John Lefferts' Blog

Monday, November 23, 2015

The New Financial Services Ecosytem

“An invasive species can be any kind of living organism that is not native to an ecosystem and which causes harm. They can harm the environment, the economy or even, human health.”
You’ve probably read about certain invasive species that find their way into a new ecosystem dominating the native species for food and sustenance. The Asian Carp is one that is often cited. They were introduced into Southern U.S. fish farms in the 70’s and over time have spilled into and taken over rivers and lakes by overwhelming all other species. They are now a threat to enter the Great Lakes and it is apparently near impossible to eradicate them once they've spread.
A similar phenomenon may be occurring in the retail financial services business. For some time, each specialized discipline in the financial services business grew up in and stayed within their respective ecosystem walled off by regulations and business model style. RIA’s were distinct from wirehouse stockbrokers and indy producers were district from insurance agents. For generations, there was little crossover into one another’s turf, but those distinctions are quickly fading away. Industry harmonization has been occurring organically over the past decade and will continue with or without regulatory involvement. The heavy trend is away from proprietary commission based products and towards asset based fees, even in the insurance industry.
For some time, the purist fee only RIA segment has been very vocal about the need to hold all practitioners to a strict definition of a fiduciary standard (a viewpoint I also hold if implemented properly). This falls in the “be careful what you ask for…” category and I think they’re getting what they wished. The prevailing belief was that holding all advisors, brokers and agents competing in this space to the higher fiduciary standard would force imposters out (.ie. salespeople) thereby elevating the profession while eliminating the competitive threats to the RIA only business model. Instead, what has evolved today is that every discipline of the financial services industry is now competing within the same ecosystem with no barriers to keep one another out.
Opening up the financial services ecosystem will force model consolidation, failure of smaller indy B/D’s and further impose a separation of product manufacturers from owning their distribution platforms. But, the barriers from competition RIA’s have enjoyed are also being removed. It becomes a survival of the fittest circumstance. The new larger ecosystem will look a great deal like the former RIA only space, but with new competition from invasive species. I’m not calling former stockbrokers and insurance agents “Asian Carp” (though I’ve heard them called a lot worse), but having grown up in a “kill and eat” ecosystem, they are far more aggressive than the traditional RIA community. This is where I see the purist RIA community to be most challenged competing in this new ecosystem.
Having attended the FPA meeting in Boston this past September, I was struck by the contrast in style of attendees compared to other industry conferences such as AALU. (Yes, I know the purists don’t see AALU and FPA to be similar, but believe me, they are quickly evolving to cover the same subject matter as the industry harmonizes). At the risk of overgeneralizing, I observed that AALU is attended by a bunch of Alpha’s (male and female…but sadly, dominantly male) who are crisply suited and buttoned up, bold in demeanor and very outgoing and social. At days end, the lobby bar is always a party. At FPA, it was a more subdued. As a group (again, overgeneralizing) it appeared that they were more analytical, dressed down with more earthy casual attire and a tad less bold than the Alphas at AALU. Frankly, they appeared more nerdy and proud of it. It’s not that one is better than the other, it just struck me as different. But it did cause me to think about how, as every segment evolves to compete in the same ecosystem, the space may become reshaped.  
There have been a several industry articles recently citing the death of the “rainmaker”. The young generation being trained by our colleges and universities in their financial planning programs are not being taught the most difficult skill of all which is business development (i.e. rainmaking). Apparently they have no interest in sales and the challenges that come with it. And the “go to” pool for new young talent, wirehouses and career life insurance companies, are dialing down or eliminating their recruiting of newbies since it has become a very expensive proposition. Add to this that nearly 70% of RIA’s are solo practitioners, one wonders how RIA’s will be able to compete with the aggressive invasive species of former stockbrokers and insurance agents entering their space.
I’m not proclaiming that the legacy RIA model is destined for extinction. But I do think it will change. To compete they’ll need to be more proactive with business development while becoming broad based in product and service offerings outside of investment management. Yes, they’ll have to behave more like the salespeople they formerly shunned while offering products such as insurance and annuities they often avoided. Likewise, the former sales driven broker and agent will also see a falling out of those who cannot meet the higher standard of fiduciary. And those who do survive will need to behave more like their RIA brethren. I suppose what I’m saying is that the new ecosystem will be comprised of mutants derived from advisors, brokers and agents. Fighting this change to hold on to the way it was is futile and a waste of energy in this "survival of the fittest" battle. The sooner our various business models begin to structure and retool for the future, or mutate, the better chance they have to not only survive, but thrive in the new financial services ecosystem.
 “The secrets of evolution are death and time-the deaths of enormous numbers of lifeforms that were imperfectly adapted to the environment; and time for a long succession of small mutations.”  
-Carl Sagan, Cosmos