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
