John Lefferts' Blog

Wednesday, October 31, 2012

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  or e-mail to  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