John Lefferts' Blog

Tuesday, April 29, 2014

Big Tent-Little Minds

A trial attorney can work on contingency and will at times get up to 40% of the funds awarded if ruled in their favor. A divorce attorney asks for a retainer and applies an hourly fee to draw it down as work is done. An employment law attorney often charges a flat fee to review documents. These are just a small sample of different forms of compensation in the legal profession. The Financial Planning industry often points to the legal profession as one to aspire to for recognition as a TRUE profession compared to the fragmented collection of models we in financial services are often viewed as today. Yet, seldom does the legal outsider hear bickering within the ranks of attorneys about their forms of compensation. What defines them as a profession are their qualifications, specialized knowledge and what they do, not how they get paid. The legal industry maintains a “big tent” which helps legitimize them as a profession where it often seems like the financial services business is made up of multiple houses of worship excluding anyone who does not believe as they do. As I was quoted in the closing line of this Investment News article, “This partisan bickering has got to stop. It doesn’t do any good for the industry”

The American Bar Association is open to all attorney’s and non-attorneys who work in the legal profession. It’s a big tent. Contrast this to the financial planning Industry struggling for identity. When it was announced last week that Met Life was to become a sponsor of the FPA, it stirred a debate and criticism rooted in the concern that Met manufactures and distributes some products that have a commission. Apparently some in our business believe that one cannot be compensated by commission and fulfill a fiduciary duty to their clientele. In the article referred to above, the Met affiliation was called a “conflict of interest” and taking money from “the other side”. The other side? Really? This closed minded “my way or the highway” thinking is exactly what is keeping the industry from earning the legitimacy it so badly wants. Insurance planning and risk management are core subject areas for CFP’s and yet there is a vocal segment of the profession not wanting to have anything to do with it. I’ve actually heard some in our business say “I don’t believe in insurance” which always puzzled me since I never viewed what we do as religion.

I applaud the FPA opening the tent and much like the American Bar Association, their job is not to pick and choose which sort of professional to support, but to advance the entire profession. Like most of you, I get angered when I see an insurance only licensed salesman peddling indexed annuities at 12% commission calling themselves financial planners or investment advisors. I also get miffed when I see a “fee only financial planner” advertise their sole value proposition as being how they are compensated while all they do is not really planning and giving advice, but simply slapping a charge on an already professionally managed account. We shouldn’t average down the industry identity to the lowest common denominator. Hopefully in time, regulations will take care of that through a universal fiduciary standard for all who give “personalized investment advice”. What we need to do now is support the FPA in advancing the profession based upon what we do and not how we’re compensated. Once we gain the hard earned recognition as a profession by coming together, we can work out our differences as we evolve and grow our through our collective strengths.

 “There are not more than five musical notes, yet the combinations of these five give rise to more melodies than can ever be heard. There are not more than five primary colours, yet in combinationthey produce more hues than can ever been seen.There are not more than five cardinal tastes, yet combinations ofthem yield more flavours than can ever be tasted.”
― Sun TzuThe Art of War

-Bertrand Russe

 "People around the world, we have a problem. Far too many of us are easily offended – and demanding frequent apologies. This clogs up the diversity roadways, and brings traffic on the road to inclusion to a crawl."

 "I have found that an environment that is welcoming and highly inclusive creates increased levels of trust, which in turn results in higher levels of productivity and better outcomes."

Wednesday, April 16, 2014

If it looks like a duck and quacks like a duck, is it a ?

As an Oregon State alum, the last thing a diehard Beav fan wants to be mistaken for is its archrival University of Oregon Ducks. Yet, in parts of the country where there is less familiarity with the West Coast (ie everywhere Oregon is pronounced as Ory-gone instead of Ory-gun) and I tell them I went to school at Oregon State, they say, “oh, you’re a duck” to which I sheepishly respond, “no, we’re the other one”. Similarly, every year when the financial services industry publications come out with their “Broker-Dealer Rankings”, I am dumbfounded by the make-up of the lists where it seems like folks who should know better place proprietary insurance business models as independent B/D’s. Categorized by # of reps, GDC, revenues, etc., you naturally don’t see wirehouses on the lists. Nor do you see large asset managers and RIA’s. But, as an example, in this year’s Investment News ranking of “Largest B-D’s”, 70% of the top 10 are captive statutory employee based insurance models. LPL is clearly the largest Indy B/D and appropriately ranked,  but the remainder listed in the top 10?...not so much. Among those in the top 10 on this list are Lincoln Financial, Allstate, Ameriprise, Northwest Mutual, AXA Advisors, Metlife and Mass Mutual Life. I’m not saying that they are inferior or undeserving of any list, just not this list. And I’m not singling out Investment News here since all the industry pubs such as Financial Planning, Wealth Management and On Wall Street all rank the same way.   

On this particular IN list, I noticed at #24 listed is “Signitor Investors, Inc.” which is also a statutory insurance based business model…until recently. You may have read this article from IN announcing that John Hancock (an insurance company) will be terminating its health and insurance benefits for producers where the byline states “Signator moving from career agency to IBD model”. Now, this is an example where an insurance based model like those named above is actually appropriately listed as an Indy B/D.

Why did John Hancock make this change to its distribution model? My educated guess is that they realized some time ago that due to the great expense of maintaining a “tied” sales force coupled with the probability that regulatory changes towards a fiduciary standard will render the economics of a proprietary model unsustainable, they got ahead of the curve and made the hard decision to decouple manufacturing from distribution. I’m pretty sure most who glanced at this article thought it to be a non-event. But from my perspective, this is a fairly big deal. I’ve long predicted that the proprietary based models over time are unsustainable and other than several insurers selling off their B/D’s like ING or Hartford, none have morphed from career distribution to becoming completely independent. A risky and bold but admirable decision. I have to believe that other distribution models like them are watching this carefully. Will they lose all their advisors to “brand X”? Are there legal issues? Can they pull this off?

It’s clear that the financial press is somewhat unsure how to categorize the large insurance based distribution models as the industry has evolved and I can see why. Gone are the silos of insurance only, stockbroker only, Indy only, etc. Yes, we have harmonized as an industry without the regulators doing anything. If it looks like a duck and quacks like a duck, then it must be a duck…right? Just don’t call this proud Beav a Duck!