John Lefferts' Blog

Monday, January 30, 2012

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"

Tuesday, January 10, 2012

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 3rd 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.