John Lefferts' Blog

Wednesday, April 11, 2012

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