“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.
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”…