I recall when Glass-Steagall was repealed back in 1999. The year before, Citigroup challenged the regulation by merging with Travelers Insurance (who had already owned Smith Barney) essentially prompting the Financial Services Modernization Act of 1999 to come into being. It was thought at the time that this harmonized model was the future of the business and there would end up being about 20 combined banking, insurance and investment worldwide giants running one stop shop branches. We now know this did not happen and the combined insurance, banking and investment experiment didn’t work. But why? Some blame bad management and others think it was simply too unwieldy to merge the different cultures. But from my perch, while the repeal of Glass-Steagall regulations allowed insurance, banking and investment models to merge or “harmonize” at the holding company level, the regulations at the point of sale (FINRA/SEC/State Ins.) remained in silo’s. The result was an inability to truly merge these business models into a one stop shop at the retail distribution level. However, today we are potentially facing a big change here. What if regulations do harmonize and everyone giving “personalized investment advice” are held to the identical standard presumably with the identical regulatory entity overseeing it. And how would that impact the future of financial services business models?
Back in the late 90’s when the Citi model was being assembled, the evolution of stockbrokers moving towards RIA styled AUM and insurance agents morphing into financial planning was in the early stages. But today, 17 years later, the momentum for convergence is quickening. By the end of this year, it is expected that 75% of industry compensation across all channels will be fee-based. This past March, Northwestern Mutual historically known as a life insurance cult, bought LearnVest to help increase its reach in the financial planning business where they already deliver 400,000 plans a year. And take a look at Investment News ranking of the largest independent B/D’s. In the top 10 ranked by revenue, you’ll find platforms historically known for insurance such as Lincoln Financial, Northwestern Mutual and AXA Advisors near the top of the list. The truth is, the industry isn’t just harmonizing…it’s already harmonized! Regulations are simply playing catch-up.
Most people I speak with who are “in the know” on the DOL harmonization, which covers brokers, advisors and insurance agents, believe it will get done in some form unless lobbyists are able to stall it further. It’s also speculated that the SEC is letting the DOL take the beach first and will follow soon after with a similar set of regulations. And to the dismay of those who dropped their securities licenses to get rid of FINRA, it’s wishful thinking that they harmonize the regulations but don’t harmonize the regulator.
For many models, it’s really not a huge deal since the majority of business they’re doing is fiduciary based anyway. 70% of the business that wires do today is in fees and in time, it could easily get close to 100%. However, there are 3 segments that will be negatively impacted the most unless they make big changes soon:
- The small one person RIA which represents about 70% today will need to find a larger firm for compliance/operational infrastructure since it’s going to be too costly to go it alone.
- The small Independent B/D (the 4,000+ not large enough to make the Investment News list of top 100) who lack the scale to withstand a hit from the potential reduction of 12b-1 fees, and the increase in compliance infrastructure costs and legal liability.
- The proprietary insurance manufacturer that maintains a tied sales force whose value proposition for retaining career producers is predicated on the economics of selling proprietary products.
"Change is at the door, accompanied by anxiety and fear; if you dare to open it, you may find that opportunity lies on the other side"
As is often said, change brings opportunity. For those models that are currently operating successfully as a hybrid of scale, there is the potential to leverage the existing infrastructure to take in refugees from the 3 segments listed above. But it's with a slight twist to the already popular hybrid model. If, for the first time, insurance agents are held to a fiduciary standard as is currently proposed in the DOL regulation, it opens the door for a more current “Tribrid” model to emerge.
Since leaving my gig at Lion Street where we created a tribrid model of RIA, B/D and BGA, I’ve been consulting and talking to many leaders in the industry. Some clearly see the opportunity while others are so rooted in traditional lines of thought, they simply can’t accept that the business has changed from under them. One leader at a prominent Indy B/D firm when I introduced the idea of integrating insurance into their model replied “I don’t believe in insurance”. Many in the industry continue to suffer from what I call “Groundhog Day Syndrome”. That is believing the insurance industry is still operating as portrayed in the movie from over 20 years ago. There are many “insurance producers” who have evolved into the investment and advisory lines of business and happen to find themselves trapped in a dated proprietary model. These producers will be searching for a home that fits their business.
Currently there are just a handful of independent models that can take in the insurance based refugee. M Financial, NFP, Valmark and Lion Street come to mind and they will benefit from the pending regulatory change. But the opportunity is so huge, and the landing pads so few that if a large IBD ever figures it out, they stand to profit greatly in a post harmonized environment. Additionally, most of the insurance business currently being done by IBD advisors is going outside losing a huge revenue opportunity and placing the IBD at great compliance risk. Having the outside business on the OBA does not exempt the IBD from supervising it. I think this is particularly true with the way indexed products are being illustrated and sold.(FYI-an interesting white paper in this link that supports my premise. Click where it indicates to download)
The Citigroup one stop shop model was ahead of its time and with harmonized regulations at the field branch level, it may have had a chance to work. Functionally, today much of the business operates in a harmonized way and if/when regulations remove current patchwork maze of redundant regulations, the door will have opened for a new era business model and the financial services landscape that we all grew up in will be forever changed. I believe that the tribrid model’s time has come.
"Entrepreneurs see change as the norm and being healthy. Usually they do not bring about change themselves. But the entrepreneur always searches for change, responds to it and exploits it as an opportunity" –Peter Drucker
