As mindless entertainment, every once and a while I browse at the daily horoscope that pops up on my web home page. I admit, I don't really understand astrology much less believe it. But the one in twenty or so times it is remotely applicable to me and in a positive way, somehow, I take it as being spot on. The same is true with fortune cookies. If the message is not fitting or positive, I think we all tend to accept the reality that it has no basis in fact. But if it happens to say something like "You have great wisdom and will soon be richly rewarded", somehow, I suspend reality and actually start believing it may be true. I show my family at the table my good fortune to have picked up that particular cookie and can't wait for my rich rewards!
Lately, I've been seeing a fair amount of discussion in financial periodicals and blogs about "Buy and Hold" versus "Market Timing". Flipping channels (sounds like I have a lot of free time these days) I invariably stumble on CNBC and Jim Cramer. I admit, he can be entertaining if you're in the mood for obnoxiously loud, fast talking and pompous middle aged balding guys. Like most of these guys who pitch their systems, strategies and books, they make you feel like a stooge if you adopt the boring, time tested asset allocation based upon your time horizon, risk tolerance level and tax circumstances. They imply that it's buy and hold...no matter what, without regard to rebalancing. But I don't buy their "this time it's different...buy and hold is dead" chants and neither should the vast majority of investors. These market guru-prognosticators make quite a few predictions. And the one in 20 times they're right, the gullible media and unknowing public lock onto it. Never mind the majority of their prior predictions being failures.
Smart investing is counter-intuitive. It's as much about managing our own human nature as it is all the factual data available today even to the most novice investor. The pro's in the business who have all the experience, market data and resources behind them cannot beat the market averages the vast majority of the time. Yet the one time someone hits a market prediction right, the media and herd of investors flock toward them. My father, who is as colorful as he is brilliant, has a fondness for horseracing. He says, "I'd rather put my money on the ponies than the stock market. At least when I lose my money, I get the excitement of watching them run around the track!" As it relates to market timing, I think he's right.
The greatest benefit of a financial planner/advisor is not to choose the #1 ranked investment for their clients, but to keep them from acting on irrational emotion...keep them from hurting themselves. The financial crisis hasn't changed human nature and it hasn't changed the time tested buy and hold-asset allocation strategy in favor of market timing. But like the horoscope and fortune cookie, on the rare occasion the market timers hit the mark, our human nature is to suspend reality. And the reality is, market timing is fools play.
The entire financial services industry has been waiting for what has been termed “sweeping” regulatory change for close to a year since the fallout of the financial crisis began. It reminds me of the old Heinz ketchup commercial set to the tune of “Anticipation”. You know the lyrics…”Antici-pay-ay-tion...It’s making me late…keeping me wa-a-a-iting”... while the commercial shows nothing coming out of the ketchup bottle as it is shaken. It kind of feels the same with regulatory reform. We’ve been shaking the proverbial regulatory bottle, but nothing is coming out. And there's been a great deal of anticipation. Finally this week, it appears that we’re at last seeing the regulatory bottle start to give us some drips.
Naturally, everyone is attempting to evaluate how changes will affect their particular business, whether they be SEC or State regulated advisors, B/D Reps, insurance professionals and financial planners. From comments made by Mary Shapiro this week, it’s clear we’re headed towards a harmonized and not watered down fiduciary standard for all who give investment advice. Isn’t this what the fee only advisor has been arguing for and the B/D’s have been fearing? Well…not really. The fee only crowd had thought that by fiercely arguing to keep to the highest fiduciary standard, it would somehow repel B/D’s and FINRA, the 900 pound gorilla that regulates them. The objective?...keep them separate and as far away from the advisory business as possible. But I'm afraid for them that this may have been a gross miscalculation.
While in New York recently, I visited a CEO of a large 12,000 registered rep organization to hear his perspectives on the regulatory issue among other things. I asked, “Aren’t you concerned about the effect a fiduciary standard will have on your field force?” His response may seem surprising except to those of us who have been under the thumb of FINRA for some time. He said, “As a large highly visible organization, we’re already held to the highest standard. A harmonization will actually give us a competitive advantage and make our business easier”. I’m fairly sure CEO’s and distribution heads of the country’s largest FINRA regulated organizations feel the same way. While on paper, one would assume that a fiduciary standard is more restrictive and consumer focused than the suitability standard of care, in practice, not so much. And so I don’t completely lose and offend my fee only friends, I’m not saying a fiduciary standard is a lower one, just that there is little in place to hold one accountable to that higher standard.
In the late 90’s, I headed an initiative to transist a national field force into fee based financial planners. This involved re-licensing and retraining an entire sales force numbering in the thousands, while changing their product offerings, compensation and recognition. Because the lawyers had an absolute fear of the field force holding themselves out as planners but really only acting as salespeople, our process built a Chinese wall between advisory activity (the planning) and the implementation of the plan (product recommendations). One would think that the fear would come from the SEC who is to hold investment advisors to the higher standard…right? Nope, the SEC was no where to be found. The fear was from FINRA which not only breathes down the necks of registered reps, but also rep’s who offer advice. A product recommendation (aka sale) couldn’t even be made until the client had signed off on a final plan which took up to 3 to 5 separate meetings, often resulting in no product implementation. In this sense, it was viewed that we were wearing two hats. First the investment advisory hat while planning, and then the Registered Rep hat while making product recommendations. But we all knew, the only regulatory body holding us accountable was FINRA for all our activities. And it’s my bet that the fee only investment advisor knows this. While RIA's will pontificate about not wanting to be watered down to a standard and regulator set up for salespeople, what they’re really thinking is how ominous it would be to have a regulator hold them to ANY standard. Enjoy the benefits of the public perception a higher standard gives, but have no serious accountability for doing so. It looks kind of two faced to me.
Belief is a powerful positive force. It can open prior closed doors, bring out talents one may not have thought they had and can help overcome obstacles that previously seemed insurmountable. With such positive outcomes from belief, it's easy to believe to an extreme at the exclusion of all else. But in this world of ebb and flow, yin and yang, summer and winter, few things are absolute all the time, except, of course, death and taxes.
After a trip to Capitol Hill this week to meet with senators and congressmen about Financial Regulatory Reform, it is clear to me and others that the atmosphere is more polarized between Democrats and Republicans than ever before. An attitude of "if you're not for me, you're against me" prevails. All yin and no yang. Belief can be a good thing, but belief without humility can turn into arrogance and extremism. Extremism in politics, religion, business or really anything can be a powerful negative force. Perhaps it's my inherit skepticism that one can be 100% right, 100% of the time that has shaped my relatively moderate views on many things, including politics.
At this unique and transformational period of time in the financial services business, I see the same levels of extreme views being taken within the industry. Speaking with a congressman this week, he made the comment, "perfection is the enemy of the good". In other words, in our fight to make everyone see things perfectly and absolutely our way, nothing gets done. He also said, "in politics, civil war is fatal". By this, he meant that infighting should take place and be resolved behind closed doors and in private. Not doing so in a public civil war risks an outcome that no one can live with. In the effort to get the "I win-you lose" scenario, they end up getting the lose-lose. This is exactly what concerns me about the financial services industry as 26 year old staffers write and mark up legislation that will materially affect our business and livelihood.
With the issue of "harmonization" the lines seem to be drawn to one side being the SEC regulated fee only investment advisor-"don't associate me with a salesman" group, and the other being the FINRA regulated registered reps. While the FINRA RR group is concerned about how and when the fiduciary standard will be applied they have acquiesced to being held to a fiduciary standard. The SEC advisors seem to have taken the extreme position unwilling to bend in any way. In fact, one investment advisor was so bent about being remotely associated with a salesman that he wrote an article in this week's investment news espousing his extreme views.
http://www.investmentnews.com/article/20091004/REG/310049996
He arrogantly infers that FINRA regulated rep's are akin to used car salesmen, and I don't think it was meant in a good way. Let's see,...there are roughly 650,000 FINRA registered reps and about 11,000 SEC regulated investment advisors. It has been cited that a full 1/3rd of all Ponzi schemes come from the RIA's. Simple math tells me that short of 2% of the population between the two are producing 33% of the Ponzi schemes. Does this mean that all investment advisors are crooks? No more than one can infer that all FINRA RR's are unprofessional used car salesmen. Each discipline has it's bad eggs and fortunately they both have far more professionals who are very good at what they do.
In hind sight, It's unfortunate that the various segments of the industry didn't work together before publically waging their civil war protecting their respective turfs. I'm hopeful that as uninformed much of congress is about this issue, that they'll be able to see through the arrogance of a vocal minority protecting their sacred "advisor" turf and find a win-win solution that meets the needs of the American consumer. And as importantly, that the minority of investment advisors who take the extreme view find some humility for the future credibility of the industry.
After a summer of simmering and debate, the Financial Regulatory Reform is finally gaining some traction and showing signs of taking shape. Paul E. Kanjorski (D-PA) has prepared a draft piece of legislation authorizing the SEC to make and enforce "harmonized" rules. Apparently it imposes a "fiduciary duty for brokers, dealers, and investment advisors in providing personalized investment advice to act in the best interest of retail customers without regard to the financial or other interest of the broker, dealer or investment advisor who is providing the advice". The draft legislative language also empowers the SEC in other ways under this new standard of conduct by: (1) giving the agency authority to examine and prohibit sales practices, conflicts of interest and compensation schemes the SEC deems contrary to investors' or the public interest; and (2) increasing its resources and providing rulemaking authority for enforcement purposes.
This is the first piece of legislation to bring the highly anticipated regulation of Investment Advisors and Registered Reps under a single harmonized roof. As part of my financial services industry involvement (I'll be at the Financial Planning Assoc meeting in OC later in the month), I'm headed to Washington DC next week on behalf of AALU to get a better "finger on the pulse" of proposed regulation and perhaps influence some senators and congressmen with some more balanced points of view. I don't know about you, but the increased government involvement in everything has me more than a bit uncomfortable. While initially hopeful that an Obama election would bring needed change, it seems the only thing he has done is stick the governments fingers into everything we do with trial attorneys and labor unions in his back pocket. I think he is a gifted orator and has favorably changed the international perception my folksy neighbor "W" portrayed, but he has empowered certain politicians, as well meaning as they may be, who could be on the path to destroying the "American Dream" as we know it. I had hoped for better.
Without question, the regulations in the financial services industry are outdated, misaligned and in serious need of reform. I, along with others have been calling for better aligned regulations, not necessarily more. But in the "be careful what you ask for, you may just get it" department, I'm afraid in laying the responsibility for re-regulation in the hands of well meaning, but misinformed politicians, what we may get is worse than what we've had. A copy of a speech AALU sent me done by UK insurance producer Tony Gordon is very instructive and provides a window into what could be our future. His comment, "The greatest risk to your business today is government interference with it, excessive regulation." is more true now than ever. Try this link for the entire speech:
http://rs6.net/tn.jsp?et=1102739284786&s=1277&e=0012KbsWoX804vU6vXocIVqk6bcIaNM7T1aA27w_AUoqYUKCo6B2Y5doP0zjbk3dR34Xml-g-PIrS1CP69niv-nXZnL0wjqc6J7dDZxBvfWaId6Bi1bD5ItW5GOhpeZtv3gsdhV1p4jywn8tyrb6-wbhwSol6BrrcTx
It provides insights into what the future could look like in the US as they have been more progressive with financial services regulation than we have been over the past decade. And it isn't pretty.
Yes, we need re-regulation and now is that time. But bigger and more is not better. In fact it is a potential nightmare scenario for the financial services industry and the American people it serves.
I'll write next week upon my return from DC about my perspectives. Stay tuned...
Change. That's the word that seems most often used in the financial services business today. In fact, it's the operative word I've heard used throughout my 25+ years eaking out a living in this business. But what has really changed? Frankly, not much. It reminds me of the quote, "Our dilemma is that we hate change and love it at the same time; what we want is for things to remain the same, but get better" As we all know, expecting change without doing anything different is the classic definition of insanity. I, for one, prefer to keep my wits.
But somehow this time it does seems different. Forces of economics, regulation, demographics and psychographics are in motion like never before, all at the same time. It's tempting to say that it's the "perfect storm" for change in the financial services business, but that has been said too many times before. While some of us are hopeful that this time it really is different, the majority are equally optimistic that nothing changes and everything remains status quo. Each regulator is protecting their respective turf, wirehouses keep swapping brokers with unsustainable signing bonuses, insurers keep paying huge upfront commissions, bankers are trying to cook up the next derivative to cash in on and the independents stick with their relatively less productive and highly fragmented advisor corps. There is a great deal invested in keeping the status quo from all parts of the industry. In The Prince written nearly 500 years ago, Machiavelli wrote, "there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things, because the innovator has enemies all those who have done well under the old conditions and lukewarm defenders in those who may do well in the new"... How true this is even today!
Nonetheless, I remain in that hopeful camp...hopeful that this time it really is different and the forces of change will overcome the basic human desire to cling on to what is known and familiar. Here is why:
Economics: The economy, while somewhat stabilized, is nowhere out of the woods as of yet. When it all hit the fan a year ago, major brand names were falling like flies and those who remained were forced into survival mode by downsizing as much as possible like bailing water to keep the boat from sinking. Then after the 1st quarter of this year, most companies that remained afloat had downsized as much as could be done, and basically paralysis set in. No strategic plans, no deals...nothing, just paralysis. But doing nothing is not a sustainable business model and it's my bet that as stock values keep improving, debt becomes more available and balance sheets can no longer hide, the scene is set for major consolidation within the financial services industry amongst the survivors of this financial fiasco. Financial firms will be forced to become strategic and decide what they want to look like on the other side of the crisis.
Regulation: The "Great Recession" has ignited several forces of change, the most impacting being the re-regulation of financial services. While the Fed, Treasury, FDIC and Capital Hill keep arguing the too big to fail-super regulator issue, the componenent of Obama's 6/17/09 Financial Regulatory Reform proposal that seems to have momentum and a likelihood of getting done is the move to a universal fiduciary standard for SEC/state regulated investment advisors and FINRA registered reps alike. The impact this will have on distribution models, product pricing and sales processes range from mild tweaks to a "turn it on its head" transformation of the financial services retail distribution business. There will be winners and losers as a result. It'll be interesting to see how this one plays out.
Demographics: The segment of the population that owns 70% of Americas financial assets and represents 50% of discretionary spending, the boomers, have not gone away. If anything, this crisis has caused them to place a greater focus on their finances with a need for advice making them all the more meaningful to the financial services industry. As this generation continues to move into retirement, estimated to peak in 2023, their interests shift from asset accumulation to asset distribution, protection and transfer. Demand for risk management products (aka-life insurance and annuities) appears to be on the front side of a fairly good run.
Psychographics: Ever since Reaganomics was born in the 80's, through to the beginning of this financial crisis last year, the savings rate has been on a steady decline from 10% to 0% and "conspicuous consumption" through debt became the norm. But just as the Great Depression made an indelible impact on the financial behavior of the generation that lived it, so too has the behavior changed today. As Americans deleverage and increase their rate of savings, the beneficiary of this shift in behavior will be the financial services industry. In particular, it will be the firms and practitioners who can lead with advice rather than a product pitch, who will find themselves in the greatest favor.
Now that we are past the "shock and awe" stage and the paralysis begins to lift, the financial services industry will no doubt go through a much needed transformation. The only debate is how far reaching the change will go. Many will continue to fight to keep things the same. But the forces of change seem far more powerful now than ever before. As one who leans towards being an innovator of change, I think it's time to bust up the status quo and align the interests of the business with those who make the financial services business possible, the American people who so desperately want and need quality financial advice.
In his recent blog post "failure to resonate" http://clarkatlarge.com/2009/08/24/failure-to-resonate/ Investment Advisor Magazine writer Bob Clark correctly identifies a sad reality...Financial Planning is a very fragmented industry and not very well defined. This fact is clearly an obstacle in evolving the practice of financial planning into a legitimate profession. And it is the high-jacking of financial planning by the investment and asset management industry that will continue to prevent it from ever happening. This leads me to ask, "When did Financial Planning become synonymous with Investment Advice?" Perhaps it's because financial planning and investment advice are both regulated by the SEC under investment advisory laws written in a different era for different reasons than today. Somehow they have evolved to be viewed by most in the profession as inseparable and one in the same. And why is this?...follow the money. It is estimated that 90% of compensation for SEC regulated investment advisory practitioners which include financial planners, are derived from asset management fees, not billings from financial planning services. If you can cloak what you do (Investment management) under the moniker of financial planning to avoid the more stringent regulations placed on FINRA regulated registered reps essentially doing the same thing as you, why not. It's worked for nearly 70 years, right? In efforts to retain their turf as fiduciaries, separate and away from FINRA oversight, the Financial Planning Coalition, as well meaning as they may be, are dooming the profession of financial planning to be little more than a sales process. Out of the CFP web site, the defined "process" of financial planning includes 6 steps:
1. Establishing and defining the client-planner relationship.
2. Gathering client data, including goals.
3. Analyzing and evaluating your financial status.
4. Developing and presenting financial planning recommendations and/or alternatives.
5. Implementing the financial planning recommendations.
6. Monitoring the financial planning recommendations.There is one step in the process that is keeping the practice from becoming legit and I bet you know which it is....that's right...#5. Personally, I believe that no plan is complete until it is acted on. Just as no trust is complete without titling assets under the trust, no financial plan is complete without implementing its recommendations. But financial plans must be funded with the recommendation of insurance and investment products and services, all of which have multiple regulators. The CFP Board is very misguided if it thinks it can regulate the investment advisory business and I'm fairly sure the ultimate decision makers on this issue of re-regulation think the same. The industry has given up a golden opportunity to redefine and legitimize financial planning on par with the legal and accounting professions. Current industry leadership is so blinded by their investment fee turf protecting that they can't see the proverbial forest through the trees. This financial crisis has forced the change argued for by the industry for years, yet leadership is intent on fumbling it all. What, be called a salesman? Oh, the horror!It's probably too late and the CFP Board is so invested in preserving their investment advisory constituents interests that little is likely to change the current course. But in my view, here is what should happen. I readily admit, there is little chance it will come about, but here it is anyway, in 5 steps:1. Get the CFP board out of investment regulation debate: The CFP board and all others wanting to legitimize financial planning should step out of the fiduciary argument with the SEC and FINRA. This war has already been won. Regulations to "harmonize" the fiduciary standard are all but a done deal, and for good reason. And no regulatory body is in a better position to oversee this better than FINRA. Done deal. Move on and fight a battle that can be won. 2. Eliminate "implementation" from the planning process: The CFP Board should eliminate #5 from the financial planning process, clearly focus on the practice of financial planning and get out of the investment/asset management business. While we can all agree that plans must be implemented, it confuses the public and invites multiple regulators into the planning process by combining the two. If a practitioner derives most of his/her compensation from investment advisory fees, guess what, you're an investment advisor, not a financial planner. Trying to tie together investment/asset management with planning process waters down and compromises the profession of financial planning. 3. Separate Financial Planning from Investment Advice. Let's face it, whether you're a FINRA regulated broker or an SEC regulated advisor, too much of financial planning currently being done is as a means to an end. And that end is a product sale. I don't care if it is a broker selling a loaded mutual fund/variable annuity, or an investment advisor selling an managed account, it's a sale. How one is paid for the sale whether it is an ongoing fee, commission or combination of both, should not drive how it is regulated. It's about what one does that should drive regulations, not what they call themselves or how they chose to be compensated for what they do. Investment management is not financial planning. The advisory community should be applauding the regulators for getting it right holding everyone recommending investment products to a fiduciary standard and stop defending their sacrosanct advisory turf in a giant game of keep away. Again, separate implementation from the rest of the planning process and regulate it accordingly. 4. Consolidate, simplify and streamline investment product regulations and regulators. Regulation should be simplified and streamlined rather than retain the current patchwork that creates unmanageable administration and leaves gaping holes large enough for Credit Default Swaps and Ponzi schemes to drive through. It'll never happen this way because of politics, but if there were one regulator that oversees all investment products and services, including non-casualty cash accumulation insurance products (life and annuity), everyone including the investing public would be better served. Answering to state securities, the SEC, FINRA and multiple state insurance regulators is ineffective and a waste of time and money. 5. Allow financial planners to become licensed to sell and be compensated for recommending investment products and services. Once the CFP board has placed a focus on the practice of financial planning much like the AICPA does for the accounting profession and the State Bars do for the legal profession, a new profession of financial planning can emerge and become legitimate. I know the word "sell" is foul to many in the business, but let's call it what it is. If a planner wants to recommend and sell investment products and services, they must do the same as CPA's and attorneys do when they want to recommend and be compensated on the sale of financial products-they must become licensed and disclose it.Arguing to preserve investment and asset management as being one in the same as the financial planning process risks a lose-lose scenario. Not only will the industry lose credibility and risk becoming legitimate as a profession, but the inevitable oversight by FINRA or a like kind organization is going to happen anyway. Unfortunately, the status quo typically wins out when politics and money are involved. And in the financial planning business, there's a great deal of both to go around.
Conventional wisdom tells us that salesmen are bad. Further, salesmen who earn a commission are even worse. And salesmen who sell the most and make the most commission...very very bad! The financial crisis has placed a focus on compensation and perhaps for good reason. Without question, compensation does drive behavior and at times, bad behavior. But the generalization that one who makes his or her living on commissions is somehow devious or less than professional is absolutely ridiculous.
In high school and during college summers , I worked at Nordstrom for one primary reason; they paid the highest commissions and as a result, highest compensation for those of us who were good at what we did. To this day, I prefer to shop at Nordstrom for nothing else than they employ the most knowledgeable, service minded and attentive salespeople in the business. Why?...because they pay their people performance based compensation-a commission. When I drop into a store where the "salespeople" are not paid on performance based commissions, not only is it difficult to find someone to help, but when you do find them, you often wish you hadn't.
Having grown up in the financial services business and being paid commissions, fees, bonuses, incentive comp, non-cash comp, salary and multiple combinations of each, by far the most transparent and performance based form of compensation was commission. And perhaps that is part of the perception problem. A commission is highly visible and easier to distinguish than most other forms of compensation. And when a scoundrel gets caught for misrepresenting, overselling or manipulating a client into the wrong product, it is very easy to point to commissions as the motivating factor. Contrast that to the esteemed professions of law or accounting. If they misrepresent, oversell and manipulate their client by padding their billable hours, it is very hard to detect. It's less visible. An article in this week's WSJ titled "Billable Hour Under Attack" cites that Pfizer who pays $500 million a year in "billable hours" expects to reduce their legal expenses up to 20% by moving to a flat fee arrangement which will result in a savings of $100,000,000 a year. Were the law firms dishonest with Pfizer to the tune of overcharging $100 million? No one has even called that into question. But had it been a commission...
My point is that there are scoundrels in every profession and it's unreasonable to paint a broad brush across an entire field as a result of a dishonest few. The Financial Planning industry is doing its best to gain legitimate footing as a profession on par with Doctors, Attorneys and Accountants. And they are distancing themselves from FINRA regulated brokers and "salesmen" choosing to be perceived as more noble. But with 1/3rd of the Ponzi schemes hatching under the lightly regulated investment Advisor model with the vast majority of them charging fees for assets under management, not providing real financial planning services, it's a tough argument to defend. Frankly, I see little difference when a Merrill broker lands a client by selling a managed account and an Investment Advisor lands a client to manage his/her financial portfolio. And neither does the investing public.
I agree that the financial planning industry is legitimate and should be viewed on par with other professions. The data gathering, cash flow analysis, budgeting, modeling and coaching clients in reaching reasonable financial and personal goals is noble and the professional who does this should be paid a handsome fee for the service. But when a financial planner crosses the line and offers to manage the clients assets for a fee, I'm sorry, you've entered the financial sales business and should be regulated accordingly. The hubbub recently http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20090823/REG/308239991 about those in the Investment Advisory world getting bent over a FINRA regulated broker who gave bad advice in the sale of FINRA regulated products is laughable. Are they really arguing that her dishonesty should be protected from big bad FINRA because she is also an investment advisor? If there ever were a case FOR FINRA to take over SEC regulated advisors, this one is it. It makes the investment advisory community look just plain dumb.
Look...I want financial planning to be a legitimate profession. But those in the business who simply de-register from FINRA, but continue their asset management practices while claiming they are "holier than thou" compared to brokers are doing all of us a disservice. I personally believe we need to separate the regulation and activity of real financial planning services from the asset/investment management services. This is the only way Financial Planning will become legitimate and separate themselves from the blowhards who simply don't want to be regulated for what they do. You see, it's not how you are paid that should dictate the regulations, but what you do. And I'm willing to bet that for every rogue broker who sells an unsuitable product just for the commission, there is an investment advisor who pads his/her fees to pay the monthly bills.
ING Seeks PE Money for BDsMore evidence that Private Equity will play a lead role in breaking up the deal making paralysis and get the consolidation games started....stay tuned.
Two private-equity firms close in on AIG Advisor Group - Investment News
As expected, Private Equity has come in to break the logjam in deal activity for the Broker-Dealer space hopefully ending the paralysis that has set in. Once the price gets fixed on this deal, expect many more to follow setting the stage for widespread industry consolidation as we head towards year end. It will be interesting to watch this along with re-regulation as the entire landscape of the retail financial services business changes. Shared via
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Ever since Obama unveiled the Financial Regulatory Reform white paper calling for "harmonizing" B-D and RIA regs to the fiduciary standard, the special interest groups (including the regulators) have been angling and positioning to save their respective turf as is. In fact, the "fee-only" camp has even taken to a "holier than thou" approach just after their primary trade group, NAPFA, had their former president locked up for investment fraud. The link here is the first balanced suggestion I've seen and it makes a fair amount of sense. I'd be curious to hear what you think about it.... What, exactly, does fiduciary really mean? - Investment NewsShared via
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This is the game changer feared by most in the business. At least directionally, this may be where we're headed. Stay tuned....Compensation: SEC mandate called too broad - Investment NewsShared via
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A concept I was exposed to early in my career was called "The Sigmoid Curve" also known as the S curve, which was developed and coined by European management guru Charles Handy. It is the simple yet profound way to describe personal, professional and organizational growth/decay. It can be ascribed to relationships, careers, product life cycles, company life cycles, etc. Best explained in graphic form, below is an example of the S curve.
As it relates to one's career, it starts out slowly as they take on a new challenge and growth is slow in the "learning curve". But as they gain competence and confidence, a stage of growth begins up the curve. However, the growth plateaus and is at risk of decline if a new S curve is not started to begin the cycle again. The theory is that what was once new and challenging becomes stale and stagnant and a renewal of sorts is needed to begin a new S curve. If properly planned, Handy suggests that you should begin the seeds of a new S curve near the height of the current cycle you're in as illustrated below:
The plan is for you to develop your new career renewal plan while you are cruising along in growth mode so as to avoid ever being pulled into a decline. And if done right, one's career would be a series of S curves (illustrated below)throughout their life...like I said, this is a concept, not necessarily reality.
Obviously the trick is the timing of when to start a new curve since it's counterintuitive to change something when it's going well. What if GM or the Republican party had the foresight to change their old ways to become new again? Don't relationships and marriages get stale needing renewal? When you think about it, the concept can be applied in numerous situations.
Personally, I have had the good fortune to develop career renewal for my entire tenure at AXA-Equitable. For me, each S curve seemed to last for 5 years and then I would take on an new challenge. It was a great 25 years, but at year end 2008, I found myself at the end of an S curve with no opportunity to recreate one within the AXA corporate structure. So the handwriting was on the wall, it is time to start a new S curve elsewhere...haven't started it yet, but getting close.
Another blog that does perhaps a better job explaining the S curve is this one: http://vannevar.blogspot.com/2009/01/riding-sigmoid-curve.html
Where are you on your personal or career S curve?
The Financial Regulatory Reform whitepaper released in June has produced some interesting responses from the retail financial services business, depending on which breed of player they are. The business is fragmented to say the least, which is exactly why reform is needed. There are the "holier than thou" fee only advisors who claim to adhere strictly to the fiduciary standard and view themselves not as salespeople, but professionals. This while a full 1/3rd of Ponzi schemes come from the thinly regulated RIA model as the majority of them have given in to the easy money of investment management acting more like sales people than, well...salespeople. They don't want to be lumped together in regulation with salespeople because that would frankly blow their cover. Then there is the non-FINRA registered insurance agent who is so far under the regulatory radar, they aren't even required to give fingerprints to their state regulator in most cases. Selling 12% commission annuities will be tough for these folks to justify in a fiduciary world. Then there is the wirehouse broker who, if not for selling their financial souls for high upfront signing bonuses, would prefer to be somewhere else. Merrill's distribution head was recently quoted saying, "brokers who leave give up a global brand identity"...was he serious? Next are the insurance based broker/dealer brethren who can read the writing on the wall: in a regulatory world holding to a fiduciary standard, the proprietary insurance distribution model has no economic reason for being. Then the Independent B/D's, the vast majority of them lacking the scale, resources and technology to remain in business. With revenue sharing deals likely to go away or at least become less rich, it leaves most financially under water-not a sustainable business model.Most of us can see that change is coming and that it is much needed. But I'm reminded of the quote, "Our dilemma is that we hate change and love it at the same time; what we want is for things to remain the same, but get better" We want everyone else to change so that we don't have to. But as we know, it doesn't work that way. Everyone is simply "Whistling through a graveyard" knowing change is coming, scared of it, but moving on in the same way not changing a thing. Here's what we know; the financial crisis and multiple Ponzi schemes uncovered has exposed cracks in the regulatory system, and it is going to change. And the Obama administration set it in motion in June with the blueprint for regulatory reform which clearly states:
The SEC should be permitted to align duties for intermediaries across financial products. Standards of care for all broker-dealers when providing investment advice about securities to retail investors should be raised to the fiduciary standard to align the legal framework with investment advisers. In addition, the SEC should be empowered to examine and ban forms of compensation that encourage intermediaries to put investors into products that are profitable to the intermediary, but are not in the investors’ best interest.Every financial intermediary and special interest group has its own interpretation of what this means. And their interpretation and argument is, you guessed it, not to change anything wanting everyone else to change so they don't have to; an unlikely scenario. The SEC has been given broad powers here. And the SEC under Mary Shapiro, who has long lobbied for all financial sales/advisors to be regulated under the same regulatory roof, presumably FINRA, will more than likely get their way.
So here we are, playing a giant game of "who's your daddy" . Let's face it, the 900 Lb Gorilla is FINRA. Whether we like it or not, that's where the financial sales and advisory business is headed as regulations are harmonized. It's time we, regardless of which breed of financial services player we represent, stop arguing against inevitable change and start becoming part of the solution in helping mold the new regulations so they don't end up worse that what we've had before. Let's place the focus where it should be, on the consumer and clients, and develop the distribution models and regulations around them.
As mindless entertainment, every once and a while I browse at the daily horoscope that pops up on my web home page. I admit, I don't really understand astrology much less believe it. But the one in twenty or so times it is remotely applicable to me and in a positive way, somehow, I take it as being spot on. The same is true with fortune cookies. If the message is not fitting or positive, I think we all tend to accept the reality that it has no basis in fact. But if it happens to say something like "You have great wisdom and will soon be richly rewarded", somehow, I suspend reality and actually start believing it may be true. I show my family at the table my good fortune to have picked up that particular cookie and can't wait for my rich rewards!
