"Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth"-Marcus Aurelius
These quotes seem to reflect the age old truisms about everything we see and hear as being a matter of perspective. And depending on one’s circumstances at any one point in time, those perspectives often change. Like many idealistic young people, I recall holding some rather liberal views back in the day with only the perspective of a student not yet engaged in the life of building a business. Today after having had a long business career, my perspectives have definitely changed much like the Churchill quote indicates. We are all guilty of hearing what we want to hear and seeing what we want to see colored by our values and life experiences. Yet, despite the existence of multiple perspectives, the current media narratives tend to be framed as extremely one way or another. One would think listening to the political news that you are either an extreme right winger or an extreme left winger while the reality is that most of us fall on some spectrum in between. I bring this up as a backdrop to a discussion about one of the most impacting drivers of change in the financial services business; regulatory reform and its impact on retail business models.
In the debate about where financial services regulations should be headed, the narrative has drifted away from what is best for the clients and the industry to which business model is superior to the other, RIA or Broker. Just as the noise in politics tends to be loudest from the extreme positions, the same has occurred within the financial services industry. There was a study done by Duke University this past fall that coined the term “Belief Superiority” where researchers found that those at the extremes of the political spectrum felt most superior about their beliefs. WaPo article on Belief Superiority Sound familiar?
In our business it has been framed as the self-righteous fee onlys against the greedy commission onlys and both have a high degree of “Belief Superiority” going on. While the debate among the extremes plays out in blogs, tweets and industry articles, the business models are organically drifting towards the middle. The Hybrid model of fees and commissions has become far and away the fastest growing business model with no sign of slowing down. The narrative that all FINRA regulated brokers are some mutation of Gordon Gecko simply no longer applies (Although the “Wolf of Wall Street” movie keeps perpetuating the myth). The vast majority of those formerly known as “stockbrokers” earn most their compensation through fees today. The evil empire as wirehouses have been portrayed no longer exists. This while some former “fee only” advisors have come to realize that marketing one’s services based on a differential advantage of how they are compensated isn’t exactly the ticket to success. They missed the class on Marketing 101 that taught us “in the absence of value, price is always an issue”. I know some high end insurance practitioners who disclose ALL their compensation often well into the six figures on a singular engagement and their clients do not object as they see value. There are also many "fee-only" advisors who have dropped hourly and/or flat fees being forced to charge only on AUM since they could not demonstrate value otherwise. With all the debate about whether the business should “harmonize” or not, it is happening organically despite the objections by the industry extremes. By the time regulations catch up, and I hope they do, it’s my suspicion that regulatory change may then be a relative non-event.
- A single governing body holding us to a fiduciary standard no less stringent than the SEC definition today.
- A singular definition of Fiduciary standard whether it’s from the SEC, FINRA or DOL
- A singular SRO to hold us accountable to the fiduciary standard and keep the bad guys out. Frankly, I don’t care if it’s FINRA, the SEC or some new SRO...just keep it down to one. It simply makes no sense for duplicate regulators, regulations and multiple standards of conduct
- Place all who give "personalized investment advice" which includes RIA's, Registered Reps and Life and Annuity Insurance Agents, under this single fiduciary definition and singular SRO
- A complete separation between product manufacturers and those who give advice. In other words, if a company is in the business of building products like insurance, mutual funds, TAMPS, etc, they must distribute their products through a non-affiliated organization to avoid conflicts of interest. This addresses the need to eliminate proprietary product sales.
- I’d like to see the continued trend towards fee compensation to include annuity and cash value life insurance products. I believe annuities and life insurance are an important part of one’s asset classes/allocations and should be included accordingly.
- I’d like to eliminate anyone holding themselves out as a Financial Planner if all they do is peddle indexed annuities or sell asset management (or any singular product sale whether it’s for commission or a fee)
- I’d like for anyone holding themselves out as a Financial Planner to be required to hold a credential of CFP® and/or ChFC and be held accountable by a single governing body to insure adherence to the six step process.
This is what I would like to see given my unique perspective. Will it happen?...probably not. There are simply too many special interests at the extremes giving conflicting information to lawmakers causing "paralysis by analysis". We know that the insurance industry and SIFMA are trying to water down the definition of fiduciary if not delay it altogether under the argument that it will increase the costs and reduce access to financial products and advice. Does that hold water? Well, yes it does. Just look what happened in the UK and Austrailia when their regs changed. The good news is that it weeded out the riff-raff, but also dramatically cut the number of advisors catering to the middle and low end markets. That doesn't mean we shouldn't pursue a harmonized fiduciary standard, just that those of us who would like it to happen need to be careful arguing that this defense has no merit when it in fact may hold some truth.
As the extreme voices of the industry continue to confuse, obfuscate and delay what I believe should happen with regulations, the forces of change go well beyond what and when the regs may become enacted. The momentum towards fees, consumer need for advice, technological advances and new economics of the business will keep on-keep’in on continuing to evolve the retail business models like never before. Next week I’ll comment on the impact of new technology on retail business models. And remember, everything I write or say is opinion, not fact and the way I see it is perspective, not truth. I’d be curious to hear your opinion and perspective…