Sun, Moon & Stars

After spending a 27 year career in the corporate grind, I took a breather a few years back and made the personal decision to pursue a more entrepreneurial path. While taking some time out to de-program myself from seeing the world through “corporate goggles” and all the predispositions that come with it, I studied the financial services industry in this post “great recession” environment and concluded that we were about to see more change in the coming years than we had seen in the past several decades combined. I also determined that the current business models are ill equipped to meet the future needs of the high net worth financial advisor. Changes like Dodd-Frank with its fiduciary “harmonization”, a potential SRO (FINRA?) for RIA’s, a flood away from proprietary distribution models towards independence, and new technology reinventing the client-advisor experience are just a few of the many drivers of change. So I wrote an investment thesis for a new financial services distribution model and shared it with Venture Capital and Private Equity firms to assist in capitalizing this new vision. I made multiple trips to NYC, Chicago, San Francisco and found that they’ll all talk to former exec’s like me, but in the end, they all said “bring us a deal”, and I had none. All I had was a vision. Often I was asked how it was going, to which I would say, “To get a deal done, I’m probably going to need the Sun, the Moon and the Stars to align”. Well, I’m pleased to say that in my world, the Sun, the Moon and the Stars have aligned.
Lefferts Press Release

Thinking in “3’s” and the word “Tri” are core to my business vision perhaps somewhat shaped by the fact that I have 16-year-old triplets (boy and 2 girls) at home.  For the longest time, the retail financial services business has been silo’d by regulations with brokers in the FINRA silo, Investment Advisors in the SEC silo and Insurance Agents in the state insurance silo. They were regulated by the products recommended/sold and not by what the advisor actually did. In recent years, what they recommend to clients has tended to be all of the above. Brokers are giving advice through fees on AUM, RIA’s are recommending annuities and agents are now selling investment products. They’re all giving “personalized investment advice”, but not being regulated for doing so. And that’s about to change. 

While wirehouse and insurance distribution models are mature and in decline, the investment advisory business is like the Wild West growing frantically and exponentially. In fact, the only business models growing in recent years have been RIA’s and the “Hybrid” or FINRA registered brokers who maintain their own RIA. New models that have recently hatched such as Hightower and Dynasty are growing quickly off the backs of the traditional wirehouse investment models in decline. But I have always been puzzled as to why new elite insurance models hadn’t evolved the same way. Decades ago, M (“M Financial) and Partners (Now part of NFP) came to be and were like the “Avis and Hertz” in the high net worth insurance distribution space. But no others have been launched since, not even as part of these new high net worth investment models now seeing early success. I often thought the ideal model would look like a combination of Hightower or Dynasty on the asset management side and M on the risk management side melded together in a holistic approach. As the business regulations harmonize, likewise, it gives way for the business models to harmonize. We all know what the hybrid model looks like, but what if you added a 50 state Brokerage General Agency (BGA) to the mix. It then becomes the “Tribrid”. And the Tribrid distribution model is the basis for my investment thesis.

In the summer of last year, I submitted my investment thesis to an Austin based PE firm and the timing must have been right. In the prior year they had funded the launch of the first elite insurance producer group since M and Partners called Lion Street (so called to portray the image of fiercely independent advisors combined with investment savvy of Wall Street...the good parts).  Bob Carter who co-founded Partners which subsequently became NFP left his former firm and after the requisite non-compete was up, he founded Lion Street in August of 2010 Lion Street Press Release. It is structured on the idea that advisors would rather be aligned and place business with a firm they co-own rather than build value in a company owned by intermediaries. It’s analogous to the concept that no one ever washes a rental car, but they do the car they own. Advisors who meet the select criteria of Lion Street are invited to become an owner of the firm. Advisor/owners have direct access to the product manufacturers without the middleman taking a cut because of the collective volume and quality of business from these elite advisors. And naturally, the support and services are commensurate with the high levels of business done by this select group without being forced to dumb it down to the lowest common denominator rookie as most larger distribution platforms must do. The folks at the VC/PE firm knowing that Lion Street had originally envisioned a phase II to include a B/D and RIA among other distribution platforms thought that my “Tribrid” model may be a good fit and introduced me to Bob. I had known Carter by reputation and involvement in AALU, but our paths had not crossed, he being on the independent side and myself on the career distribution side of the business. I was intrigued by the idea of creating what could be the first insurance styled producer group in the RIA business and while Bob was initially skeptical about opening into the investment space, over time as regulations began to steer towards harmonization, he saw the value of creating this 3-legged platform. In the early part of this year I was hired by Lion Street as a consultant to help build out this platform.

We studied the existing 42 Lion Street advisor-owner firms and found that the vast majority had B/D relationships and half of those had fairly robust RIA practices, some in a hybrid model and others fee only. In fact, several have AUM well over $1Bill while many do a great deal of investment GDC, but with our competitors, not us. We know that the regulators are turning up the heat on B/D’s to regulate not just what goes through them, but all other business including outside insurance business. We also know that over time, the regulators are going to force RIA’s onto a supervisory platform much like FINRA (and it may well be FINRA). This tells us that sometime in the not too distant future, the regulators are going to force all business through a single regulatory channel/tube to hold a single supervisor accountable for every piece of business an advisor does. This is why some B/D’s have recently become more curious about outside business activity since it has now become their risk and they need to capture that business in house. For the elite advisor/advisory team, there are few platforms that can accommodate this holistic family office type approach seamlessly…until now.  There are defensive reasons to build the Tribrid on a single platform because if we don’t, our current advisor/owner firms may be forced to move to a platform that does. But there are as many offensive reasons to build it. (See future vision of platform through this post: A speech I'm writing for 2017)

Knowing that we needed an “insurance friendly” B/D (a B/D relationship that does not force advisors onto their in house BGA relationship) and an “RIA Friendly” B/D  (B/D that does not force advisors onto their corporate RIA platform), it became clear that we need to own our B/D. Had we developed our distribution model but used, say LPL as our B/D (a firm I have a great deal of respect for), then who really owns the platform; LPL or Lion Street? We think that whoever holds the registrations (B/D, SEC, State Ins Dept.’s) of any one advisor, ends up capturing the entire relationship. And what better relationship than to place your business with, and increase value in a B-D/RIA/BGA that you own versus one that you do not.  Advisors; be careful here because if you don’t choose the most suitable Tribrid platform to meet your client and business needs, it may well choose you by default. You may find that the relationship between you and your B/D moves from one where you are currently independent to that of being captive due to the regulatory forces in play. And non-FINRA registered fee only advisors who are proud to say they let their FINRA licenses go may well be pulled back into the same regulatory infrastructure in the end. Again, choose your RIA-B/D-BGA partner wisely before it chooses you.

So, rather than build a B/D from scratch which is time consuming and capital intensive, we decided instead to file for our own FINRA B/D so we have the supervisory responsibility and control while essentially renting the middle and back office services. This is done through a joint venture (Press release on this later in the year) from an existing operational B/D that meets our requisites as being private, have best of breed technology, is compliant, profitable, and is a cultural fit. The reason we want the risk of our own B/D is that we understand the needs of the advisor who plays in this harmonized space. There are only a handful of B/D’s that understand and process Private Placement VUL or PP Variable Annuities, executive benefits (COLI/BOLI), etc. And most are seeing their commission revenue giving way to fee based revenue causing them to become more RIA un-friendly as they seek to capture that piece of the business. We are building one of the first B/D’s that can cut across all these lines of business where as competitors are stuck in the silo’s of the past with legacy systems/technology that can’t be undone or a culture too rooted to make changes necessary to compete. It is akin to the Apple ecosystem (Financial Services Ecosystem post) where all systems work seamlessly within the Apple platform. The same styled ecosystem can be developed in our business meeting not only your client’s needs but also the regulators requisites. And it has become apparent that with the exception of a handful of Mutual Life companies who can hide the cost of their loss leader distribution platforms in the “black box” (for now), the proprietary based manufacturing/distribution models have been slowly cutting their way towards irrelevance. It’s like they’re squeezing an ice cube until it melts and is lost forever. We are seeing this at wirehouses, career distribution firms and insurance owned IBD’s.  At Lion Street we can be the platform of choice for the elite teams looking to “skate to where the puck is going”.

We are in the process of setting up Lion Street Financial, the B/D and Lion Street Advisors, the RIA firm for which I will serve both as President and CEO working closely with Bob Carter, Founder and CEO of mother ship Lion Street, Inc. Getting a start-up off the ground always takes more time than anticipated, but with some fantastic venture capital partners, Bob’s “land and expand” approach establishing a beachhead with firms on fixed life only relationships (easiest to come to market), we are positioned like no one else in this evolving financial services distribution landscape to leverage the opportunity to the max. It’s very exciting and I’ve told several colleagues that it’s like I’m 20 something years old again building my first sales district into something very special. It’s the right place, at the right time, with the right people. Reinventing yourself and your career through a start-up is a very risky proposition and though I always had tendencies towards the entrepreneurial mindset, I was stuck in a corporate bubble that became too comfortable to jump off of. Bob has assembled a first class team in Austin with “new-co” and while my office will be co-located with the B/D joint venture in Dallas getting phase II built out, I’ll be spending a fair amount of time in Austin with an office there as well.

Typically I write in this blog about my point of view in the financial services business and that has helped shape my vision for the future. Like HighTower, Dynasty and now Lion Street, there is more than enough room for many more new independent models of varying specialties to emerge with success. I’ve basically laid out the recipe to our “secret sauce” here and I am not at all concerned about competition. It’s not the ideas, but the execution of the ideas that separates winners and losers. And while it’s not an original thought and a bit cliché, it really is true that those who adapt to change, not fight it, will be the winners of the future. Change always closes the door on some endeavors while opening the door to new and more current opportunities. We are at that inflection point right now in the financial services business. I’ll continue to write in this blog about my thoughts on the business from time to time, but suffice to say, I’ve got some heavy lifting to do in the near term. For me the excitement and future of this Sun, Moon and Stars event is very rewarding seeing my vision become a reality. I welcome your thoughts, input and/or criticism and would like to hear it via a Linkedin note  http://www.linkedin.com/in/johnlefferts  or e-mail to jlefferts@lionstreet.com.  And, of course, referrals to advisor firms that fit our model who want to be on the ground floor of the next great story in the business will always be welcome.

“We cannot become what we need to be by remaining where we are”  -Max De Pree

“If we don’t change, we won’t grow. If we don’t grow, we are not really living. Growth demands a temporary surrender of security” –Gail Sheehy

“Business more than any other occupation is continual dealing with the future; it is a continual calculation, an instinctive exercise in foresight” –Henry R. Luce

The Evil FINRA Witch!

Last month Senator Baccus tabled his bill that defacto pulled RIA’s under the evil rule of FINRA. RIA’s rejoiced singing and dancing in the streets like munchkins in the Wizard of Oz; “Ding Dong, the witch is dead”…the evil FINRA witch! But then, Baccus runs an op-ed in the Wall Street Journal essentially saying that the SEC cannot and will not get the job done and self-regulation is the only reasonable choice. Oh no! The Wicked Witch FINRA is back! RIA’s long for the day where there was no evil witch lurking, audits happened once every 10 years at best and all was well. There’s no place like home. But how do we get back home?...follow the yellow brick road.  

My point here is that believing nothing is going to change and we can all go back to the way it was is tantamount to believing in fairy tales like the Wizard of Oz. It could as easily been written about FINRA brokers fearing the evil Fiduciary Standard. It’s about time to get real.

Both sides of the SRO and Fiduciary argument have been in denial all along. RIA’s slam FINRA at every level yet offer no reasonable alternative solution. And brokers, while saying they support the fiduciary standard (how can you publically not support something in your clients best interests?) are secretly hoping it goes away and  can do business the way it’s always been done. And they’re both dancing down the yellow brick road.   

The fact of the matter is that RIA’s, brokers, agents, financial planners, and whatever other term we call ourselves…we’re all in the same business. We all give “personalized investment advice”. Non-registered insurance agents hiding away from FINRA while selling indexed annuities are almost the same as the fee only asset manager selling a TAMP who is also hiding away from FINRA. They are both making recommendations of asset management products but are not subject to the level of oversight and controls that FINRA places on its registered reps. The government is intending to solve this by “harmonizing” the oversight to a single standard of fiduciary care and holding all accountable to an SRO which is presumably going to be FINRA.

We can and have argued the virtues of each segment of the industry maintaining the status quo. The fee only RIA, many former FINRA registered reps have the “born again” zeal of a former smoker about how they now have the moral high ground. I get that. But this segment of the industry is so small that I really don’t think their sacred high ground will be spared. And the brokers/agents, etc. should be glad that the US is not going so far as the UK which is banning commission sales altogether effective in 2013.

Change is happening whether we want it or not. Rather than fight change, it seems to me to make more sense to help shape it. If it appears that FINRA is the 800 LB Gorilla, then let it be so and propose demands and requests on how it should look. Carve out a separate fee only segment of FINRA run by fee only minded regulators under the moniker of FINRA. Doesn’t that make more sense than touting some law students in Mississippi creating a new SRO? It’s time to get real and stop living in Oz dancing down the yellow brick road hoping it leads them back home to the way it was.  It’s no longer the way it was. It’s time to help create the way it’s gonna be.

Fly With The Eagles

“Fly with the eagles or scratch with the chickens”. It’s an old but often used line describing one in an exclusive position soaring to heights while the others remain among the rest of the rank and file scratching in the dirt. On the insurance side of the business, there have long been exclusive producer groups that formed as the industry was enduring profound change from career producers to independent firms (still happening). Over 30 years ago, M Financial was one of the first to launch as an elite group of producers/owners who came together to leverage their collective clout, quality of business and expertise for differentiated product and services offerings. It became an exclusive club that you had to be invited into while the rest of the industry was managed down to the lowest common denominator(i.e. scratching with the chickens). About a decade later, Partners Financial hatched under a similar strategy with the same level of exclusivity and superior support services for the independent elite firm. And as you may know, Partners morphed into a roll-up in the late 90’s as NFP. To this day, M and NFP are the only two scaled elite insurance based producer groups that have a history of success, although one could question how the NFP roll-up strategy may play out. As Pres./CEO of AXA Advisors a while ago, we hatched an “internal producer group” in the early ‘00’s called “Paramount Planning Group”. But in the end, they were always still part of the AXA mother ship and could not ever completely separate from being managed to the lowest common denominator. Even though it is the early adopters who make out the best as founders of these producer groups, I find it curious that no other has gained the level of success and acclaim as M and Partners have accomplished.

In today’s financial services business, we are enduring perhaps the most disruptive period of time any of us have ever seen. Long time powerhouse wires are being marginalized, regulations are shifting and the economics of the business are forcing the little guy to find a scaled partner while the proprietary models implode. There isn’t a single financial services practitioner I speak with who isn’t in the middle of evaluating their practice, firm affiliation and structure.  Similar to the era in the insurance industry when M and Partners were formed, the environment for a new model to emerge in the investment management/advisory business is as ripe as it is ever going to get. We’ve seen several roll-ups come and go over the last decade, Focus Financial being the most prominent today. But ask some of the NFP folks about how a roll-up works. They know how that story plays out having lived it. We’ve also seen the emergence of firms targeting the corner office wirehouse team such as HighTower. They have a great model but it seems built as a life raft for the wirehouse broker not quite ready to be in business for themselves. Recently you may have read about a firm in the concept stages called Advizent which seems to have identified the huge need and desire for RIA firms to join together for scale, share intellectual capital and offer differentiated services. But with a goal to reach 1,500 RIA membership firms, one wonders how exclusive this group really is. It looks more like a collective bargaining union membership to me.

As the industry continues to evolve, I’m certain we’ll see multiple new models pop up as the business de-fragments and collects towards this new norm we’re fumbling around to find. But I keep thinking about the success of M and Partners (pre-NFP roll-up) in the insurance business having endured the test of time and how that same culture of exclusivity, differentiated products and support, sharing best practices with elite firms and common ownership that truly ties the best with the best, can be implemented within the RIA business. An RIA Network that is invitation only where the advisors take an ownership stake in the entity offloading centralized services (compliance/legal/HR, etc.) while having access to capital for tuck-ins as the business consolidates. A true community of sharing best practices but at the same time remaining 100% fiercely independent.  Access to best of breed technology, products and services as vendors clamor to affiliate with these elite players at the most reasonable cost. And potentially increasing firm valuation multiples by 2X as you grow revenues faster than going it alone. Can the M Group/Partners type model launched over 30 years ago be one that can successfully apply to the quickly evolving RIA business? Rumor has it that a model that holistically cuts across advice, investment and insurance is in the works. Time will tell…

“Innovation is resisted by individuals who are unwilling to risk the status they have achieved and jealously guard their own job against any change”

“The trouble with our times is that the future is not what it used to be”

“Vision without action is merely a dream. Action without vision just passes the time. Vision with action can change the world”

A speech I'm writing for 2017

At today’s 2017 annual industry conference, I was asked to reflect on the evolution, or what some say is a revolution the financial services industry has endured over the past 5 years. While 2012 may seem like it was just yesterday, as we all know, the “turn on its head” sort of change we’ve seen is more than any of us have witnessed in our entire lifetimes. I am fortunate to have had the foresight to launch a platform positioned not only for survival, but to carve out a niche that truly serves our clients in the best way possible. Unfortunately, many of our industry peers did not anticipate the changes or were just too set in their ways to make the necessary adjustments for survival. There is a certain paradox that for a business where the demand for what we do is perhaps at an all-time high with more money in motion than ever, the number of financial advisors and advisory firms has reached a multi-decade low. I suppose that means for those of us still standing, it’s a good thing.

So let’s review how we got here. While the silo’s no longer exist, I guess it makes sense to start by discussing the Wirehouse, Indy B/D, insurance and RIA models and how they ended up where they are today.  We all grew up in a world where each model was regulated separately and typically by the products and services they primarily recommended. The brokers were regulated by FINRA, the RIA’s by the SEC and insurance by each respective state insurance department. It seems archaic and highly restrictive, but each had their own set of standards and rules despite essentially doing the same thing; giving personalized investment advice.

The major wirehouses seem to have changed the most. I think history will show that once they moved from client focused partnerships to publically traded companies driven for quarterly profits; it was the beginning of the end. Yes, the biggest of the bunch, Merrill Lynch has survived having been spun off from B of A, but only after the damage was already done. You would have thought that we learned about banking and wirehouse marriages from the Citigroup-Smith Barney debacle over a decade ago. Today after acquiescing to the independent models, we now have “wirehouse lite” formats. But it seems to be too little too late. The glue used to be culture and brand. Moving towards independence changes all that and it’s hard for them to justify lower payouts with little to no value added.

The independent B/D models for a while were the fastest growing of the bunch. But when the great recession hit with interest rates remaining low and extremely thin profit margins, the shakeout was brutal. Insurance company owned B/D’s couldn’t shed them quick enough and PE firms having seen LPL’s early success thought that collecting small B/D’s would be a good way to build scale and then sell ‘em off for the big bucks. They didn’t realize the culture of indy B/D’s. Trying to dictate who the indy producer is going to affiliate with is like herding cats. Once they realized their B/D was going to be sold off to yet another owner, or that their B/D would be merged with the other PE owned B/D, the producers bolted for more stable and scaled models leaving the PE investors holding the bag.

RIA’s enjoyed a unique niche for the longest time flying under the radar of the regulators. They clearly had it right having long adhered to the fiduciary standard and operating under a fee and AUM model. But their arrogance about the moral high ground over other models ended up catching them flat footed. In a sense they were winners having a head start on structuring under the fiduciary standard that all models now must operate under. But how did they ever think that the rest of the industry would be regulated separately as fiduciaries and they would remain under the SEC with a visit once every 10 years? Now that we are all under the microscope of FINRA, it’s been interesting to see how they have become somewhat humbled. Their fear was that they would be dumbed down playing on the same field as lowly salespeople. They were focused on the wrong thing. Holding everyone to the fiduciary standard and accountable to a regulator has been a real win for our clients while substantially increasing the level of professionalism for the entire financial services industry.  

For our insurance based models, I suppose we should have seen it coming with what has taken place in Australia and the UK. Once they moved life insurance and annuities out of the state insurance department regulations and into FINRA, holding them not only to full commission disclosure but under a fiduciary duty, those 12% commission indexed annuities went the way of those 20% commission limited partnerships of the 80’s…and good ridance. Like the other models, the insurance industry has been rocked by the European financial crisis and lengthy period of low interest rates. It seemed like over the past two decades the mega large European insurance companies were taking over. Now that they’ve essentially become Eurozone government run entities, the prominent names like ING, AXA, Aegon and Allianz are blasts from the past. And in a low interest rate environment, what were they thinking when they offered contracts with up to 4% guarantees when safe investment rates were points lower? We’ve seen this picture before. Remember Executive Life? While commissions have reduced and levelized while the number of insurance only advisors has come down by 75%, I suppose the silver lining is that the rest of the financial services industry has picked up the ball realizing that insurance is the bedrock of financial planning by insuring against dying too soon or living too long.  With the emergence of non-commission and fee based life and annuity contracts, the former fee only RIA bunch have jumped on the bandwagon and now tout insurance products as one of their more attractive financial vehicles. Who knew?!

When we set out to build our model back in 2012, we had some basic tenets in place to drive our decisions. It had to be advisor owned so the focus was on the client and not firm stock value. We had to be highly professional so as to be able to hold ourselves out under the fiduciary standard. We needed to be broad based with expertise that cut across all former silos of investments, insurance and advice. This is what hatched the “tribrid” by combining Insurance BGA, Broker-Dealer and RIA all onto the same platform enabled by straight through processing technology.  And we focused on the high end of the market where our expertise was best suited. We had always observed that the ideal model would look like M Financial on the insurance side, but HighTower on the investment advisory side. And we wondered why a model combining the best of both had never been developed. Basically, that’s what we did and it turned out to be a real differentiator for us.

Back in 2012, it was very difficult to predict how things would turn out. It’s ironic that  Senator Dodd and Representative Frank are now serving jail sentences for the mortgage mess they were part of when the very bill to clean up that mess has their names on it. Nonetheless, there were some signs that everyone could have heeded to make changes for survival. We knew that the fiduciary standard was going to happen, yet many firms fought it and continued with product driven, commission based proprietary models anyway.  We knew that regulations were going to become more harsh and cut across all lines of business, not just in a silo’d way. And there had been a long trend towards fee forms of compensation and AUM models that are no longer the outlier, but the standard today.  I suppose with legacy systems and CEO’s focused on profits and stock prices that they saw what they wanted to see. But in the end, it is our clients who we serve that must be front and center. That’s the way we’ve done it, and that is also the reason I’m standing here today telling our story.

Thank you very much 

Top 10

The financial services industry has both a huge problem and a huge opportunity over the same exact issue; increasing demand with decreasing supply. With more assets in motion than ever before and an increasing demand for financial advice, there has never been a better time to get into this business. Industry expert Mark Tibergien was recently quoted as saying that the RIA business alone needs to quickly add about 10,000 advisors to meet this increasing demand.  But here’s the other side of that coin; it has never been more difficult to enter the business than right now. The vast majority of seasoned financial advisors I know cut their teeth in the business with a large wirehouse, mutual fund firm or insurance company who recruited and trained them to sell their proprietary products. With a 4 year average retention rate of a little less than 15%, only 1 in 7 of these trainees became survivors. Since independent B/D’s and RIA’s lack the resources and know-how to recruit, train and induct advisors new to the business, these lucky survivors have been the primary recruiting targets for them. Unfortunately for the industry, these proprietary models are quickly fading away and devoting fewer resources to trainees. Add to this the demographics with the average age of current advisors pushing 60 years old, it’s obvious why we’re seeing rapid consolidation in the industry. It’s a real problem that the industry hasn’t figured out yet.

There are a number of reasons new advisors fail in the business. Having recruited and trained thousands myself, I’ve observed first hand some great successes and as many miserable failures. Some people simply don’t have the aptitude for being in business for themselves while others place their success or failure on the wrong thing. Individuals who lack self-confidence or a certain ego drive tend to focus on the plan, process or product they offer. They fail to realize that in the financial services business, the product you are offering is trust. Whether you’re a fee only RIA or a commission based broker, you are basically selling yourself.

I like to develop top 10 lists and dug up one on this topic from a few years back. It was directed at advisors trying to enter the business and giving some pointers. I called it, “Lefferts Top Ten Overlooked Truths in Our Business”

1. If you commit first, it commits back to you. You must make a leap of faith and close the back door once you enter this or any entrepreneurial business. If you wait for good things to happen before you mentally, emotionally, and physically commit, it’ll be a long wait. The happiest people are those who commit to the situation they are in and make the best of it while unhappy people are continually looking to external factors for their success or to blame for their failure. Take 100% responsibility, commit and enjoy the results, but you have to make the first and continuing move. Don’t be in the backyard looking for four leafed clovers while opportunity is knocking on the front door.

2. Simply showing up is half the formula to success. Exercising self -discipline in your time management is vital. You cannot maintain bankers hours and expect entrepreneurial pay. Show up whether you have something to do or not. You will create your own opportunities by simply being “in play”.

3. Be your first and best client. The power you have by owning the products and services you offer is beyond description. Not only will it be one of the best financial moves you can make, but you will have the power of belief in what you do working in your favor.

4. Effort, at times, defeats itself. If you maintain a consistent, steady pace of doing first things first and last things not at all, then you are on a path to success. By forcing everything, you can come across as desperate. Keep the pace, let it flow, be patient, and success will follow. And demonstrate what is perhaps core to one’s success; self-discipline. A definition I picked up from Brian Tracy a while ago states that self-discipline is “The ability to do what you’re supposed to do, when you’re supposed to do it, whether you want to or not”

5. It really is a numbers game. As much as we want to believe that there is such a thing as “working smart”, the fact remains that successful advisors simply make more calls and see more people. Don’t let your mind trick you into believing it’s otherwise. There is no substitute for hard work.

6. “Fatigue makes cowards of us all”. This quote says it all. If you are not well rested, are ill or lack energy due to little or no exercise, take care of it. Prospects buy strength and push away weakness. You need to be in top shape and good health to convey a positive and impacting impression. Get adequate rest and put yourself on a routinized exercise schedule.

7. You are being judged by first impressions. The saying “You can’t judge a book by its cover” does not apply to us. Prospective clients are judging us the moment we meet them. Dress impeccably, drive a clean, well maintained car and be sure your props (pens, presentations, etc.) are first class. A common theme I have is, “Do it first class or don’t do it at all”

8. Believe, even when you don’t want to. Much of your success in anything will be predicated on your ability to maintain a positive mental attitude. Believe in your industry, believe in your firm, believe in your services and believe in yourself. You can choose to believe or not to believe (being indifferent is not believing). Believing, even when it’s difficult, will open doors and attract the opportunities you want where not believing closes the doors. A paranoid is someone who believes the world is conspiring against them. Be the opposite. Believe that the world is conspiring for you. You’ll be amazed what this simple change in perspective will do for your results. Besides, given the choice, it’s a lot more fun.

9. it’s not what you say, but how you say it. Many of us spend agonizing time trying to figure out the catch phrase or line that will wow the client. Worse yet, many write letters and e-mails thinking that they’re selling. It’s not entirely what you write or what you say, but the confidence in how you present yourself that will win over the prospective client. This is a proven fact that is counter-intuitive and must be worked on by all of us.

10. You become and get what you consistently think about. Any thought you carry repetitively, will become your reality. This phenomenon was written about by Napoleon Hill in his 1937 book “Think and grow rich” and has been the secret of every motivational speaker/writer ever since. The picture in your mind’s eye of how you look, your level of success and your lifestyle, will eventually become reality if it isn’t already. If you want to make $500,000 per year, then wipe out any thoughts in your mind with other figures. Think the unthinkable, dwell on it daily and your belief will create its own talents to get you there. Only you control this. Is your mind disciplined enough to hold the pictures of what you want to become rather than what you don’t want to be? All successful people know this universal key to success and practice it daily through prayer, meditation and visualization.

Though I wrote this close to 20 years ago, the basic themes still hold true today. For the new advisor entering the business with the right mentoring and proper mind-set, there has never been a greater opportunity.

First Gen Silos and Next Gen Integration

There was a recent study released by Schwab about advisors turning independent. We all know the facts about RIA’s being the only financial services channel experiencing growth. But what struck me most about this study was the difference in perceptions between those advisors under age 40 and those over age 40. In this Investment Advisor article on the study, it says, “Younger advisors, in particular, show even more proclivity for independence, with 65% of those surveyed under the age of 40 finding the idea of becoming an RIA appealing, compared to 43% of those aged 40 and over”

Those older advisors grew up in a silo’d business. Elite Life producers over 55 years old generally sell life insurance only and don’t want to clutter their practice with securities or investment management. Investment advisors of all stripes (wirehouse, IBD, etc.) over age 55 are the same with their practices not wanting to get involved with insurance. And fee-only RIA’s want nothing to do with anything that generates a commission which basically cuts them out of the commission based world altogether. Why is this?; regulatory silo’s. It has frankly been too difficult to integrate these practices onto a single consolidated architecture due to FINRA, SEC and State Insurance Departments forcing each into their respective corners. So what has emerged is a fragmented set of models where one advisor has his/her BGA with “Brand X”, his/her B/D with “Brand Y” and his/her RIA clearing through “Brand Z”. None of them integrated or on the same platform.

Having recently completed reading the Steve Jobs book, it struck me how similar this fragmented financial services model resembled the open architecture of Microsoft and the PC where the software, hardware and internet services are not integrated. The user can choose from multiple suppliers which at first glance seems like an advantage. This as opposed to the Apple model of a closed and fully integrated architecture.  

For the longest time, I was a dedicated Microsoft user over the years buying Gateway, Dell, IBM and SONY hardware along the way. I disregarded the Apple products as foreign and different for a sub-culture user. But when I bought i-Pods for my now 15 year old triplets a few years back, I thought they were pretty cool and got one myself. Then came the i-Phone. At first I was suspect about it because I thought my blackberry keyboard was easier to use. But at the urging of my kids, I made the switch a couple years ago to the i-Phone and never looked back. Then as I was rewiring my home AV system, my tech guy suggested using Apple TV, so now I have my i-Tunes libraries, movies, pictures, home videos all integrated with the ability to play anything on any TV or speaker with a controls through an app on my i-Phone. And on business trips, I used to haul around a heavy laptop. Not anymore. Now I carry my trusty i-Pad which does all that I need on a trip. And I can get to all of my stuff anywhere, anytime through i-Cloud. Bottom line, I’m hooked on the closed Apple ecosystem and will not leave.  

Apple as a closed architecture could be perceptively at a disadvantage, but it allows for a consistently higher quality product and seamless user experience. I had thought the younger generation would object to closed systems, but apparently not. It appears that the early adopters of the current Apple architecture are the younger generation and the holdouts are generally more mature still holding onto their blackberry, PC and flip phones.  Could it be that the next generation of financial services platform is on a closed architecture where the RIA, B/D and BGA are seamlessly integrated? One client account form, one application, one place for client and advisor to see a consolidated view of the entire portfolio through front end single entry.

Just as the under 40 set is more open to a different practice model than their more mature peers, I also believe they will gravitate  away from the silo’s towards a fully integrated architecture enabled with high quality and state of the art technology.  And by fully integrated it is a given that proprietary products will be a thing of the past and I’m talking about open access to all products and services within this closed and integrated model. Those with retirement on the horizon won’t want to risk changing platforms just as I was resistant to get off the Microsoft Windows system and onto the Apple architecture. But I believe those who are still growing their practices will demand a better more fully integrated experience. With the likelihood that a new "harmonized" fiduciary standard gets enacted breaking down the barriers prior set by regulatory silos, true convergence and integration of the models may finally happen. It may not be here yet, but trust me, it’s coming soon.   

The Times They Are a-Changin'

Impute. It’s a word not often used in day to day language. So when I read it as the third and final of 3 points (empathy, focus, impute) for “The Apple Marketing Philosophy” early on in the Steve Jobs book, it caused me to think about it. Most firms have mission statements with obvious and overused words like excellence, vision or quality. But impute stands out and really says it all.

The Steve Jobs book has been sitting on my night stand for several months now. I bought it obviously because I wanted to read it. But with about 600 pages looking more like “War and Peace”, it was easier to pick up the i-Pad and read current events or whatever was on my Flipboard at the time. Then in my discussions with multiple CEO’s and business leaders over the past couple months, invariably the Steve Jobs book comes in; “I’m reading the Steve Jobs book, and…” or “Have you read the Steve Jobs book?”. So on a rainy Saturday morning in Texas (no more drought!), I set the i-Pad down and began reading the book. I was captivated after the first chapter and before I knew it, the day was over and I had cruised through over 300 pages (I took my time). Steve Jobs was one weird dude, but was he ever driven and with his “reality distortion field” he set wild expectations that made what seemed impossible, possible.

“Impute” emphasized that people form opinions about a company or product based on the signal it conveys. Basically, people do judge a book by its cover.  You can have the absolute best product or service, but if it is packaged or presented poorly, that’s it. You’re done. So naturally, I began thinking about how this applies in our business today as various segments of the industry are positioning for relevance and success as regulations, consumer attitudes/behavior and the underlying economics of the business models are dislocated.

It’s no secret that the financial services industry and those in the business of giving financial advice have a public perception at all-time lows. I read where financial advisors rank lower than car salesmen in public perception while the media has continued to lock onto all of Wall Street being one in the same; crooks. With the message that we as an industry are sending out, it’s no wonder it isn’t worse.  In a Registered Rep magazine survey of financial advisors, more wirehouse advisors (84.7%) described their services as “financial planning” than RIA’s (only 73.9% of RIAs use that description). Of those who practice as RIA’s, only 30% actually merit the title “Financial Planner” since all they do is investment management. RR mag article . What we “impute” is a very confused message.

I think it comes down to this; if the only positive perceptions the public has of us are 1) that we as an industry are advising based on what is in the clients best interest (fiduciary standard) and 2) that the regulators are holding us to it (SRO), then it should be so. Whether it’s Merrill Lynch, Cetera, Mass Mutual, United Capital or the boutique RIA, we’re all in the business of selling trust. The products we use to fulfill that trust are basically commodities that our clients can get anywhere, even online. But they can only get trust in a one on one relationship with a qualified, properly trained professional who has their best interests, not that of the advisor, as front and center. I always found it odd that financial firms advertise products to the general public. My alma mater, AXA, had an ad with a gorilla to promote annuities. Complete flop. Why? It placed the focus on the wrong thing. They would have been better to advertise the professionalism and client focus of their advisors while pitching products through 3^rd party channels in industry publications (which they do). But they wasted millions on an ad campaign with the wrong message.

All the special interest groups representing each faction of the industry, (NAIFA, NAPFA, FPA, FSI, SIFMA) have a competing interest to protect their existing turf without realizing that, as they say down here in Texas, “that horse is already out of the barn”. What we “impute” and what is expected in the marketplace is that we are held to a fiduciary standard and that the feds are holding us to that standard. There may be some temporary victories for some special interest groups. I still can’t understand how indexed annuities continue to be unregistered products. But in the end, I think public perception wins out regardless of current regulations or SRO’s. The heavy trend is a movement away from product push and commissions towards fees and broad based product and service offerings. It’s happening without the regulations or SRO’s forcing it. When we finally evolve and get to a point where all advice is held to the highest standard, it’s then and only then that we can rise up as a true profession and be perceived in a more positive light. It is all about what we impute…"for the times, they are a changin'”

Fear the Known

Tom started his career in the mid 90’s with a large insurance company focused on the 403(b) market targeting K-12 teachers. He received great training and as he became more experienced, he evolved out of the TSA market and began using fee based asset management accounts for affluent clients. Today he manages nearly $100 mill in AUM, yet he remains affiliated as an IAR with the insurance firm B/D he started with. At one time when he sold only the proprietary products of his firm, the relationship worked. But today, not only does he not recommend their products, the insurance company seems to have been cutting expenses and benefits for over a decade to a point where there is really no reason for staying. All the relationships he had with the firm which was the cultural glue of the company had been downsized and let go. So why does he stay? Fear of the unknown.

Melanie got her career start with a major wirehouse but in short order, became disenfranchised with a culture that hatched the “Boom Boom Room”, so she moved her business to a small B/D. Her practice has grown, but the small B/D has not. With just over 200 advisors at the B/D, she has real concerns after reading about multiple like sized firms unable to compete and simply closing their doors. But with the business moving so quickly, she is unsure about what to do. She has a fear of the unknown.

Jim broke into the business 20 years ago advising small firms and individuals on their retirement plans. The B/D he was with seemed to get in the way more than help. About 10 years ago, he made the decision to drop his FINRA license and move his practice to fee only. Today he is a solo RIA practitioner with $90 mill in AUM with no succession plan in place despite the fact that he wants to retire soon. He knows he has to adjust his practice with the SEC and State registration changes taking place. And he has read where the costs of compliance going forward will increase in multiples, a cost he cannot absorb and remain in business. Yet, he remains a solo practitioner and is unsure what to do. Why? Fear of the unknown.

I talk to quite a few practitioners in the business like Tom, Melanie and Jim. There seems to be a common theme among most of them. They are part of a platform or model that is being dramatically impacted by the economic, regulatory and cultural shifts taking place in the business. They are unsettled and concerned and will generally acknowledge that their practice model and/or firm affiliation will change at some point in the future. But they keep on keeping on. They don’t know what else to do. And that’s understandable. 

As the business consolidates and tries to anticipate Dodd-Frank, there are but a handful of firms with a strategic vision investing in growth for the future in a surviving business model. Most are cutting valuable personnel, eliminating support and basically treading water in hopes that nothing changes. They tell themselves, “the threat about this fiduciary thing is going to go away, right?” and “They’re not really serious about an SRO for RIA’s,  are they?”,  “The shift from commissions to fees is just a fad and soon everything will be back to normal”. “If only things just stayed the same”…they keep telling themselves.

Fairly soon, doing nothing will not be an option. It will come down to this: change or be changed. It’s time we stop fearing the unknown, do our homework and make proactive moves that position our practices to be in a position to take advantage of the largest generational transfer of wealth our country has ever seen. It’s time to turn the fear of the unknown into the fear of the known. If you find yourself stuck in an outdated model that has no strategic plan for the future, fear it! There was a time when I told advisors thinking about moving their business model that “the devil you know is often better than the one you don’t”. Not anymore. 2012 is the year where a great many unknowns will become known and it will be more clear who the survivors will be. I also think it will be a year where the greatest amount of movement from one model and/or firm to another takes place. Study those unknowns and you’ll soon find that what you now know is even scarier.

“Why do people persist in a dissatisfying relationship, unwilling either to work toward solutions or end it and move on? It's because they know changing will lead to the unknown, and most people believe that the unknown will be much more painful than what they're already experiencing.” -Tony Robbins

“People don’t want their lives fixed. Nobody wants their problems solved. Their dramas. Their distractions. Their stories resolved. Their messes cleaned up. Because what would they have left? Just the big scary unknown.”  -Chuck Palahniuk

People have a hard time letting go of their suffering. Out of fear of the unknown, they prefer suffering that is familiar"

A Triple Threat: The Tribrid

The colorful and often controversial owner of the Dallas Mavericks, Mark Cuban, writes a blog that I read from time to time. His first post of the year titled “You don’t live in the world you were born into” makes a point that what we see as new and cutting edge today will soon be outdated and forgotten:Blog Maverick  The pace of change is not steady, but gets quicker every year. I grew up with vinyl records, then 8 track tapes, then cassette tapes, then CD’s; each making the prior one obsolete. In fact, I haven’t purchased a CD in years since I now get all my media electronically. (Yet, for some odd reason I hold onto my vinyl record collection from my college years) Change is quickening everywhere, but one business that is kicking and screaming to avoid it is the financial services industry.

For the longest time, well into the 90’s, financial services fell into one of 3 regulatory silo’s driven by products manufactured and sold. You got your investments from your stockbroker regulated by the NASD (now FINRA), your life insurance/annuities from the agent representing his “primary company” regulated by the state insurance departments and if you got advice, it was from the investment advisor regulated by the SEC. It was all based on the products you sold which were very separate and distinct in an era gone by. I don’t think any of us would say the business is the same as it was in the “world you were born into”, yet the regulatory bodies have remained the same. These silo’s have shielded any real change in the business as the world has evolved around them. Agents are selling asset management products wrapped as variable annuities, Brokers are selling asset management wrapped as mutual funds and RIA’s are selling asset management wrapped as a fee only account. And in many cases, each is selling all 3. It’s no longer about the products as they’ve become more similar than dissimilar. Today it’s more about how the products are recommended. Rational change is being shielded by“8 track tape” regulations in a world of cloud technology. And as the DOL, the SEC, FINRA and to a lesser extent, the state insurance departments attempt to bring regulations into the current world, each constituency is fighting to keep the status quo. Advisors don’t want FINRA to hold them accountable to their fiduciary advice. Brokers don’t want a fiduciary standard to apply to their suitable sales and insurance agents don’t want any of it at all.

When a customer is receiving personalized investment advice, whether it’s from an RIA selling (yes, it is selling) a fee only account, a broker selling a mutual fund or an agent selling an indexed annuity, they don’t really know who is regulating and protecting them from the bad guys. They just assume you’re recommending what is in their best interests. If you were to describe what a fiduciary duty is to them, they’d likely assume their agent/broker/advisor is held to that standard. But as we know, it simply isn’t so.

You can fight change only so long before it eventually wins out.  I don’t have a crystal ball, but my gut tells me this is the year that the industry will point to as one where regulations finally become aligned with the interests of those who they are in place to protect, the buying public. What IF the fiduciary standard was harmonized among all those who give “personalized investment advice” that is no less stringent than the current SEC definition. What IF the DOL pulls IRA’s and perhaps 403(B)’s (in insurance terms, TSA’s) into a fiduciary standard. What IF the SEC finds a way to interpret indexed annuities as registered products to be regulated by FINRA. What IF RIA’s get the same SRO as B/D’s with FINRA. Frankly, I don’t think any of these are If’s so much as whens. It may not all happen this year, but I think it will eventually happen.

So how does this change the financial services landscape?  I think in BIG way. When brokers began moving to fee based accounts, it gave rise to the new hot model known as the Hybrid combining support and services of B/D’s with that of RIA’s. There is a trend for fee only RIA’s to find a B/D to diversify offerings as there is the movement by commission based brokers to move towards fees. But what happens to the 3^rd wheel in this discussion…the insurance guys? If…I mean,  when these regulations capture all those who give advice under the same regulatory roof, it gives rise to the next evolution of a business model; The Tribrid. Yup. A B/D, RIA and a BGA (Brokerage General Agency) all aligned and on the same level of regulations under a fiduciary standard, all on a consolidated statement/account within the same entity. There are huge amounts of variable annuity assets held in IRA’s and TSA’s that may be held to a fiduciary standard. This will force that segment to move from commission to fee based and materially change the current distribution system for those products. We’re already seeing insurance companies dump their owned B/D’s in favor of focusing on product manufacturing See: Ins B/D's going way of VHS? Where will the best of them go?

I’m sure many are thinking, not gonna happen. But you don’t live in the world you were born into. It’s time for the industry to stop holding onto the past and move towards what is truly in the best interests of our clients. We’ve seen the evolution of the  silo’d B/D’s and RIA’s towards the Hybrid.  Add BGA’s to the mix and I believe the Tribrid is the next evolution yet to be seen.