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don’t live in the world you were born into” makes a point that what we see as new and cutting edge today will soon be outdated and forgotten:Blog Maverick The pace of change is not steady, but gets quicker every year.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.