comic/writer Harold Ramis and his wife simply offering a hand to someone in need. I guess Cindy was subconsciously thinking that if Ramis could save New York City from the bad guys as a Ghostbuster, he was a safe bet to be with on a day like this. So she got in and they just started driving out of the NYC area headed north with no real destination in mind.

The robbed that smiles, steals something from the thief. ~William Shakespeare, Othello

Meanwhile, I was still in midtown making sure everyone got out of the building. I was among the last exec’s to leave the mid-town building along with our CFO, Stan Tulin. We got into his car and he barked orders at his poor driver to head to his home in Greenwich, Connecticut. It was bumper to bumper and we took every shortcut possible to get out ASAP. While I was still unable to reach Cindy by cell, I was able to call my Mom in Dallas. I found out that she had also heard from Cindy and she was okay. So we used my Mom in Dallas as “mission control” to communicate back and forth and got instructions to them to meet in Greenwich. Later in the evening we made it to Stan’s home which was set right on the shore of Long Island sound. Within the hour, Ramis, his wife and Cindy arrived. Stan grabbed one of the best bottles of wine from the cellar (he has quite a collection) and we sat outside on this beautiful but disastrous day sipping wine and recollecting in shock what had just happened. The Long Island Sound was extremely quiet and glass like…no boats, trains, cars or aircraft that are usually buzzing in the background...extremely serene and very eerie considering the day’s events. Then, as our conversation drifted into Middle East politics searching for reasons to explain away what had happened, Ramis apparently fashioned himself as somewhat of an expert on the topic expressing a fairly liberal (hey…he’s an actor) view of the landscape. But he had met his match as Stan went on to verbally slice his remarks to pieces with facts that left even a comic actor speechless. It was fun to watch.

Anyway, Stan offered for them to stay, but they were adamant about getting back to Chicago and planned to drive all night to get there. Stan and his wife Ricki were very kind to host us as we had no place to go and all air travel was suspended. A few days later, we were fortunate to secure one of the first aircraft (private jet) out of White Plains airport back to Love Field in Dallas. And while a month later there was another attempt at house hunting, it ended with the fear of the anthrax scare that captured the city at the time. My story pales in comparison to those who lost their friends and family members at ground zero, on flight 93 and at the Pentagon. But it was a defining time in many lives, regardless of where they were that day, mine included.  

I don't like people who have never fallen or stumbled. Their virtue is lifeless and it isn't of much value. Life hasn't revealed its beauty to them. ~Boris Pasternak

I had enjoyed somewhat of a charmed life up to that point and then on the first week in my dream job, 9/11 hits and changes everything. Cindy’s world was obviously rocked by the events as well and she beared down and refused to relocate. So after living in the Midtown Hilton for months, I broke down and leased an apartment on the Upper East Side while commuting out of NYC to DFW every Friday night and back again on Sunday night for the next several years. I would spend over 12 hours door to door every weekend on my commute, not to mention other travel during the week under post 9/11 restricted and delayed travel conditions…not exactly the glamorous lifestyle one would otherwise imagine. American Airlines personnel knew me on a first name basis while I was wondering if my own kids would recognize me. But I had basically chalked it up to just something a good soldier has to do given the cards dealt and figured that I would be the best weekend Dad I could be and focus the rest of the time on my career while placing the marriage on hold for a later time. But the now ex-wife saw it differently. The tragic events caused her to reevaluate her own life and after a few years seeing her minimally, she decided to make it permanent and wrote me out of her life script. I recall talking to Bob McCann formerly of Merrill and now at UBS, when he had a short stint as Vice Chair at AXA. He said, “John, you just don’t know how to quit, do you?” He was right. Kip Condron, CEO of parent AXA Financial, accommodated my situation (for which I am very grateful) and allowed me to basically fire myself and rehire myself in a placeholder role in Dallas that I could do while I took care of personal business, or to put it another way, rebalance my life. And in true form, I remained in that role for exactly 5 years and then decided it was time to pursue the next career chapter after the “great recession” hit.

Adversity has the effect of eliciting talents which, in prosperous circumstances, would have lain dormant. ~Horace

This brings me to “the moral of the story”. You’ve probably heard of the “Whole Person Concept” where one’s life should be in perfect balance like a square with equal time and attention paid to each important quadrant shown here. If you spend too much time on one, it throws the others off balance and something eventually gives. While I stayed in pretty good shape physically and had myself covered on the spiritual side, my career was clearly overshadowing all of them, most impacted being family. Over time, something has to give if you’re totally out of balance. 9/11 wasn’t the cause, but the catalyst to expose my long standing weakness here. I’m a bit hard headed and it took a national tragedy and personal setback to realize I had to change. The good news is that I have since remarried “the one” in my life (Dianne), have had the time to be front and center for the now high school aged triplets who are thriving, am in the best physical shape of my life and am positioned to start a new career growth S curve with a wealth of experience and a new healthy outlook. Despite the rocky economy and a relatively uncertain future, I am about as happy as a person can get. It’s kind of strange that I was so tightly wound as a young professional that I actually acted older than I do now. I guess you call this maturity and wisdom.

My goal orientation has not changed, but perhaps what I value most has.  And for those who may think Lefferts has gone soft, forget about it. What I’ve found is that living life in balance gives you the ability to see things more clearly and deal from a position of strength. The competitive fire is there like ever before, but it burns more efficiently with far more lasting power. I probably still won’t be outworked, but it will never come at the expense of the other important facets of a balanced life. So, while all my prior 5 year goals were career/financial related, the last 5 have been on all the other quadrants.  A life in balance…check! 

“Now, we have inscribed a new memory alongside those others. It’s a memory of tragedy and shock, of loss and mourning. But not only of loss and mourning. It’s also a memory of bravery and self-sacrifice, and the love that lays down its life for a friend–even a friend whose name it never knew. “
- President George W. Bush

Sunday, August 7, 2011

Extreme Moderation

As I write this posting, it’s closing in on 110⁰ outside in Dallas heading towards a record consecutive number of 100⁰+ days prior set in the summer of ’80 at 42 days in a row, a milestone no one in the area ever thought would fall. It was 6 short months ago that Dallas hosted the Super Bowl in a week marred with ice, snow, record low temps and kids out of school for a week. In short, the weather in Texas is EXTREME. That seems to be the theme for many things lately. The stock market has been pounded for weeks down close to 10% within a month; the extreme left politicos want to tax and spend more while the extreme right wingers refuse to bend on anything, and several economists are prognosticating a “double dip” recession while “shovel ready” Obama is still blaming Bush for the economy and being divisive by wagging class warfare and showing no leadership at a time we need it most. Enough extremism…perhaps it’s time for some moderation.

It’s been found that no more than two drinks a day can actually be healthier than being a teetotaler, but a fifth of scotch a day will kill you…moderation. Exercising 3X/week can achieve tremendous health benefits, but running excessively can actually do long term damage and even kill you…moderation.   And being spiritual can improve well-being and peace of mind, but religious extremists fly planes into skyscrapers…moderation. I was visiting family in my old home town of San Diego last week where the weather forecast is almost always “night and morning low clouds with a high of 72”. Now I’m in Dallas where there are two seasons; mid-summer and mid-winter. Needless to say, we could use a little moderation in these parts.

Most folks I know aren’t zealots politically, religiously or for that matter, in any way at all. Most people have a fairly balanced view on things. They understand that every yin has its yang. Yet, it seems that the extremists in every facet of the country are driving the bus. I have nothing wrong with a conviction in one’s beliefs, but when it is without regard for others and/or consequences, it can get destructive.  And in our business, I see the same thing happening. Most FINRA regulated advisors I know welcome the fiduciary standard. Many have been adhering to it for quite some time as their business has drifted towards fees in the past decade. But the industry lobbyists and certain organizations will have you believe it is the beginning of the end if the fiduciary standard is put in place. I don’t think so.  Likewise, there are fee only advisors who are espousing the belief that commissions should be banned and all those giving personalized investment advice should adhere to an even more stringent definition of fiduciary than currently exists. Their primary industry group is NAPFA which numbers less than 1,000 members nationwide. So, there are over 20,000 State and SEC RIA’s, about 650,000 registered reps, the majority giving “personalized investment advice” and these guys are speaking for the industry? I don’t think so.

It’s been said that the squeaky wheel gets the grease, but more so these days, it seems to gum up the system and impede rational progress. Watching the political circus during the debt ceiling debate is just one obvious example. The far left and far right were doing all the yelling while the vast majority of American’s were thinking, “just come together and get it done!”  So we end up with a solution nobody likes and the country gets downgraded.  I’m hopeful that the SEC will come up with a reasonable solution to the “harmonization” debate and avoid cratering to the extreme zealots on each side.  But just like the debt ceiling debate and the striking lack of leadership at the top, it’s going to take some bold compromises and decision making to get it done right. It’s time for extreme moderation. 

Thursday, June 23, 2011

They're Heere!

“They’re here”: This is the famous movie quote from the little girl out of the 80’s flick “Poltergeist”. You may recall that it’s about a young family in a new suburban California home that are visited by ghosts. At first the ghosts appear friendly and the little girl in the house seems to connect with the supernatural through a dead channel on the TV. When she sees them she announces, “They’re Here” in her high pitched sing-songy voice. At the end, the ghosts get more aggressive coming through the walls and destroying the home finally abducting the little girl into her bedroom closet seemingly taking her to “the other side”.  
Well, I’m far from the image of the little girl and my voice is quite a few octaves lower than hers, but as it relates to the financial services business, “They’re here”. No, not the poltergeist, but for some in the biz, it’s just as horrifying. It’s the long anticipated but feared change. The B/D’s and Insurance agents fear the fiduciary standard. Investment advisors fear FINRA. And the long anticipated convergence and consolidation in the business is finally taking place and gaining momentum. We’re at a decision point for most financial services executives-invest to change and grow or divest and get out. This is true for the largest of firms down to the one person shop investment advisor. They’re here…

Here’s a snapshot of how I see the changes evolving and affecting the financial services distribution business models:
Product Manufacturers (Insurance and investment firms)
Pro: Have large sales and advisor forces built over multiple generations in place. The boomer shift from wealth accumulation to wealth transfer and income has increased the demand for insurance based products and services
Con: Increasing legacy costs in the form of dated technology, pensions, benefits, infrastructure prevent most from investing for growth. Economics are dependent on the sale of proprietary or commission based products which will be negatively impacted by regulatory harmonization to a fiduciary standard of care. Decision point: invest in distribution and scale up or cut expenses and die a slow death (exception: Mutual Life Co’s not held to strict profitability-willing to use sales force as “loss leader”)
Pro: Currently control majority of investable assets with high GDC (revenue) per producer
Con: Tarnished brand has producers opting to “breakaway” for higher payout and control. The cultural glue is thinning.  Down to 4 major wirehouses with further erosion expected. Pressure on regional B/D’s as well (wanna buy Morgan-Keegan?). Exposed for more waves of attrition as retention agreements/bonuses near expiration.
Independent non-registered Insurance Agents
 Pro: Not currently held to FINRA suitability or SEC fiduciary standards-under the radar…for now
Con: This regulatory imbalance has been recognized and those agents who offer “personalized investment advice” will likely be folded into new supervisory regime over time. Limited product offering that is under scrutiny (Indexed annuities with 12 % commission!). The UK move to fiduciary standard is very instructive for potential outcome in this segment where total agent force went from 150K down to 50K.
Pro: Vast amount of customers and in control of substantial investable assets-greatest opportunity for growth
Con: Have historically been unable to bridge culture with investment advisor/brokers/agents. Bankers try to convert them to what they know by pushing cross sales of transaction based banking products. Will bancassurance ever successfully hit the US? Too great a cultural divide.
Independent Broker-Dealer
Pro: Not dependent on the sale of proprietary products
Con: Vast majority lack the size & capital to survive in light of probable loss of revenue in 12b-1 fee support and increasing legal/compliance costs (wanna buy Securities America?). The average GDC per advisor is below $100,000 with extremely low margins/profitability with very high legal and compliance risk. Merging B/D’s is described as being like “herding cats”. Difficult to create incremental value in consolidating business since the primary asset is in producers who are fiercely independent, have little loyalty and can walk away at any time.  Like buying or merging ether.
    Investment Advisors (RIA)
Pro: Fastest (and only) growing segment increasing ranks by 30% since ‘05. Not proprietary/commission based like models above. Can create real value in recurring fee based revenues and is easiest model to merge, acquire and come to market.
Con: Dodd-Frank reform will materially impact this model with greater compliance scrutiny forcing small players to join with supervisory/operational infrastructure that stands up to new SRO (likely FINRA)

No business model is going to be able to do business as usual and none escape change. Early indications are that scale is becoming more important and those who are already operating under a fiduciary standard have a head start. This would favor the RIA model of size. But none of us really know what it’s going to be like on the other side of this change. For some, I’m sure it could mean something disastrous. For others, it could be nirvana. We’ll see. The one thing I do know is,  “They’re heere”…

Saturday, May 21, 2011

Shift Happens

Perception is a tricky thing. For example, looking at this picture dating back to the 1800’s , many people see a very different thing. That’s their initial perception. I initially saw the young lady looking away. But with new information, such as the young lady’s ear is really an old woman’s eye and her chin the old woman’s nose, then I see the same picture entirely differently. Now I can see both.

The same is true in nearly all facets of life, including the financial services business. One’s truth is another one’s lie. The most glaring example is the division in ideology among fee only RIA’s who claim the moral high ground of not taking commission and the B/D brokers who believe they can offer the full suite of products to serve their clients better, not just fee only products. Who is right and who is wrong?….it depends on your perception. The reality is that all truth is relative. With certain information, some see it one way, and with other information, some see it as the opposite. And with even more information, many can see it both ways, just like we can in the picture above. Perceptions can really be illusions if you don’t open your mind to a different point of view.

Back in ’09 when I jumped off the corporate hamster wheel, I was conditioned over many years to see the business based on the information I had at the time. Naturally it was bent in the direction of my charge to grow the business through both fee and commission based business with an emphasis on proprietary products. I was really good at creating, setting and communicating the vision that helped drive a sales force numbering in the thousands to act based upon this point of view. But when I left, a whole new world opened up to me and I began to look at the same business very differently. I can see why the fee only RIA is so militant and protective of their fiduciary client relationship. I get why they don’t want to be regulated by the same regulator that oversees the mechanics and beauticians who earn $1,000/year extra as part time sales people with Primerica. (Yes, that’s their rough average per capita annual income)

I use this as an example, because I think we’re seeing a dramatic shift in the direction of the business. The buzz term “paradigm shift” has been so overused as consultant speak that we all tend to be numb to its real meaning any more. It refers to a change from one way of thinking to another. It's a transformation or a sort of a metamorphosis that just does not happen, but rather is driven by agents of change.  Over the past two years, my views of the business and those of others have gone through a complete paradigm shift.

With the new information we now have, the shift is occurring in the business models of retail financial services firms. It’s no longer about being fee only or commission based. The recent and enduring trend is towards both. RIA’s are adopting B/D’s to accommodate those who want to transist into independence rather than go “cold turkey”.  Doesn’t that violate the ideology of “fee only”…not really particularly if you offset fees with commissions earned on products that meet the client’s needs and are in their best interests. And having access to the full suite of products, namely insurance based products that tend to be commission only, can actually improve one’s ability to offer objective advice under a fiduciary based relationship. Likewise, mega Indy B/D LPL lost their #1 advisor recently to an RIA model while large wirehouse teams are moving to Hightower and Dynasty. Just as the government is developing “harmonized” regulations for RIA’s and B/D’s alike, the business models are evolving in the same direction meeting in the middle.

You will see certain financial services firms and models stick to their ideology and refuse to budge off of it. Rather than shift their strategy, firms like several I’m very familiar with will keep doing the same thing over and over expecting a different result (i.e. definition of insanity) while cutting costs to survive like squeezing an ice cube as tightly as possible until there is nothing left. They see only the young lady or old woman. It’s the illusion that nothing is changing and perhaps even a delusion that their way of seeing and doing business is the only way. But as this paradigm shift takes hold across the entire business, I believe the hybrid model is the clear winner seeing both ways of doing business under a uniform standard of fiduciary care. We are witnessing a very unique and positive period of time in the financial services industry. The winners will be those who open their minds to differing points of view and are willing to make necessary change along with it.  Oh well….shift happens.

Friday, April 15, 2011

A decade late and a dollar short

 During my consulting engagements with analysts or management consulting firms, I am often asked a common question these days; “Given the shift to a fiduciary standard, how can the large retail firms adapt and compete?” For the longest time, the differentiators between the players and laggards in large financial services retail distribution have tended to be product, price, marketing and brand.  But now products are basically uniform and commoditized while the big name brands have taken a huge hit during the financial crisis…that is if they even survived. So my answer is not to create a cheaper whiz bang product or to load up on advertising. When it comes to what a customer wants and needs, it’s really about one thing. It’s the quality of advice they receive.

While not yet a done deal, all arrows point to a form of fiduciary replacing suitability as the standard to which all professionals giving personalized financial advice will be held. There are some who think (or hope) that this means the end of commissions and proprietary driven product sales. At the very least, the likely outcome will be a complete and clear disclosure of compensation and any differential advantage to the advisor/producer/broker/agent for recommending one product over another. For example, if Joe Broker receives non-cash compensation for recommending a particular product, typically proprietary, then they will need to disclose that they receive benefits, retirement contribution, 401(K) credits, health insurance, recognition, management support, etc. They may even need to disclose the dollar value of those non-cash benefits. When the only thing advisors have to differentiate themselves is a product, then game over. This is why UK saw its agent headcount decline by 2/3rd’s after it enacted regulations forcing compensation disclosure. The product peddlers were forced out and I would expect to see the same here.

So, back to my answer about what it’s going to take for the large retail firms to compete. It’s going to come down to process over product. If (and it’s a big IF) a firm wants to continue to successfully sell proprietary manufactured products, it will need to do so within the context of a process that lends itself to a fiduciary relationship with the client. The fiduciary relationship will be the only thing to give them air cover to recommend their more profitable manufactured products over another. But can this be done? I can tell you from personal experience…absolutely yes.

A little over a decade ago, I headed up an initiative to move a commission based salesforce towards fee based advice.  (See Dallas Morning News Article: We started with a pilot in the state of Texas as somewhat of a test tube. The McKinsey folks working with me called it “proof of concept”. We had to change licensing, training, products, compensation, recognition…basically everything. And we had to do this while continuing to run a business as we knew it. We used to joke that it was like changing the tires while driving 60 MPH. Needless to say, it was the kind of “turn on your head” kind of change that is very unsettling. But our results were very interesting. Over the year we made this seismic shift from essentially a product push methodology to a process driven fiduciary relationship, overall sales revenue increased by 30%. Naturally using a financial planning process, investment product sales increased 73% while non-proprietary sales in general increased 57%. But the proprietary sales revenues also rose 25%. It was a case where a high tide raised all ships. A win for the better served client, a win for the advisor who increased his/her income and a win for the company which increased all sales, including proprietary sales.

Financial Planning magazine did an article on the initiative and made the statement, “if AXA can develop such a strategy, it could transform not only its career agents, but the entire financial services industry”  (FP Mag article here: A pretty bold statement and probably true…but it didn’t happen. The fee based strategy was rolled out nationally with some success, but nowhere near the level that the Texas test tube experienced. Unfortunately, change requires leadership and while I had the vision, passion and commitment to make it work in Texas, the same level of leadership was not shared throughout the enterprise. When the market slid post 9/11 and expense cutting became the front and center strategy, the entire initiative was cut and the focus of the firm went back to the product push of old.

So, CAN a large financial services firm change gears and move towards a fiduciary fee based strategy to survive in the future…as evidenced by my experience, yes. But WILL they change their strategy? Sadly, I don’t think so. Many large financial services firms have HQ leadership who have no experience in the field with real live advisors and clients. So lacking any real strategy, or ability to develop a strategy, we’ll likely see more of the same through cost cutting their way to success. In hindsight, it’s a shame that AXA didn’t see the strategy through. With so much invested in the process and uniquely positioned, it may well have transformed the entire financial services industry. And it would have been perfectly positioned to compete in a new fiduciary and fee based world that the industry is driving towards. But now I’m afraid they’re a decade late and a dollar short.  It will be interesting to see if any of the large distribution firms will toss their product push strategy for one that meets the regulatory and consumer trends driving the business. 

Monday, March 28, 2011

You're not a very good financial advisor...

For those of us who have dealt with many different clients over the years, this xtranormal cartoon video should be very funny (except for the obligatory "F" at the end).

Click here to view:

Wednesday, March 16, 2011

Interesting and Fearful Times

 "I've often thought how great it is to be part of the first generation of humans for which the world will be a radically different place toward the end of our life than toward the beginning. The time-scale for change has suddenly become short compared to a human lifespan, which makes it an interesting (and in some ways fearful) time to live." -- Dr. Clint Sprott

I came across this quote while surfing info on my i-pad the other day and it caused me to pause for a moment and think about it. The pace of change driven by technological advances and the resulting opening of communication/information is having profound and life altering effects on governments, businesses and individuals. I recall as a kid, going through drills where we would hear sirens and then be instructed to curl up under our desks as if that would protect us from the nuclear bomb attack from the USSR…remember them? A lot has changed since then. But it is the pace of change today that has got most businesses and business models playing catch-up rather than leading it.
Of all the businesses enduring change today, none is more impacted than financial services. Technological advances, new regulations/tax laws and shifts in consumer demographics and attitudes are forcing some business models to become obsolete while also creating the opportunity for new ones to emerge. There was once a mindset that rather than leading change which has risk, it’s better to be a “fast follower”. The problem is with todays fast pace, following puts you at greater risk of falling behind more than ever before. Fast followers are becoming latent laggards.

Wouldn’t it be nice to be able to predict the future? When 1984 came and went, it looked nothing like George Orwell’s version. And in 2001, we didn’t end up all living a “Space Odyssey” like the movie. I suppose this may be why we cling to the tried and true; the known. Change is hard and as the quote above infers, very frightening. But now more than ever, it is necessary for survival.

 Just as I get all futuristic and philosophical, I am drawn to start thinking, okay, what specific business moves do we need to make today to survive and thrive into the future? It is here where I start drawing on past experiences and thinking about history repeating itself. Back in 2007, before any of us could even conceive of what was to unfold in the financial chaos of 2008, a speech was given at the annual AALU (an organization of elite life producers) meeting by Tony Gordon who has a successful practice in the UK. His message was simple. He explained what had happened over the past 20 years in the UK financial services business and warned that if we in the US didn’t get more proactive about cleaning up our business practices and defending our respective way of business life, that what has happened there would no doubt occur here “across the pond”. What he described in his cautionary speech is almost exactly what we are seeing unfold today with Dodd-Frank. (Send me a note if you would like a PDF copy of the speech) A result of what looks a great deal like what the SEC is attempting with “harmonization” moving to a uniform principle based standard for advisors/brokers/agents is that the population of practitioners was reduced by 75%, the middle markets were no longer served by advisors and banks became the primary distributor of financial products and services. Could this happen here? Absolutely. Will it happen?...we’ll have to see. But it does present a dose of reality and a picture of what the financial services business here in the US may look like if we continue on the current trajectory.

An interesting and fearful time to live, no doubt. 

Thursday, February 17, 2011

Collateral Damage

While out with a friend of mine we observed a guy with his hands fumbling through what seemed to my buddy as a strange, archaic device. He sarcastically asked, “What is that thing that looks like words printed on paper?” Uh…that would be a newspaper, I replied.

While I am not ready to predict the complete demise of newspapers like my friend inferred, it can’t be that far away. The pace of change over the past year in communications is staggering. Over the past week, Borders announced a plan to file bankruptcy, Blockbuster is frantically looking for a buyer and the Egyptian government was toppled. These events would have been unthinkable a couple years ago and today it has all changed just because of the way these little technological devices have entered our lives. In the 2/17 WSJ there is a great article that describes “technology driven job destruction”: 2/17 WSJ Article here Technology is eating jobs as well as entire companies and governments that do not keep up, as we have witnessed this week.

I used to look forward to entering my day by reading the Wall Street Journal every morning. But since I read the most current version before going to bed on my iPad the night before, by the time it hits the doorstep in the morning, most of it is no longer news to me. By using the Tweetdeck application on my desktop, Flipboard on my iPad, and Twittelator on my iPhone, I can keep track of all the business and financial industry goings on in near real time. For an information junkie like me, it’s pure heaven…not so much for my wife who has recently and often been repeating “Can’t you stop looking at screens and pay attention to me for a minute!”

I admit that while this new information world has changed much for the better, there are nearly as many annoyances that come with it. Like driving down the freeway at 70MPH watching the hipster in the lane next to me with a cell phone in one hand texting while applying eye make-up in her rear view mirror with her other hand and swerving like she just downed a fifth of scotch. At a restaurant, I witnessed a family of 5 (Mom/Dad/3 teens) sitting together with each of their noses, parents included, turned downward towards their cell phones and texting in unison. It made me wonder if they were texting each other instead of talking. And we’ve all been annoyed by the dolts who don’t take time to look up from texting while at the stop light. I observed one where, despite all the honking horns, the light went through a full cycle before he looked up to notice. I suppose this is all part of working through progress.

The pace of change in business is often incremental and not immediately seen while it is taking place (the frog in boiling water thing). But you would have to be a complete shut-in not to feel the absolute “turn on its head” kind of change occurring in the retail financial services business. It’s as if the business experienced its own “big bang” event in the fall of 2008 where everything was in chaos and then over time, began to take shape and evolve. I think we’re in that period where we’re taking shape being molded by forces unlike ever before. And just like we’ve seen with Borders, Blockbuster and the corrupt Egyptian government, we’ll soon be seeing similar collateral damage in financial services as a result of those staying rooted in the past rather than embracing change for the future. While one door is closed for some, another is opened for the forward thinking who can embrace technology and crack the code on a business model that survives the change we are enduring. Stay tuned….um, I mean… stay connected!

“Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~John Kenneth Galbraith

"Unless you are prepared to give up something valuable you will never be able to truly change at all, because you'll be forever in the control of things you can't give up." ~Andy Law"

“The greatest danger in times of turbulence is not the turbulence; it is to act with yesterday’s logic." ~ Peter Drucker

Tuesday, January 25, 2011

All over but the shout'in?

I was born and raised on the west coast up and down I-5 from San Diego to Seattle and points in between. So when I came to Texas in the early 90’s, it really was somewhat of a culture shock. Out west, we ski in winter and surf in the summer. Down here in Texas, it’s hunting and golfing, two pastimes in which I have developed little interest or skill. One thing about the culture in Texas I’ve come to appreciate, besides Tex-Mex and the prevailing view of football as religion, is the use of sayings to make a point. I catch myself saying “Howdy” and “Y’all” and have even offended some women in New York by calling them “Ma’am”. Apparently the female folk in the Northeast don’t appreciate the attempt at being polite. Texas sayings I’ve recently heard; “This ain’t his first rodeo”-experienced, “He’s so broke, he can’t pay attention”-poor, “He’s one taco short of a combination plate”-crazy, He’s all hat and no cattle”-boastful “He ate supper before saying grace”-immoral “He looks like he was in the outhouse when the lightning struck”-ugly “If dumb were dirt, he’d cover about an acre”-stupid. I could go on but I think you get the drift…besides, you’re smart enough to know come here from sic’em!

Anyway, what brought to mind Texas sayings was seeing the final SEC study on the fiduciary standard. After reading it and looking at some industry reactions, another saying came to mind; “It’s all over but the shout’in” This saying has several meanings, one being that it’s all pretty much a done deal. But my thoughts were a bit different. While it’s great to finally have the SEC study done, it’s far from a done deal, particularly when 2 of the 5 commissioners write a dissenting opinion just after the study was released. The shout’in is not over and may have just intensified.

Those for the fiduciary standard are pressing to get it enacted ASAP knowing that time tends to blur the facts. But those whose business models are threatened by change will press on with delay tactics hoping the landscape will change in time. To me, that’s kinda like “whistling through a graveyard”, but it’s all they‘ve got. How can you argue against placing your clients’ interests first? One of the most lame arguments is that the products will become too expensive and less available to lower income people. Really? Newsflash….that has already happened. And in the few markets where the products are available to lower income folks is where you’ll find complex, high commission, relatively unregulated indexed annuities being peddled as the solution for every need…something that should be driven out of the system anyway.

What I hope and believe will happen is that the product driven, one size fits all amateurs will be weeded out of the business giving rise and opportunity to the true professionals. This has nothing to do with commission based pros versus those who are fee based. Some of the most professional advisors in the business happen to be compensated by commissions for their work. The difference is that the true pros disclose their compensation while the amateurs hide it. For those worthy of their services, compensation disclosure has never been a factor. In fact, I’ve known some who after disclosing compensation on a case well into six figures, their clients were concerned about whether or not they were paid enough for their work.

As the turf protecting continues, I’m heartened that it appears the regulators are attempting to do the right thing in the face of a great deal of special interest pushback. All of us who give personalized financial advice should be held to a standard that places the clients interests first. And we should all be held to that standard by self-policing via a single SRO, namely FINRA. I realize that for the fee based advisor or commission based broker, this kind of change is “as welcome as a skunk at a lawn party”. In this case, it appears that “lettin the cat outta the bag is a whole lot easier than putt’in it back in”. Translation: You can’t stop progress.