Who Moved My Cheese?...Is It Top Down or Bottom Up?

I’ve been a follower of Ken Blanchard and Spencer Johnson's books and teachings since the One Minute Manager came out in 1982 (hard to believe it’s that old!). They always have a common sense message for the business community told through stories. With all that is going on in retail financial services, it has caused me to re-look another of their popular books “Who Moved My Cheese”. You may recall it was about change in one's work and life and four reactions (fear, shock, anger and grief) to those changes by two mice and two "little people," during their hunt for cheese. They live in a maze, a representation of one's environment, and look for cheese, representative of happiness and success. One day they went to the spot in the maze that always had cheese and it was gone (hence the title “Who moved my Cheese”). One of them went on to look for cheese elsewhere while the other, with fear of the unknown, does nothing. The brave one, hoping his friend would change his mind and go out to look for new cheese, left a trail of writings on the walls of the maze (ie “Handwriting on the wall”).  The writings are meant to be lessons:

• Change Happens
  • They Keep Moving The Cheese
• Anticipate Change
  • Get Ready For The Cheese To Move
• Monitor Change
  • Smell The Cheese Often So You Know When It Is Getting Old
• Adapt To Change Quickly
  • The Quicker You Let Go Of Old Cheese, The Sooner You Can Enjoy New Cheese
• Change
  • Move With The Cheese
• Enjoy Change!
  • Savor The Adventure And Enjoy The Taste Of New Cheese!
• Be Ready To Change Quickly And Enjoy It Again
  • They Keep Moving The Cheese.

 Given what we are witnessing today in the financial services business I honestly believe this is our “Who Moved My Cheese” moment. It is becoming eminently more clear that we’re about to see a dramatic shift in business models and their source of revenues. I’m not talking about an evolution over a period of years, but swift “turn on its head” kind of change happening as you read this. For the longest time, financial services has prospered under a product driven top down model. Financial product manufacturers made products and priced them with a “Gross Dealer Concession” or “distribution allowance” pushed down through B-D’s or agencies to sell them. The GDC/Dist. Allowance was ultimately paid for by the client in the form of commissions and/or surrender charges. But this is quickly changing from product driven top down to a market driven bottom-up model. Rather than the flow of money starting at the product manufacturer level in the form of GDC moving down the chain, it now is shifting to begin at the client level in the form of fees moving up the chain. The cheese has moved!  If/when the DOL proposal becomes the law of the land, it quickens this shift from top-down to bottom-up. And what does this mean for the traditional distribution platforms of independent and insurance based broker-dealers? It flips the value proposition on its head. Rather than the B/D or distribution entity holding the purse strings dictating the terms of the advisor relationship (What have you done for me lately?) it shifts the power to the client and advisor (This is what we need from you to support our clients). The vast majority of distribution platforms are either unwilling or unable to make changes to survive, setting up what I believe will be a business version of musical chairs as it morphs and consolidates.

“Sometimes, Hem, things change and they are never the same again. This looks like one of those times. That’s life! Life moves on. And so should we.” ― Spencer Johnson, M.D.

We’ve seen a number of companies anticipating change and adapting to it following the “handwriting on the wall” lessons above. They’re primarily product manufacturers coming to the realization that owning distribution is no longer a viable model without substantial structural changes and investment. That was true with AIG selling off their Advisor Group Indy B/D and more recently with Met unloading their career life insurance agency force they’ve held for about 150 years. And Met practically gave it away for $300 mill while saving $250 mill per year by doing so. Can you say “hot potato?” What did Met and AIG see? The current top down model is fractured and neither was willing to make the structural change and investment to fix it. And they won’t be the last to punt.

So, does this all mean that the entire business is transitioning towards the RIA business model and we can all dump our B/D? Wow, you mean we won’t have to be supervised by the terms of FINRA and be subject to their harsh discipline? Not so fast. I think the business model of the future looks more like a law firm where the focus is on client billings driven by partners in various disciplines of financial planning. But I don’t think FINRA goes away. They simply adjust to the new environment and supervise RIA’s as well by shifting resources from overseeing the shrinking universe of B/D models. Yes, FINRA’s cheese has been moved as well.

I think many business models are past the stage of fear and perhaps even shock. But too many are taking a wait and see attitude to the issue of making changes for future survival and that is deadly. Remember, the quicker you give up the old cheese, the sooner you can enjoy the new cheese. You can do this by selling out as did AIG and Met, or making changes and investments for future growth as are firms like United Capital and Dynasty Financial. They have realized that the cheese has moved from top down to bottoms up. It will be interesting to see how advisors, brokers and the various business models face this existential crisis. 

“He knew sometimes some fear can be good. When you are afraid things are going to get worse if you don't do something, it can prompt you into action. But it is not good when you are afraid that it keeps you from doing anything.” 

―Spencer Johnson M.D.