With all the "Back to the Future" posts were seeing these days, I thought I'd take a crack at it here. This is a speech I've written for a financial services industry conference after being awarded financial services company of the year honors playing "Carnac the Magnificent" for the moment....
"At today’s 2020 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 2015 may seem like it was just yesterday, as we now 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. With 2020 vision...no pun intended...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 here 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 an all time low. I suppose that means for those of us still standing, it’s a good thing.
So let’s review how we got here. I guess it makes sense to start by discussing the Wirehouses, Indy B/D, insurance and RIA models and how they ended up where they are today since those silo's and labels no longer exist. 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, redundant and highly restrictive, but each had their own set of standards and rules despite overseeing essentially the same thing; practitioners giving personalized investment advice. The old models where product manufacturers maintained their own tied sales force went the way of proprietary products. Today in 2020, I can't think of a single distribution platform or model owned by a product manufacturer. It's no longer about what you recommend, but how you recommend it. As we now know, that's what brought the silo's down.
The major wirehouses seem to have changed the most. I think what history shows is that once they moved from client focused partnerships to publicly 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 severe damage was already done looking today like a shell of their former self. You would have thought that we learned about banking and wirehouse marriages from the Citigroup-Smith Barney debacle decades 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. The flight to independence changed all that and it’s hard for them to justify lower payouts with little to no additional 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 along with extremely thin profit margins, the shakeout over the past decade has been brutal. Add to that the elimination of soft money deals and increased compliance costs and it's no surprise that only an handful of the 4,000 B/D's in 2015 exist as stand alone's today. Insurance company owned B/D’s couldn’t shed them quick enough and PE firms having seen LPL’s early success thought that collecting and rolling up 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 early winners having a head start on structuring under the fiduciary standard by which today all models must operate. But how did they ever think that the rest of the industry would be regulated identically as fiduciaries but RIA's would remain separate 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. The high tide has raised all ships.
For our insurance based models, I suppose we should have seen it coming with what had taken place in Australia and the UK. Once the US 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 the 20% commission limited partnerships of the 80’s…and good riddance. 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 prior 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, Aegon and Allianz are no longer prevalent here. 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 slack 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 solutions. Who woulda thunk?!
When we set out to build our model back in 2015, 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 integrated straight through processing and real time technology while leading with comprehensive and modular financial planning. We earn revenues through 50bps on assets under management while we charge a retainer for the type of financial planning services our clients need. The combination of reasonable AUM fees and retainers has increased our revenues per client to all time highs while being a better model for the consumer. 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 2015, 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 had 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"
"You can't connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something - your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life"