John Lefferts' Blog

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.