Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with a look at why, nearly 3 months after its surprising decision to vacate the DoL fiduciary rule, the clerk’s office of the 5th Circuit Court of Appeals still has not actually issued its official mandate to vacate the rule, raising the question of whether there may actually still be some other last-ditch effort afoot to save the rule… or if the clerk’s office is simply backed up on paperwork, such that the final issuance will be coming soon.
Also in the news this week is a brief recap of the Financial Planning Association’s Advocacy Day in Washington DC, where 85 FPA members spoke with Congressional lawmakers and their staff about raising the standard for financial advice (and advocating that “financial planner” should also be a protected term, along with financial advisor), and the launch of “Equita Financial Network” for women-led advisory firm owners who are seeking more infrastructure and support to launch and run their own independent advisory firms.
From there, we have a number of articles on the ongoing shifts in the broker-dealer industry, as May is the month that several industry publications issue their annual “top broker-dealer” lists and interview broker-dealer executives. Highlights include: the annual Financial Planning magazine survey, that highlights how the largest broker-dealers are adapting to the changing landscape as this year marks the first ever that fee-based revenue at the top-50 independent broker-dealers exceeds commission-based revenue; the annual ThinkAdvisor broker-dealer Presidents poll showing that in the near-term, most broker-dealers are struggling the most with technology and regulation, even as their advisors are struggling to attract new clients in an increasingly competitive environment; how the likely roll-back of the DoL fiduciary rule (and the non-fiduciary SEC advice rule) is giving a new wind to small broker-dealers, even as more and more large broker-dealers appear intent on rolling them up (which might not be a bad deal for those smaller broker-dealers in the end); how the burden of FINRA regulation is so cumbersome that not only are many advisors leaving broker-dealers to start their own RIAs, but now some hybrid broker-dealers are themselves considering whether to spin off their entire “legacy” broker-dealer and instead just focus on becoming mega-RIAs in the future; how Cambridge Investment Research embodies this trend by choosing to start eschewing broker-dealer terms like “OSJ” and “branch” as the majority of its advisors, and its revenue, now come from the fee-based side of the business; and how the increasing mobility of brokers is leading them to take a hard look at not just the costs of the broker-dealer that are subtracted from their payout grids, but all the additional ways that broker-dealers mark up their various investment solutions by 10bps – 25bps (or more in some cases).
We wrap up with three interesting articles, all around the theme of how the “politicization of everything” is making more and more of us have to deal with criticism and negative feedback, and the best way to handle it: the first is a Harvard Business Review examination of how various CEOs are handling the growing pressure of businesses to take public positions on controversial issues; the second looks at how, whether it’s political criticism or simply personal criticism, there are better and worse ways for us to take in criticism to actually learn from it; and the third is a good reminder that, no matter what we do, someone will likely criticize it, so often the best approach is simply to try take it all in, figure out if there is a grain of truth that merits an adjustment, and then simply move on and focus on making whatever choice is right for you (may as well, if you’re going to be criticized no matter what!).
Enjoy the “light” reading!
Weekend reading for June 9th – 10th:
5th Circuit Mandate To Vacate DOL Fiduciary Rule ‘Still Pending’ (Mark Schoeff, Investment News) – It was all the way back on March 15th that the 5th Circuit Court of Appeals issued a ruling to vacate the Department of Labor’s fiduciary rule in a controversial 2-1 decision. Technically, the Department of Justice (on behalf of the DoL) had until April 30th to appeal the decision, and after the DoJ declined, both AARP and several state attorney generals attempts to intervene and appeal as well. Yet with all paths to appeal ostensibly over – except the potential for an appeal to the Supreme Court that could occur by June 13th, but is not anticipated given silence from the DoL on the issue for months – the 5th Circuit has still technically not issued its mandate via the court clerk’s office to formally vacate the rule (which was originally due by May 7th). Instead, the court clerk’s office merely reports that the final mandate to vacate the DoL fiduciary rule “is still pending”, even as the DoL itself has (re-)iterated a temporary non-enforcement policy permitting brokers to operate “in a good faith effort” to comply without fulfilling the full Best Interests Contract Exemption that technically still remains on the books. As a result, speculation is now reigning about why the court continues to delay… and whether 5th Circuit is simply waiting for the Supreme Court appeal deadline to also pass, or if the 5th Circuit chief judge is trying internally to get the full court to agree to (re-)consider the ruling. Alternatively, it’s possible that the court is backlogged and simply “hasn’t gotten to it yet”. Nonetheless, for the time being, uncertainty remains.
Financial Planners Push To Add Restrictions On Use Of Term In SEC Advice Proposal (Mark Schoeff, Investment News) – This week, the FPA held its annual Advocacy Day in Washington DC, bringing out 85 financial planners to help lobby Congressional lawmakers and their staffs… particularly regarding the recent SEC advice rule and its proposed limitations on who can hold out to the public as a financial advisor. Working in coordination with the Financial Planning Coalition, the FPA advocated that restrictions should also be placed on the term “financial planner” to limit its use to only those who hold the Certified Financial Planner designation (given that the SEC advice rule was silent altogether with respect to financial planning in particular). Which is notable, as most financial services industry organizations – representing the financial product manufacturers and distributors – have been arguing against higher standards, while the FPA is advocating for tougher rules and oversight. Other advocacy positions from the FPA included: increasing the frequency of SEC investment adviser exams (above the current ~15% annual rate); that the new Regulation Best Interest proposal from the SEC falls short; and that it’s time to lift up a full-fledged SEC fiduciary standard for financial advice that is consistent with the CFP Board’s new Code of Ethics and Standards of Conduct and shifts away from the pressure on consumers to interpret the “legalese” of lengthy disclosure documents.
Advisors Launch Network For Women Advisors (Asia Martin, Financial Advisor) – This month, advisors Katie Burke and Bridget Grimes launched “Equita Financial Network“, an RIA specifically intended for women-led advisory firms who want to affiliate with a larger RIA entity for technology, compliance, and other back office support, while continuing to maintain their own brand and business (ostensibly by operating as a DBA under the Equita parent company’s RIA). While functionally the structure would make Equita a “roll-up” firm, the founders’ stated goal is not merely to aggregate assets, but to create an environment where women-led firms “can be successful through collaboration and sharing of resources”, including access to TD Ameritrade or Schwab Advisor Services and Dimensional Funds Advisors (DFA), along with compliance support, financial planning software, tech support, and other practice management tools. The cost of the network is intended to be only the hard-dollar cost of the services themselves (i.e., the fees to participate are “at cost” for what it takes to provide them), but in order to join prospective members must meet Equita’s membership requirements, including having CFP certification, acting as fiduciary, being an independent RIA or IAR, having a blemish-free regulatory record, and be comfortable using (just) mutual funds, investment-grade bonds, and ETFs for client portfolios.
FP50 2018: Independent Broker-Dealers Adapt To Survive (Tobias Salinger, Financial Planning) – The irony of the independent broker-dealer model is that 30 years ago, IBDs started the movement towards “independence” and away from a world where financial advisors were captive employees of their financial services firms; now, the ongoing shift towards total independence is drawing advisors away from IBDs and into the independent RIA model, as the trend that IBDs began now threatens to topple them. The challenge is driven in no small part by the evolution of the IBD itself, which historically was focused on processing investment transactions and being a product distribution intermediary, into a firm that is actually built to support the success of its less-and-less-product-centric advisors. Combined with this evolution is a shift in the revenue model of independent broker-dealers themselves, with this 2018 study showing, for the first time ever, that fee-based revenue at the top 50 IBDs has now passed commission-based revenue, with fee-based revenue more-than-tripling in the past decade, compared to commission-based revenue up “just” 21% in 10 years. At the same time, even fee-based revenue for IBDs is under pressure, as advisors increasingly shift to low-cost ETFs and away from mutual funds that pay 12b-1 fees, which further cuts into the IBD revenue model. Compounding the challenge for IBDs is the tumult of regulatory changes, especially those spawned by the DoL’s fiduciary rule, which notably had mostly been already implemented by the largest broker-dealers before the rule was struck down (and as a result largely remain intact, even as the SEC stirs up its own potential advice rule). In fact, many IBDs have not been able to survive these shifts, especially smaller and mid-sized broker-dealers, and as a result significant consolidation is already underway, as typical operating margins at IBDs have fallen from 11% to 3% since 2007, and 847 broker-dealers – or about 28% of the total – have been shuttered or merged over that time period (although notably, the total number of registered reps at those broker-dealers has remained relatively constant). Nonetheless (or perhaps because of these trends), the largest IBDs continue to grow larger, with industry leader LPL showing a whopping $4.28 billion of revenue last year, and Ameriprise in a close second at $4.26B as the planning-centric IBD benefits from the advice-oriented shift underway in the broader industry.
2018 Broker-Dealer Presidents Poll (Janet Leveaux & Liana Roberts, ThinkAdvisor) – For many broker-dealer Presidents, there was a sigh of relief with the decision of the 5th Circuit Court of Appeals to vacate the DoL fiduciary rule. Yet despite the potential wind-down of the DoL fiduciary rule, the independent broker-dealer model still faces substantial headwinds, from retail financial services firms pushing into the advisory business directly with consumers (i.e., Vanguard Personal Advisor Services, Schwab Intelligent Advisory, etc.), to the competitive fight for talent in the face of a dearth of younger new advisors entering the industry, and the challenges that come from brokers themselves growing larger practices and negotiating more aggressively on pricing. In this poll of IBD presidents, ThinkAdvisor finds a number of notable trends emerging from here, including: the most pressing short-term issues for broker-dealers is the need to spend more on new technology and platforms, and the pressure to spend more on compliance and regulatory issues as well (more so than the fear of fee compression, industry consolidation, or the trend of brokers switching to become RIAs, although all of those are still major long-term concerns); the most pressing short-term issues for the advisors on broker-dealer platforms is adding new clients and coping with compliance demands (but not technology or fee-compression), although in the long run the second-most-common advisor issue is simply whether to stay with a broker-dealer or go RIA instead. In the meantime, the ThinkAdvisor poll shows that most IBDs are now taking a wait-and-see approach on new fiduciary regulations, are not very concerned about the end of the Broker Protocol (anticipating that they’ll be able to recruit away from wirehouses anyway), and (perhaps as a result of having been stung in the past) are not moving quickly to add esoteric new investment products like Bitcoin/cryptocurrencies. The bottom line is simply that most IBDs right now are focusing on how to stay competitive in an ultra-competitive landscape, which is all about the three primary trends of improving technology/platforms, managing compliance/regulatory burdens, and surviving and thriving in the shift to fee-based business (albeit with a growing focus on how to facilitate mergers and acquisitions, particularly to retain the assets of clients on their platform as their older advisors retire).
Small B-D Outlook Improves (Dan Jamieson, Financial Advisor) – Just one year ago, there were fears that the Department of Labor’s fiduciary rule could be a death knell for small broker-dealers who wouldn’t be able to handle the change in business model, nor have the depth of resources to comply with the rule’s regulatory oversight burdens; yet now, with the DoL fiduciary rule on retreat and the potential for a far milder “Regulation Best Interest” rule from the SEC that would not require broker-dealers to substantively change their business models at all, executives at smaller broker-dealers are more upbeat, especially given the recent uptick in broker-dealer mergers and roll-up transactions, from the publicly traded LPL to the private-equity-backed Atria Wealth Solutions. Nonetheless – or perhaps because of the broker-dealer industry consolidation – the number of broker-dealers still declined by 109 last year, about the same pace as 2016, but cumulatively causing the total number of broker-dealers to decline nearly 25% from a decade ago. And while the most stringent aspects of a fiduciary rule appear to be getting wound back, the underlying challenge of a rising regulatory burden remains, not only from a potential SEC advice rule, but also FINRA regulations, the rising activism of state securities regulators, and requirements under the Dodd-Frank Act for financial statements to be OK’ed by PCAOB auditors since 2013 (for which small broker-dealers are still seeking an exemption). Fortunately, though, some of the regulatory burden is being relieved, most notably with a recent FINRA proposal to drop the 24-year-old requirement for broker-dealers to supervise the independent RIA activities of their hybrid brokers (a challenge when the RIA was owned independently and the broker-dealer lacked supervisory control in the first place). And even as the burdens of regulation and competition rise, a subset of small broker-dealers are thriving by providing more individualized attention in a world where the largest broker-dealers are so large that they struggle to maintain the same depth of relationship with their registered representatives and adapt to their needs.
Hybrid Broker-Dealer Entities Considering Dumping FINRA And Working As RIAs Exclusively (Bruce Kelly, Investment News) – While the trend of registered representatives going from only working under a broker-dealer, to being dual-registered brokers who also operate under an RIA, to “pure” independent RIAs, has been underway for a number of years, at the recent Pershing INSITE national conference, executives revealed that the shift from hybrid to “pure” independent RIA isn’t just a consideration of registered representatives, but is increasingly a consideration of entire broker-dealer entities themselves. After all, the more that a hybrid broker-dealer’s revenue comes from fee-based accounts on the RIA side of its business, the more onerous it is to continue to subject themselves to and have to comply with FINRA oversight requirements on the ever-decreasing portion of their commission-based revenue (especially since as a hybrid firm, there is often-overlapping-and-duplicative oversight from both FINRA and the SEC). In addition, to the extent that the broker-dealer model itself is literally a product distribution intermediary in an increasingly advice-centric world, broker-dealer executives themselves who see the future as advisory-based increasingly see the RIA model as their future (albeit as a pivot from their broker-dealer roots). All of which raises the question of whether, despite the fact that the number of broker-dealer entities has declined nearly 24% in the past 10 years, that the worst of FINRA’s declining headcount is yet to come.
Cambridge Ditches OSJ Label Amid Fee-Based Shift, Segmentation Strategy (Tobias Salinger, Financial Planning) – While it’s no secret that the largest broker-dealers are slowly but steadily shifting their firms to become more fee-based and RIA-like, the #7-largest independent broker-dealer Cambridge Investment Research is taking the trend to a new level by starting to eschew the old language of broker-dealers altogether, dropping the traditional “Office of Supervisory Jurisdiction” (OSJ) label from its own infrastructure, along with the label “branch” for its local broker-dealer offices, which will instead be called “enterprises” with 35+ advisors or “mutli-advisor teams” with groups of 2 to 35 advisors, along with “ensembles” for firms that share clients and service them jointly (which may itself include an “enterprise ensemble” version for the largest such firms). In other words, Cambridge is effecitvely segmenting its advisors into 5 separate channels (enterprises, multi-advisor teams, ensembles, enterprise ensembles, and solos), to further refine and target its services for them (including additional business consulting services), a shift that other large broker-dealers like Cetera have been adopting as well. In addition, recognizing that now a whopping 87% of its advisors are dually registered and that 57% of its $811M of revenue was fee-based, Cambridge is claiming that it is “really more of an RIA than a broker-dealer”, in a pitch to attract and retain increasingly-more-RIA-like brokers who might otherwise shift entirely to the RIA channel.
Advisors Have Much To Gain With Broker-Dealer Arbitrage (Jon Henschen, ThinkAdvisor) – One of the biggest challenges for advisors that work under a broker-dealer platform is that, until and unless they can gain a true comparison of often-opaque costs from one platform to another, they may not necessarily even be aware of how much their broker-dealer is marking up the cost of various brokerage and administrative services they provide. As while some costs are relatively transparent on a grid payout statement, such as E&O insurance, SIPC & FINRA assessment fees, and monthly platform or technology costs, “advisory administration” fees are more commonly generated in the form of markups on the underlying services that the advisor themselves never sees line-itemed out. For instance, consider the various forms of managed account platforms that broker-dealers are increasingly offering to their reps; unbundled platforms typically separate out the fees for billing and client statements and ticket charges, with a total cost of 10-30 bps on assets, even though the direct costs may be as low as 2.5bps plus flat annual payments for administrative fees that are typically only $25 to $55/account; by contrast, “all-inclusive” platforms are typically 25-45 bps on assets (and includes technology and administration fees), yet again in the open marketing fee-based wrap accounts that bundle in ticket charges may be available for as little as 9bps and a low per-account fee for reporting software. Other potential cost-markup issues to be aware of: many broker-dealers mark up the third-party money managers offered on their platform by as much as 10-25 bps (usually justified by the broker-dealers ongoing due diligence obligations, yet arguably that due diligence should be part of what they’re compensated for with their grid payout system in the first place); separately managed accounts are also often typically marked up, with trading and administrative expenses included, for a total cost of 30 bps to 100 bps (when directly using the manager may have been available for as little as 20 bps). Of course, in the end, broker-dealers do need to generate revenue somehow, but Henschen emphasizes that often advisors at a broker-dealer don’t even realize the layers of costs they’re paying, and the pain point is especially challenging for bigger advisory practices with higher levels of production, who may be getting better grid payouts but aren’t getting the breakpoints on underlying investment platform markups (which for a $1M producer could literally be $150k to $200k in additional fees to clients!) that they may not have even realized were there in the first place, but could have been negotiated directly with the third-party managers if they went out on their own.
Divided We Lead (Aaron Chatterji & Michael Toffel, Harvard Business Review) – Historically, the separation between business and political or social debates was almost as strong as the separation between church and state, in a world where weighing in on a controversial or divisive issue will, almost by definition, alienate at least some stakeholders (whether it’s a subset of customers, employees, or investors in the case of a publicly traded business), and is especially challenging given Pew Research Center data that Americans really are far more polarized than they were in the past. Yet in the past year, a growing number of CEOs have been wading into otherwise sensitive and “taboo” topics of the business world, from the CEO of Dick’s Sporting Goods announcing the company was “going to take a stand” and stop selling firearms to people under age 21 after the Parkland shooting, or Delta CEO Ed Bastian announcing that the airline would stop offering discounts to NRA members (albeit a decision that the company stated was intended to remain neutral, to ensure that the existing discount wouldn’t be seen as an endorsement, but wasn’t interpreted that way at the time). To some extent, this kind of CEO activism appears to be part of a broader societal shift some are calling “the politicization of everything”, but for many of the CEOs themselves, the driving motivator is simply feeling personally compelled to address hot-button issues based on a combination of their own values and the culture of the organizations they represent. In fact, well-known CEO activists like Salesforces’ Marc Benioff state that they often act at the urging of (and/or in support of) their employees, especially given how Millennial employees in particular seem to expect their CEO to (publicly) represent the values of the organization. Similarly, Kathy Carter of Soccer United Marketing, has been an advocate of gender equality in Soccer driven primarily by a desire to pursue and represent her personal values. Notably, though, real CEO activism is about more than just social media messages and public statements; Chatterji and Toffel find that when delving deeper with CEO activists, most also rely on a “ground game” of actions outside the spotlight that are meant to ensure proper follow-through on their positions, from engaging with other business leaders to form coalitions to represent important issues, to engaging with their own Boards to ensure they have proper backing, and engaging more directly with the media to get the word out and ensure the message is communicated properly.
The Right Way To Respond To Negative Feedback (Tasha Eurich, Harvard Business Review) – The saying is that “feedback is a gift”, particularly negative feedback that helps us to better monitor our performance and alert us to adjustments we need to make. Except the reality is that receiving and acting on negative feedback is difficult, given the natural inclination to be defensive, and the risk of becoming more (or overly) self-conscious. Not to mention that sometimes people who give us (negative) feedback have their own not-always-obvious ulterior motives. So what’s the best way to respond to negative-but-otherwise-constructive feedback and criticism? Eurich provides five key tips, drawn from her recent new book “Insight“: 1) Don’t rush to react (as in the moment of receiving negative feedback, a flood of potential emotions and fears can make us far less objective and able to take in the information anyway, and in fact those who handle and incorporate the criticism the best are the ones who give themselves days or even weeks to bounce back from difficult feedback before deciding what to do next); 2) Get more data to affirm the criticism if you’re not certain if the feedback is a one-off incident (or criticism with an unseen ulterior motive) or truly something substantive that needs to be changed; 3) Find a harbinger, some very public action, even if symbolic, to emphasize that the criticism has been heard and that the first step of change is being implemented; 4) Don’t be a lonely martyr (as while we have a natural tendency to push people away who criticize us, the reality is that our biggest critics can become our biggest champions if we address their concerns); and 5) Remember that change is just one option, and that sometimes the best way to work around a weakness is simply to publicly acknowledge it, own it, and then work with the team to figure out the best way to move forward together anyway.
Haters & Critics: How To Deal With People Judging You And Your Work (James Clear) – No matter what your situation, every human being ends out feeling judged by others from time to time, whether it’s because of something we did that was substantively wrong, or simply because the critic has found a reason to project their own insecurities, negativity, or fears onto you. Yet ironically, the challenge is that while it’s easier to complain about “outside” critics, most of the time we are our own worst critics, and struggle to move past our own fears and self-doubt; for instance, the biggest challenge that Clear had in launching his own business was not the criticism of outsiders that it wouldn’t work, but his own fear of what others would think. Similarly, while we often dwell on our own self-doubt and criticism, the reality is that most outside critics may not really care about your choice very much, or for very long, and usually just move on shortly thereafter (while continuing to dwell on the criticism is, again, something we more commonly impose on ourselves). Unfortunately, though, we still tend to notice the critics more quickly; as Clear notes about his own writing, his articles have been viewed by a whopping 1.2 million people in the past 9 months, while only 10 have sent him an outright negative comment or email… yet it’s hard to ignore that 0.0008% who send sharply worded criticism, and in fact research by famed psychologist Roy Baumeister finds that we really are more likely to remember negative criticism than praise. So what’s the best way to move forward, especially given the brain’s tendency to focus on the negative? First and foremost, Clear suggests a philosophy of “Focus on the Road, not the Wall”, a metaphor from champion racer Mario Andretti who observed “don’t look at the wall, your car goes where your eyes go”; in other words, if you focus on the critics (the wall), you’ll tend to gravitate towards them, while if you focus on the road (your work and the path forward), you can more easily speed past the critics/wall. And to the extent that a critic must be responded to, Clear suggests simply responding to them directly and proactively taking the feedback and criticism, whatever it is; in other words, if you’re going to be criticized, win them back with sincerity in how you handle the situation. In the end, though, the real point is simply to recognize that whatever choices you make, someone will criticize you either way… so you may as well make the choices that are right for you.
I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!
In the meantime, if you’re interested in more news and information regarding advisor technology, I’d highly recommend checking out Bill Winterberg’s “FPPad” blog on technology for advisors as well.