The Protocol allowed Financial Advisors to move from one firm to another firm with no legal consequences as long as the Advisor followed the Protocol on what client information they took with them and the Advisor followed the rules of contacting their clients. The Protocol was designed to lower the legal fees that the firms were incurring with departing Advisors and also smoothed the way for the Advisors that they were recruiting for themselves. The recruiting deals got bigger and the firms accumulated generally speaking around $5 billion in Broker Loan Books.
This money had an affect on a financial institution in that these loans tied up money that could be used for the new capital requirements that were imposed after the Financial Crisis. This capital requirement is rarely discussed and yet I believe it was a factor in financial firms withdrawing from the Protocol. Capital is one reason but in my mind it is not the only reason. It is difficult to give a FA a 9 year deal in an era of immense change where we are facing fee compression, new competitors and our basic value proposition is being questioned. One can easliy build a scenario where recruiting FAs where the average age is like 58 years old in a market of declining fees and no organic growth will not end well. If a FA's revenues decline signficantly during the 9 years it becomes a write off for the firms and in a capital intensive environment this is not a recipe for success. Additionally the firms have introduced retirement deals for FAs that are actually funded from the revenue of the books of the retiring FAs. These retirement deals have reduced the pressure on retiring FAs to move firms to fund their retirement. All these factors together make a strong case to stop or at least slow down recruiting.
But, the infamous but, firms not recruiting lays bare a signficant problem. The industrys' inability to train new FAs and most importantly no organic growth. Our inability to train, and our success rate is abysmal, has led the firms to deemphasize headcount importance. The new focus is on assets per FA, managed assets for the firm and average revenue per FA for the firm. All three of these new focuses are directly affected by the bull market. Since none of the firms have any organic growth, nothing of consequence anyway for the past 25 years, the bull market directly effected the three areas of focus for the firms. Markets go up, assets per FA go up, managed assets go up and the average production of a FA go up. Cerulli recently had a report pointing out that managed money was a two edge sword. Revenues rose when the market went up but the flip side was that FAs were no longer pro-active in getting net new assets as the bull market raised their income with little to no extra work. Life is good. Of course what happens when we have a correction? And yes we will have a correction, someday.
I don't think anyone, including Financial Advisors, believes that recruiting is a good business model but it did address the two weaknesses of the Retail Financial Industry, our inability to train new Financial Advisors and to inability to grow organically. As one Complex Director always said only good things happen when you recruit. Your headcount goes up, your assets go up and your revenue goes up while the firm pays for it all. The Branch Manager's job was to take large quantities of money and entice Financial Advisors to join their offices.
Financial Advisors blather on about joining a firm that cares about their clients and the new found freedom to do business the right way but from personl experience, it was always about the money.
So the post Protocol era raises several questions in my mind. First, if you decide to move can you wihout incurring a year long restraining order not to contact your clients? I say yes and technology is the answer. There are three things a FA must plan out to successfully move with no legal ramifications. Again, first, make sure all your clients are linked to your LinkedIn Page. The firms want you to do this and if you can link your clients then when you leave and you change your LinkedIn page to your new position with all your contact information. Everyone is immediately notified that you left and where you are. They can reach out to you or you can reach out to your clients through LinkedIn.
Second, make sure all your clients have online access and then write down step by step instructions you can give to your clients on how to a PDF their monthly statement and email it to you.
Third, instead of PDFing the statements you could use the new aggregation tools to access all the client information you need to move their assets.
Technology has made it simple and legal and all we have to do is a little pre-work that the firms are encouraging us to do.
Remember in a post Protocol era it is not a financial industry legal requirement about client information but rather that the firms are held responsible, legally and financially, for protecting client information. This concept came from the original Patriot Act and has been reinforce through many different laws and regulations over the past 17 years. Given the FaceBook situation I don't believe that personal information will be allowed to be taken without ramifications. So where we do want firms in all industries to protect our personal information we can not expect that any industry will allow an at will employee to leave and go to another firm with the client's personal information. Legally it is indefensible. Luckily for us clients can choose to become part of our network and our job is to make sure we are networked.
Final thoughts. It is all about the money. Yes it was and at this moment it still is. The deals are down unless your big enough to get an offer from JPM but even a middling producer can clear a 250% deal. But in my mind this all about to change and change dramatically. Where today you will base your decision on money it may come back to haunt you in rather short order.
In the next 2 to 3 years money will no longer be the determining factor for Advisors to move. Advisors will only move based upon the technological capablities of their firm and their technology spend. I believe that deals will only be a "cost of moving". Advisors will recognize that they will not be competitive at a firm with old technology and the firm has a low technology spend. Specifically speaking I am referring to the introduction of AI into the the Advisor's business model. Your firm will either be the Amazon/Apple/Google of the financial industry or you will not be there and will fight/beg/plead to be at firms that have the new capabilities.
Looking at the landscape today the two leaders in the clubhouse are Merrill Lynch and Morgan Stanley. Both firms lead in technology spend and both firms have recently introduced basic AI capabilities. These capabilities are going to grow exponentially as once the tracks are laid, AI capabilities, adding new cars, new value added services, will move at light speed. Obviously new and old competitors will enter this arena and the future remains opaque but with great clarity we know the direction we are heading. Think about Amazon/Apple/Google. They know more about our clients than we do and we arguably execute the most important function for them, managing their personal money. This must and is changing.
This in my mind will have a negative effect on RIAs where they do not have the technology spend, breath of products and integrated systems to compete in the new world order. RIAs had their day the new day will be owned by technology driven firms and the true Robo-Advisor.
Danny
Tuesday, August 21, 2018
Monday, June 25, 2018
ETFs and the Financial Advisor Business Model
Good Morning
Even though the greatest movement of money from one investment vehicle to another (mutual funds to ETFs) in financial history is disrupting our business model it still amazes me that we, Financial Advisors, remain sanguine to the effects on our business model. I hear and participate in all the arguments concerning the pros and cons of active versus passive but PFGC believes we should be debating the pros and cons of which investment vehicle is best for our clients.
See the PFGC webinar on COIs:
Lets discuss.
Howard Marks of Oaktree Capital (an active manager) has written an insightful article on the use and risks of ETFs.(link https://www.oaktreecapital.
Mr. Marks vocalizes many of the concerns that active managers advocate as a reason not to buy an ETF. Basically investors punt on research on individual securities which may or may not lead to overevaluations because when you buy an ETF you buy all the securities with no distinction to valuation.
"Is it a good idea to invest with absolutely no regard for company fundamentals, security prices or portfolio weightings? Certainly not. But passive investing dispenses with this concern by counting on active investors to perform those functions."
I couldn't disagree more. As someone who believes that ETFs are a superior investment vehicle and I also believe that the record of human stock valuations are incredibly inconsistent. The saying, nobody beats the market, didn't come about because of active manager's over performance. It is just the opposite. On page 10 Mr. Marks points out that nobody beats the market and "on average all portfolios returns are average before taking into costs into account."
Mr. Marks goes on to say that "active management introduces considerations such as management fees, commissions and market impact associated with trading (ie: Capital Gains); and the human error that often lead investors to buy and sell more at the wrong time than at the right time."
The only aspect of active management with potential to offset the above negative is alpha, or personal skill. However, relatively few people have much of it."
Mr. Marks concludes; "For this reason, large numbers of active managers fail to beat the market and justify their fees. This isn't just my conclusion:if it weren't so, capital wouldn't be flowing from active funds to passive funds as it has been."
What Mr. Marks is saying is that we can argue all we want about active versus passive but the reality is that most people are voting with their feet and moving huge amounts of money into ETFs. (on pace to $1 trillion in 2018) There are many battles still to be fought but the war is already over.
PFGC believes the discussion should not be active versus passive but what are the characteristics of the different investment vehicles? If we assume all investment vehicles have flaws, and they all do, then which investment vehicles have less flaws than others? Trading costs, fees and tax inefficient trading lead to underperformance as well as a manager's failed investment calls.
Next Mr. Marks addresses what he calls "quantitative investing" which concentrates on dislocations between markets and securities but with "so much investing these days considers only the short run that I think there's great scope for superior active investors to make value-additive decisions concerning the long run". But unfortunately the numbers belie this rosy view of active long term performance. There is no empirical evidence that active management wins out over the long term. Quite the contrary about 85% of active managers underperform on a 3 year time horizon, 95% on a ten year and 100% over 15 years.
The attached report below (Mutual Funds Fees and Active Share) from New York State Attorney General is quite eye-opening on the effect of fees on overall performance. Many of the myths of active management are dispelled as after tax performance and fees are the major contributors to mutual fund underperformance.
Portfolio management expectations have changed because the measuring stick is no longer my mutual fund is in the top tier of it's sector performance. Translation, my mutual fund is performing less worse than other mutual funds in my sector but a lot worse than the overall market. No longer can we say, well all the funds in your portfolio are in Tier 1. So what if they all are underperforming. Relative performance is no longer an accepted measuring stick with index funds now mirroring their adopted indexes. We now must be aware that we are being judged on a different standard than in the past and we have to adapt.
Watch the PFGC webinar on Retention/Attrition Strategies which discusses the different investment vehicles in detail. https://attendee.
ETFs are the first step in a journey to AI driven tax efficient Direct Indexing Models (think Parametrics) as the end game. Computing power will disentangle portfolios to allow tax efficient portfolio management based upon an individual's risk profile. See PFGC's Big Data/AI webinar link: https://attendee.
Disruptive technologies don't care what we think. Disruptive technologies, given their name, is about replacing the existing business model and usually at a lower cost. One of the characteristics of disruptive technologies is that the new "way" is about 10% of the cost of the previous "way" of doing business. We certainly see that with mutual funds and ETFs. Actually the NYS AG report says that mutual funds are about 4.5X the cost of ETFs.
As Financial Advisors we need to think through a digital strategy and I am not talking about social media. I am referring to how we identify a path going forward where we are value add to the client because we have incorporated technology as a mainstay of our offering. Again, see PFGC's Big Data/AI webinar.
As we all know we have skipped spring this year and launched straight into summer and things tend to slow down substantially. We all need down time but use the down time to think through how you are going to build a model for the future so we all can maintain our lifestyles.
Good luck
Danny
Center of Influence Presentation
Good Afternoon
PFGC has released it's new Center of Expertise webinar on how a FA can build a consistent, well thought out approach to becoming a value added partner to accountants and estate attorneys so we can develop long term relationships for One Client/One Solution. A client solution is made up of three parts, investments, taxes and estate planning. The webinar talks about new studies on what clients want from us and it is very clear that taxes are the number one factor clients consider when choosing a Financial Advisor, number 1!
If we can not deliver as a sole practitioner then we need to work on how we can meet the demands of our clientele with Centers of Expertise.
Yes, I know, we do not give tax advice. Yet there is another old saying that the client is always right. So what do we build? What the client wants or what we want or can do?
The COI webinar is designed for action as we drive net new meetings with an eye for growth.
Take 15 minutes and take control on how we can be effective and proactive in building our businesses.
Remember it is your business.
Finally I would like to thank the PFGC clients who assisted in building the COI Presentation. Your insights and feedback are invaluable. This is the second version of the COI with the incorporated feedback.
Danny
Monday, April 30, 2018
Big Data/AI and the Financial Advisor Business Model
Good morning
This past January PFGC wrote about the possibility that the new SEC Rules for how brokers/advisors engage our clients could include title reform. Meaning that we could no longer call ourselves advisors if we are not conducting ourselves as fiduciaries. The SEC has published the proposed new rules and title reform is a prominent part of the reform package. Now there is a long way to go but once the proposed new rules were posted for comment, the next 90 days, this discussion on titles has expanded to also include "planner". The firms have fought, and won, for rules that have been best described as "suitability plus" but they may have potentially sacrificed our titles as Financial Advisors and Financial Planners.
Investment Professional anyone?
Next PFGC has published a new webinar on Big Data/AI and the Financial Advisor Business Model. Link: https://attendee.
Over the weekend an article appeared in Investment News on the new AI CRMs and how the big BDs are best positioned in this space. Link below:
PFGC's webinar explores how Big Data/AI will have a huge effect on two main business processes of financial advisors. Relationship Management, CRM, and Investment Management, firm investment models. The CRM PFGC explores is not our old CRM packages we are used to working with. On the contrary the industry is running down the road to introduce Google, FaceBook and Apple like capabilities to assist FAs in managing their books. The average FA has 160 relationships and we have not contacted over 40% in over a year. This is all about to change.
The new CRMs will extend our understanding of client needs and assist us in developing a seamless delivery of strategies to a much larger client base. PFGC believes that we will be managing up to a 1,000 different relationships in the the next ten (10) years.
Big Data/AI will also drive the development and adoption of firm driven investment models. This is a little tricky for us as we view ourselves as someone who manages money to assist our clients in meeting their needs and goals. It is core to our offering and our clients still view us, 59% of them, as the person who manages their investments. Forty-six, 46%, percent of clients view us as Financial Planners. I wonder what those two numbers looked like ten year ago? Big Data/AI will challenge this view and in PFGC's opinion change it forever.
These two major trends have implications on how and where we spend our time as our business models morph into the future. The Big Data/AI discusses all of this in detail.
PFGC believes that the RIAs have peaked, in market share, and will be at a significant disadvantage moving into the future as technology spend is nowhere near where they can be competitive. The new CRMs will be most effective in a well defined ecosystem versus an open architecture and this will challenge a core RIA offering premise of picking your technology components and cobbling them together.
But the biggest change will be the value-added firm Big Data/AI driven tax efficient Direct Indexing models that will demand premium pricing for access. Firms that have a deep institutional knowledge of running complex algorithmic trading models will enhance these offerings with Alternative Real Time Data sources that will effectively manage each individual's Risk and Behavioral Profiles in a tax efficient manner. Firms like JPM, GS, MS, RBC, UBS, MER and CS will roll out compelling offerings that individual FAs and RIAs will not be able to match.
The next couple of years will change our, FAs, view of what firms we work with and that view will be driven by the technology spend of each firm. Technology Spend will be the number one factor that will drive our employment decisions over the next ten years.
Finally Financial Advisors will need new skill sets that incorporate technology to become the true Robo-Advisor and these skills will have to be backed up by designations, the CFP and the CPM. There are many things we can not control but we can control our own education. The CFP for financial planning and the CPM for portfolio management.
We are all about to embark on a long journey of change and every journey starts with one first step, take your first left-footed step today!
Danny
Thursday, February 15, 2018
Definable, Repeatable and Scalable...
Michael Kitces recently wrote an article on market volatility and our, FA's, ability to scale our model if we "customize" our client investments. The last link is below is to Kitces' article.
PFGC has always maintained that we have to have a "definable" investment process. This simple means that we must be able to tell a prospect/client on why/how we invest their money to meet their needs and goals. FAs are encourage to first develop an investment philosophy. Yes a philosophy before we build a portfolio. Two reasons. First how can we tell a prospect how we are going to invest their money to assist them in meeting their needs and goals before we have done a Discovery? A process designed about how you, the FA, invests is the old way. Today relationship selling is driven to "why" we invest the way we do. Fully 50%, the first 50%, of your approach to investing should be designed to tell the prospect/client "why" . Second, your Investment Philosophy has to take into account that prospects/clients are different, with different tolerances, tax needs and time horizons. This is explored in depth in PFGC's Retention/Attrition Webinar and the link is immediately below.
Repeatable is simply that your Investment Philosophy is applicable to a wide spectrum of your clientele. If an FA wants to "bet" on the market by over weighting an Index, Sector or Stock to such a degree that it disregards prudent Portfolio Management then the FA has not developed a "repeatable" process. Portfolio Management is a skill set and any skill set can be honed. FAs should consider getting the CPM designation, Certified Portfolio Management, to learn the basic fundamentals of portfolio construction and maintenance.
Scalable is simple, FAs must be on a discretionary platform. How can you scale your business and effectively and efficiently manage our client's assets if two (2) conditions are not met. First you have a standardized investment model and second the model is on a discretionary platform. It takes three (3) months to move a book with over $100 million in assets if the FA has a "customized" investment process. This "customized" process is not indicative of us being a prudent steward of our client's money when the world trades in a 24/7 cycle in millionths of a picosecond. We must be better.
I have asked many FAs what is their value proposition versus a robo-advisor? Amazingly to me the overwhelming response is I hold in my clients on the way down, hand holding! I could not disagree more.
If a FA has a standardized investment process built on prudent and accepted portfolio construction rules that resides on a discretionary platform then the FA can mitigate some of the downward market moves. I know, I have heard I am not a market timer and if the client holds through the market will come back. These are true statements but also simplistic when a client can have a robo-advisor and quickly and easily move money to the sideline on their own. Where are we in this scenario? Does a thirty (30) year old hold through market corrections? Possibly as the thirty (30) year old has time to recover but what about a sixty (60) old? Hold through?
We must change. Products are dead and strategies are now driving our value propositions. Ask your Asset Management's wholesalers. Asset Managers now know that they have to be part of strategy and no longer a stand alone investment choice. Look at State Street. They just announced lower costs on fifteen (15) ETFs. The fifteen lower (15) ETFs are not news but that the fifteen (15) can be used to build a portfolio is news. State Street is offering a strategy not just a product.
When I started as a baby broker 43 years ago the largest Merrill Lynch FA in Florida, Customer Man in those days, had $10 million in assets. Today FAs are literally managing billions today. To put in perspective if you have over $250 million in assets your book is larger than 90% of mutual funds and Hedge Funds. You are a business. Act like it. We must train ourselves to portfolio management, CPM, get on your firm's discretionary platform and develop investment strategies that allow us to positively affect maintenance our client's capital.
We have been in the biggest and longest bull market in history. Could it continue, sure. But the deciding factors in our success will be driven by our ability to adapt to a low cost, standardized investment solution on a discretionary platform that allows us to meet our client's goals in an effective and efficient manner. Because where the market going up is always good, our revenues go up with the market, the main driver of our business is the gathering of net new assets and a "customized" business model is just not scalable.
Danny
"One left-footed step per day"
Process for Growth Consulting
Daniel G Gallagher - CEO
Business: 866.515.9995
Twitter: @PFGC1
Friday, January 12, 2018
Good morning (Mrs./Mr.) Client this is your Sales Person
Good Morning
Hard to imagine using the words, "Sales Person", instead of Financial Advisor? As crazy as it seems to us there is a real possibility this will be on our cards in the near future.
PFGC's blog, link below, covered this issue in June of 2017 and stated that the new SEC Fiduciary Rule would be a lot closer to the BIC standard than the Suitability Standard. If reports are to believed very soon Financial Advisors will be forced to identify themselves to clients by what standard they are working under. Adviser/Advisor or Sales Person?
Let's explain. The Investment Act of 1940 stated that if an Adviser takes a fee for advice we are fiduciaries. The Industry for years, decades, fought and won a proviso which was referred to as The Merrill Rule. The Merrill Rule was simple. Financial Advisors could be paid in fees and not be a Fiduciary. The Fiduciary Industry fought for years with the SEC/FINRA to no avail and finally sued the U.S. Government, in court, for not enforcing the laws of the United States. And really to no one surprised the Fiduciary Industry won around 9 to 10 years ago. The Courts ordered the SEC/FINRA to set the standard.
The Financial Industry then went into the four corner offense, in other words stalled, for another 10 years. Interestingly ERISA Accounts did not fall, legally, under the SEC/FINRA. So President Obama ordered the DOL to come up with a fiduciary standard for ERISA Accounts. We have all lived through this process but let us clarify the role of the courts. The Financial Industry lost decisively in the Dallas Federal Court last year and then appealed to the New Orleans Court and that decision is expected maybe next month or in March, after the Mardi Gras. First things first in New Orleans. This lawsuit is separate from the Fiduciaries suing the U.S. over the 1940 act. The Financial Industry claimed that the rule was hurried through with no input from the Industry. Unfortunately the DOL was in the works for 7 years and the courts ruled that they followed all the rules and everyone had time to comment. The interpretation of the Courts ruling was that the Financial Industry lost decisively.
I don't think think the Financial Industry is looking forward to the decision. At all.
Yesterday Investment News, link below, published their thoughts on what the SEC will announce in the next couple months. There is a lot in the article but the second to last sentence caught my attention. See below. If this is true, I say if, then we have a problem.
The SEC’s fiduciary rule proposal may ban brokerage firms from allowing their salespeople to call themselves financial advisers unless they accept a customer-first fiduciary obligation, according to the “Journal.”
The link below is also from Investment News from December of 2017 which states that 40% of client assets are on a fiduciary platform. Hence the challenge. We must be aware that if we want to portray ourselves as Advisers we must move as quickly as possible to a discretionary platform. Nothing indicates that we will be given a pass.
There has been a lot of thunder and lighting about the DOL and fiduciaries. Most of what I read are uninformed opinion from FAs with an axe to grind. But soon it will not be thunder and lighting, ie above our pay grade, but a reality that we will be asked to deal with.
So take a first left-footed step today and control your own future. Start your CFP and move to a discretionary platform. PFGC believes in 10 years we all will have to be minimum a CFP. Take tha step today.
Danny
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