John Lefferts' Blog

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.