Broker-Dealer MASTERCLASS: State of the Industry

The financial services industry has changed over the past decade, from new regulations to disruptive technology, consolidation trends and changing demographics. Making sense of the new normal is essential for any advisor.

  • David Knoch - President at 1st Global
  • Dale E. Brown - President & CEO at Financial Services Institute
  • Bill Morrissey - Managing Director, Head of Business Development at LPL Financial

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  • 55 mins 51 secs
Gillian: Welcome to Asset TV, I’m Gillian Kemmerer. The financial services industry has changed at the speed of light over the past decade, from new regulations to disruptive technology, consolidation trends and changing demographics, making sense of the new normal is essential for any advisor. Today I’m joined by a panel of experts who will share their view on both the trends shaping this industry and who will illustrate for us the firm of the future. Welcome to our first ever Broker Dealer Masterclass. Thanks so much for joining us. So, Bill, I’m going to start with you, the industry has evolved a lot over let’s say the course of your career. If we maybe limit it to the past 5-10 years, what would you say are some of the biggest changes you’ve seen?

Bill: Well, so you’re absolutely right, Gillian. I think the industry continues to evolve at a rapid pace. And that pace of change is likely to accelerate. I look at the industry and there are a number of macro trends that are really creating consolidation. So first I look at the margins in the business. The margins in the business continue to come under pressure. And that’s happening really at every link of the value chain, the asset managers are under pressure. The distributors are under pressure. The financial advisors are under pressure. And I think there are both cyclical and secular trends that are causing this pressure. You know, who would have thought we would have been close to a zero interest rate environment for 10 years? Well, that’s certainly putting pressure on the ecosystem. The more pernicious trends though; I think are the secular shifts. And that has to do with the shift from brokers to advisory, active to passive, packaged products, individual securities. That’s putting enormous pressure on the margins in our business.

Gillian: So the fee pressure essentially?

Bill: The fee pressure, the regulatory environment is getting more and more rigorous. As the regulatory environment gets more rigorous, for all the right reasons, that’s forcing firms to invest more in systems and technology, human capital, to make sure they’re protecting the consumer and they’re supporting the financial advisors. The advisor base is aging, right. So if you look at the demographics in this business, the average age of a financial advisor is in their mid 50s. And so if they’re not thinking about a succession plan today, they will be in the next five years, which again is creating consolidation. I think these trends are going to create greater consolidation at both the firm and the advisor level. On the positive side, the demand for advice is exploding. And so the baby boomers need help more than ever. And so for a financial advisor that is in the middle stages of their career, or a new financial advisor, I don’t think the opportunity has ever been better for them to grow their business. What they need though is to find a partner. They need to find a partner with the scale to be … the stability to be a long term partner. They need to find a broker deal custodian that has a history of investing in tools and technology, because given the other trends in the industry the average advisor, just to maintain their quality of life is going to be forced to work with more clients, and so for a broader set of needs than ever before.

Gillian: So you’ve mentioned some of the downward pressure on fees is driving some of the interest in consolidation. But also there’s the benefit of economies of scale when you consolidate?

Bill: Without question.

Gillian: Essentially, yes, so, Dale coming to you what are some of the biggest changes that you’ve seen in the financial services industry?

Dale: Well, Gillian, I think I’d start with what hasn’t changed and that is Americans need for professional financial advice, that in fact Bill just mentioned it, the demand for advice is continuing to accelerate. Everyone’s financial lives, whether they have just a little bit to manage or quite a bit are more and more complex and demands on their time. And fewer and fewer people are able to do it, do it yourself. So they’re looking for someone with the right training, the right expertise, the right education, right commitment to what’s in their best interest to help them. So that’s a really good thing that hasn’t changed. I think where I would follow-up on Bill’s comments, the last five years, we’ve gone from in the post financial crisis, let me use that timeframe, what I would describe it as, as a hyper inflation of regulatory pressure. You know, for very legitimate reasons, regulators or elected officials reacted to the severe harm that was caused by the financial crisis. And that reaction, or you might even sometimes describe it as overreaction, filtered out and then touched every aspect of the financial services industry, including the main street financial advisor, who by the way, didn’t cause, didn’t have anything to do with the financial crisis. But today feels in their business and in their relationships with their advisor the intense pressure created by the regulatory overreaction.
Now, I also want to follow-up on one thing Bill said. There’s a lot of good coming out in the last few years of this intense regulatory oversight. There’s already a trend amongst, I think, the financial services industry in general and FSI members in particular towards a more advisory relationship with clients and less reliance on a transaction based relationship, that’s a good thing. And we are emerging now out of the DOL fiduciary rule, the SEC’s focus on a fiduciary standard, the role of state regulators. And I think we’re emerging in a place where there’s a strong consensus on every advisor should act in the best interest of every client every time. Now our opportunity is how do we shape a regulatory environment that really supports that and avoids the unintended consequence of pushing advice out of the reach of the main street investor?

Gillian: I was just going to say it sounds like an effort to promote financial advice. The regulator has potentially taken out some of the people who could provide it by driving the costs up.

Dale: Well, I mean in defense of our regulators, they’re often in the position of having to play catch up. They’re generally speaking not on the frontlines or the leading edge of the trends and the change and the transformation. And you know their primary focus is protecting investors. And that often means that they get to unfortunately meet and deal with the lowest common denominator in our industry, the people who shouldn’t be in our industry. So you know, absolutely want to help them get those bad actors out of the business. One of the things FSI is constantly trying to do is help them have the benefit of a perspective that doesn’t allow that interaction with that lowest common denominator that color the view of everyone in the industry. And so I think we’re making lots of progress on that.

Gillian: Well, luckily we’ve got a set of stellar examples for them to take note from right here. David, tell me a little bit about some of the changes that you’ve seen over the past 5-10 years?

David: Sure. I’ll take a little bit of a different tangent on the same conversation both of these gentlemen were having. I think the trends that they’re describing are true. It’s just I don’t necessarily see them as five year trends. Let me give you an example of what I mean. For our organization, revenues from our fiduciary registered investment advisor business, our fee based business five years ago exactly became more than 50% of the revenues of our organization. And so it didn’t start five years ago, right. This is a trend towards investment advisory business, a trend towards the products Bill’s describing, that started way before five years ago. It’s just that today we’re seeing the manifestation of those long term trends. I mean it is true, four years ago; broker dealer revenues for us were at its peak. Today, commissions generated for our firm are 50% of what they were five years ago. But again these are manifestations of trends that started a decade or more ago. I think the financial advisors out there in our marketplace who are the most scared about today’s environment, who may see these as emergent trends, are the ones who probably didn’t capitalize on them the way they needed to 10 years ago when they were emerging in our industry. I’ll take a positive side of Dale’s regulatory comments, because again I think they’re true

I think we’ve seen regulators over the past decade or more go through many changes, aggressive and not aggressive depending on who’s running the agencies or what political parties are in power. I think one thing that has been trending the right direction for us is the FSI’s mission. Our regulators, our elected officials do understand who independent financial advisors are perhaps more so than ever. And maybe for the first time our mission has actually been incredibly successful. So while the regulatory environment certainly is one that we’d love to see improvement in, it has been trending the right way over the past 5-10 years. And I think independent advisors have never been more powerful and having a voice and advocating for regulations and policies that makes sense to them. That’s a great trend.

Gillian: So there is a huge opportunity for the people here on the frontline to shape what’s coming down the pipeline?

David: Absolutely.

Bill: So I agree with you completely, David. I think that this trend towards an advisory based practice, it’s at least 35 years old, it possibly started 35 years ago. It is accelerating. I think it’s accelerating as the baby boomers continue to march towards retirement. I think that the average advisor puts his or her clients’ interest first, period. And as Dale said, there are some bad actors out there; it’s the regulators job to make sure that we are protecting the investors, protecting the consumers. It’s all of our jobs to make sure we’re protecting the consumers. This trend towards independence, I think will continue to accelerate. It has been the fastest growing channel within the financial services industry over the last five years at least. And historically the barriers to independence have been technology, access to product, brand and then the inability to run your own business. And most of those barriers have come down because technology today is ubiquitous. You can get great technology to flush out. It’s an open architectural world. So your clients aren’t sacrificing just a product or platform, brand. Well, brand can work both ways. We saw that with the last correction. And then it comes down to the ability to run your own business. And one of the things that we spend a lot of time on is helping our advisors with the tools and resources they need to be a successful small business owner as well as a great independent financial advisor. So I think that’s where making sure that you align with the right partner is really important, you need to have the platforms, the tools, the practice management support necessary to run your business as well as support your clients.

David: I think Bill’s right. I mean we’re clearly in a period of mainstreaming in our industry. It’s probably not the most creative period that our industry has been in. But it is probably one where a lot of mainstream is occurring. It sounds like Bill is spending a lot more time with financial advisors in helping them work on their business, not in their business. And I think that’s a very critical moment, right. How do you use all of this ubiquitous technology and products and all the things Bill’s describing to be able to create better outcomes for clients? That’s actually a very exciting point to be in. But it does look different than what it looked like five years ago.

Bill: Well, when I got into the business 30 years ago you managed your clients’ money. That’s only one of the things you do today. I think the complexity that the average advisor faces; supporting their clients has never been higher. So the average advisor needs to make sure that they’re helping to manage their clients’ assets. But they also have to solve for really complex financial planning questions, around elder care, around, maybe they need to prepare to take care of two families. I mean there are more complex financial planning questions that require time. So that’s why I think having the right partner is important. If you’re an independent financial advisor, the highest investor use of your time or for any financial advisor the highest use of your time is with clients. And so as an independent advisor, the more you can outsource things that your partner can do through scale, the more time you have, [inaudible] time.

Gillian: Now, there’s a point that all of you made individually. Bill, you kicked it off. And Dale, I’m going to bring this to you. We are seeing an increasing demand as you’ve said, for financial advice. But I would argue too that perhaps investors have more access than ever to research and other things to make their own decisions. So explain to us a little bit about what’s driving this demand in a kind of hyper informed world. And what are some of the types of advice that perhaps you’re giving that Bill already alluded to, that you weren’t giving before?

Dale: Well, so I want to caveat my answer. You know, I’m the lobbyist for the industry. And so I’m focused on the mess that’s going on in Washington [inaudible]. And it’s a mess.

David: And they need plenty of advice too.

Gillian: I was just going to say, you are a busy man.

Dale: A couple of brief observations. Let me start at kind of the firm level and then I’ll come to the advisor level and answer your question. I’ll put my 30 years in the business card on the table too. And if you look at the role of a firm, in fact the name of the panel here is the Broker Dealer Panel. The reality today is broker dealer is regulatory nomenclature. These are full service financial services firms and partners to independent businesses. Now, that’s not as concise as, you know, it’s three syllables.

Gillian: I don’t know if I could get that all around as the name of the masterclass.

Dale: So when I started 30 years ago, and this is again, way oversimplified. But when I started 30 years ago these firms were big broker dealers with a small but growing investment advisory business on the side. And again, oversimplified, today for most of the firms in FSI’s membership, that equation has flipped, but more importantly than just the revenue mix and the regulatory nomenclature, it’s back to what Bill said and what David said. These firms are critical business partners for independent advisors, more and more independent advisors are choosing either a transition from a Wall Street environment to an independent firm to own their own business. We’re also seeing in some cases a trend where an advisor at some point decided to try to … we even call it regulatory arbitrage, shed their broker dealer license to go RIA only in an attempt to try to relieve some of the regulatory burden and seize the fee based opportunities in the business. In some cases we’re seeing those advisors come back to the partnerships that these kinds of firms offer. Now, the other answer I would tell you, Gillian, to the question of, I think advisors who are paying attention understand that they’re dealing with a challenge and an opportunity. Bill talked about it. Clients’ financial needs are more complex than ever before. And they are more well informed than ever before. Now, sometimes that information overload…

Gillian: Works in your favor.

Dale: Can lead to paralysis and can be very negative. But then you get to the role of an advisor away from the technicalities of the business. Most advisors spend a lot of their time helping their clients avoid making mistakes, avoid making bad emotion based decisions because the market’s here today or the market’s here today or whatever. Most advisors are helping clients take a very long term view of we’re on a plan, we’re on a path to get to the goals that you said you have.

Gillian: Well, I was going to say, I wonder how many phone calls are being filtered as the Dow kind of did its seesaw over the past couple of weeks. So, Bill, I’m curious, your perspective here too. How is this demand for advice keeping pace with the increase in information? Do you think that that’s what driving perhaps this interest?

Bill: Well, I agree with Dale. I think that investors today have access to more and better information than ever before. I believe their needs are more complex than ever before. My belief, and this may be oversimplifying the role of a financial advisor. But that is their role is to make sure that their clients don’t make a catastrophic mistake that prevents them from meeting their long term goals, whatever those goals are.

Gillian: So playing defense?

Bill: Well, I don’t think it’s playing defense, I think it’s making sure that their clients stay, have a financial plan that aligns their savings, their investment management, they’re planning to what their long term goals are. And so that’s not playing defense. I think that’s being very proactive, making sure that they have a proactive plan for their clients to meet their long term goals. As I said earlier, I think as the business gets more complex, the most valuable commodity an advisor has is time. Can’t make any more of it, they don’t have enough of it. And so for a financial advisor, if you can provide them as a partner the gift of time, where they can spend more time with their existing clients, more time working with new clients. I mean that should be the goal of a partner, whether you’re a broker dealer or a custodian you need to provide your advisors more time, because that’s what they need to solve those more complex questions.

Gillian: So perhaps less time focused on the back end and more time in front of their clients, helping them make decisions.

Bill: Without question.

David: Can I just focus on this point, just for a minute? Because I completely agree with everything Bill’s saying, to the point where we’ve actually done research on the degree to which what Bill’s describing actually shows up in practice. So I’m going to give you an example. So our firm, like Bill’s and like many other firms like us have a home office team that builds investment portfolios at scale for financial advisors. It’s a way for them to do exactly what Bill’s describing. It’s to focus on spending time with clients, giving great advice, becoming better financial advisors, working on their business, not in it. And leverage firms like Bill’s and mine as much as possible. What we analyzed for these financial advisors was the degree to which everything outside investment performance in their firm is working well. And what we found as we did this research was that for the firms who leverage our organization, again I would suspect the same thing would happen in Bill’s, at the maximum rate they outperform their peers in everything non-investment related. They do more long term care insurance, they do more disability insurance. In our roles, because we work with CPAs, they have more CPA revenue per partner. They bring in four times as many clients. I mean you name the metric, the firms were outperforming in every category that had no seemingly direct correlation to investment performance. It’s the proof that Bill’s exactly right.

Bill: And so the consequence is the advisor is able to solve for a broader set of needs, a broader set of those complex financial planning questions than ever before.

Gillian: Now, I want to ask a question that’s perhaps in tandem to what we’ve discussed, which is this increase for demand for advice. Okay, everyone’s coming to you, how do we ensure that they’re satisfied? Are there different drivers of investor satisfaction today than when you started in the business, would you say?

Bill: I would, I think that when I started the business, you measured your performance based against how you performed against a specific indices, now, whether it’s the Dow, the S&P, that’s how you based your performance. Today I think most financial advisors have moved to gauge performance based on whether or not their clients are on track to meet their stated goal. So it’s an outcome based type of performance gauge. And that makes sense because when you consider as the baby boomers get older, most of them are, you know, statistics have shown that many of them have under-saved. And so making sure that they’re putting enough money away to meet their long term retirement needs is critically important. A lot of investors today are in the distribution phase and so making sure that they’ve got the right distribution plan in place, so they’re not depleting their assets, which is critically important. Again, I think the role of a financial advisor is to make sure that they have a clear picture of who their clients are, what their long term objectives are. And they have a plan to get their advisors to those long term objectives.

Gillian: And I would imagine that to some extent it’s not personalizing those outcomes, right. So it’s not just about meeting the benchmark, it’s what is the outcome that you desire, whether it’s being able to retire at a certain age or otherwise?

Bill: Yeah, how you do against the S&P 500 is not necessarily as important as whether or not you can retire when you want to retire, whether or not you can educate your children or, you know, take care of your parents.

Gillian: Dale, are the regulators helping or hurting?

Dale: Yes. I think we’re moving in a very positive direction with the regulators. I think my sense is SEC, FINRA, state regulators, those are the ones that are primarily overseeing independent financial advisors in these firms. And I think they are growing, to David’s point, I think they’re growing in their understanding of our business, our business model, the role and value of the financial advisor. I think part of their role as a regulator; they’ve got to have a healthy skepticism. It’s okay. I sense more and more they’re more inclined to set that skepticism aside and understand what’s going on in the businesses of the firms and the advisors they’re regulating. So I’m encouraged by the direction we’re going. And again to David’s point earlier, I think the industry is, and through FSI we’re better positioned than ever to … we are now an incredible partner with the regulators in shaping those outcomes. We’ve worked hard to earn a proverbial seat at the table. We do that through constructive engagement. We don’t just complain and point out here are the problems with the rule you’re proposing. We’re committed to being an active participant and bringing solutions, not just pointing out unintended consequences. But here are the ways to get to the outcome that the regulators want and that our members in the industry want as well.

Gillian: Yeah, David, you know, same question to you. Obviously when you created your business you saw this need that everyone needed that CPA when they were going out and soliciting investor advice. So talk to me a little bit about sort of what drives satisfaction from your perspective?

David: Sure. I mean there’s two things that are very important to clients. One is the financial plan that Bill’s describing. And I’ll come back in a minute and sort of give maybe a little bit of a contradictory approach there. But it’s definitely the need for a financial plan that helps a client meet their life’s goals, right. I mean this is the thing that they’re striving for, even if they don’t necessarily have the words to use it, that’s what they want from financial advisors. And we know that financial advisors’ biggest role is helping the clients stick to that plan throughout the ups and downs and bobs that come along on the way. One of the most important things for clients, which is something our organization and our financial advisors do uniquely well is to save taxes, right. Because it’s not necessarily what you make, it’s how much of what you make you actually get to keep. So for most organizations, their disclosure statements, consult your CPA or tax advisor before you do anything, is our marketing approach, right. This is actually who we are. You’ll never see a disclosure like that on any of our paperwork, any of our advertising because we are the tax smart financial advisors that are giving advice. In the more complex world that Bill and Dale is describing, clients need tax advice as much as everything else along with that. In a complicated life you need to be able to manage your taxes extraordinarily well. I’m proud to work with, you know, 400 CPA firms across America that do that.
I think back to your earlier question around advice and are clients sort of happy with what they’re receiving. I think to some degree we don’t necessarily know. And in cases where we do they may not necessarily be, this is an industry statement as happy as we’d like that to be. So some examples, right, Invesco has done some research recently that shows only 3% of clients are happy with the review meetings with their financial advisors. I mean that’s a terrible statistic. And if you ask financial advisors, “Are your clients happy with the review meetings?” More than 90% of them are going to say yes if you ask. And if you ask them, “How do you know?” Most of them don’t have an objective answer. So I do think there’s more work to do in really understanding whether or not we’re meeting the needs of clients. There may be industries doing as a whole today. Again when I talk about a practice management approach working on a financial advisor’s business or being the most important thing right now, these are some of the things that I’m describing. Back to what Bill’s talking about, goals based investing is something that probably not enough financial advisors are doing in the marketplace, and something that’s extraordinarily critical.

Bill: Well, Dave, you look at the studies and I think every year’s spectrum comes out one where they talk about the attributes that a client looks for from a financial advisor. Performance usually ranks six or seven. It’s how you’re talking to me, how quickly you answer my calls. How responsive are you? Do you know me? Right, do you know what my long term goals are? I think that’s what drives client satisfaction today, more so than whether or not you outperform the S&P 500. So I agree with you, I think the complexity of what a financial advisor does today to serve their clients is much different than just a few years ago.

Gillian: Now, we’ve thrown a few jabs at the regulators early on and a few compliments too. But I think now is time to really get in the ring and talk a little about some of the regulations that are facing all of your businesses. So, Dale, I’m going to let you kick us off. If there’s any one conversation that I have whenever advisors come into the studio it’s, “I guess we have to talk about the DOL fiduciary rule.” And I guess we have to talk about it here and now. Give us a little bit of your outlook for kind of the future implementation and how you think it’s impacting the industry?

Dale: I have a personal life, Bill, we’re getting to a point where we don’t have to talk about it.

Gillian: I apologize for not giving you that outcome today.

Dale: Well, you’re okay, perfectly okay. So where we are today in March of 2018, the DOL rule, the … gosh, what is the phrase I’m looking for? The Impartial Conduct Standards went into effect earlier, middle of last year. But the implementation of the bulk of the rule, to use an [inaudible] term is delayed until the middle of 2019. That’s a good thing because our view all along has been the goal of the rule we’re 100% in sync with. Investors, particularly retirement investors need to know, need to have confidence that the professional they’re going to go to get retirement advice is always acting in their best interest. The question is what kind of regulatory structure, what kind of rules do we put in place to get to that goal? The DOL rule unfortunately undermined those laudable policy goals because it was too complex, it was too costly, drive the risk and litigation exposure. And had the serious unintended consequence of saying to an important segment of the American population, “You don’t have enough to afford a financial advisor to help you with your retirement goals. Because that advisor can’t take on the risk and so forth to serve you.” So the pause, the delay in the rule gives us a chance to try to work together with the regulators to try to solve for that, and create a workable rule. A very important part of this equation is getting the SEC in the lead.
Under Chairman Clayton, he’s made it clear from very early on in his tenure that this is a priority that for his chairmanship is to have the SEC craft a uniform fiduciary duty, a uniform best interest standard that works across all retail financial advice providers. And from the client standpoint, that would apply to every part of their relationship with a financial advisor, not just the retirement piece over which the DOL has responsibility. So we’re definitely moving in the right direction. We’re not across the finish line yet. I’m hopeful to see the SEC coming out with a proposal by the middle of this year. I’m encouraged by what I hear in terms of the coordination, real meaningful coordination now between the SEC and the DOL. It remains to be seen exactly what the DOL does. I think it’s too early. But I think in broad terms we’ll see some kind of rolling back of the more unworkable aspects of the rule in real coordination with what the SEC does.

Gillian: And, David, when you look at this standard would you say that it’s cumbersome to the point that it prevents advisors from serving a broader swathe of the population, and let’s just say the affluent, do you think that some of these regulatory hurdles are preventing more people from getting advice?

David: Yeah. So first, I mean we were in a world where 92% of our financial advisors were already held to higher the suitability standard, whether they’re CPAs, CFPs, AIFs, they had a designation that held them to a higher standard. One of the things that we have seen as a result of even the elements of the rule that Dale was describing being implemented, is financial advisors doing less business with smaller clients. So an example, simple IRA plans. The amount of business we do in simple IRA plans is down dramatically since the rule was announced, small accounts being held directly with the product manufacturers. We’ve seen dramatic declines in that business as well. We’ve still left that as an option for our financial advisors. We’ve tried to find ways to bring in more smaller clients in under a fiduciary umbrella. We’ve built a managed account program. We bring clients in with a minimum $5,000 investment. I think most firms have looked for ways to try to address that marketplace in a fiduciary way. But it seems as if, at least from our perspective, financial advisors are doing much less business with smaller clients than they were before. I think that’s a shame. I think as much as our firms, Bill’s, mine and others have focused on trying to do great things with the DOL’s conflict of interest rule. We’re not necessarily the ones who get to decide exactly what advice is being provided to clients and by who. There have been the unintended consequences I think, that Dale’s been afraid of.

Bill: So yeah, I would agree, I think that most responsible firms believe that you should put, an advisor should put their clients interests first. I think most financial advisors do put their clients first. In terms of the DOL fiduciary rule, we're a supporter of having a universal fiduciary standard in place. What we didn't like with the current fiduciary rule were really two things. One, it was the right to private action, and second, it was some of the administrative responsibilities that both Dale and David talked about. Over the last 36 months though, we've spent a lot of time trying to solve for the DOL fiduciary rule. And we believe that there will be a fiduciary rule in place, whether it's under the DOL or the SEC, that's yet to be seen. I will say that the work we've done in terms of rolling out new technology, the pricing work we've done, providing new tools and platforms for our advisers, that work will remain in place. So we believe that the fiduciary rule really has been a catalyst for the industry to solve for challenges that we've experienced with responding to some of the trends we alluded to earlier, that those changes will remain in place. And we expect that, I don't know, 80 or 85% of the work we've done to support the current DOL fiduciary rule, will remain in place and make our advisers better prepared to serve their clients in the future.

Gillian: So it's not so much the spirit of the rule that's in question, it's been more some of the nitty gritty that has created a burden on the advisory population?

Bill: Yeah. I don't think anybody objects to the spirit of the rule. You need to put your clients’ interests first, it's some of the administrative challenges that come with the best interest [inaudible]. And it was the right to private action, you know, I think FINRA has an arbitration process that the industry's used for a long, long time to sell client disputes, moving that to the civil courts, you know, would create challenges that, I think, lots of firms object to.

David: I think there's been two approaches for firms in dealing with the rule. I think one approach has been bare minimum compliance. What's it going to take to make sure that we get this rule put into our books and make sure our systems work that way. I don't think that's the approach that Bill's firm or ours followed. Unfortunately probably are a number of firms in the industry who follow the bare minimum approach. I think if we pay attention to the spirit of the rule the way we're describing, we will find ways to make our businesses better and to be able to provide better products, services, pricing to financial advisers and their clients in the marketplace. And that's been our focus as we go through the rule. Again, this was 92% of our advisers actually held to a fiduciary standard, trying to find ways to help them be successful in our marketplace. That demanding fiduciary advice was critically important to us, that part of the rule was good for First Global.

Bill: Yeah. So I think the rule itself is magnifying some of the trends we see in the marketplace. Clients are demanding lower fees and greater transparency. Advisors need better tools, better support to work with their clients. And so that's what's being pulled through as firms look to solve for this fiduciary rule.

Dale: And the innovation opportunity that comes out of this, and then one of the reasons I've loved being a part of this industry for the 30 years I have, is these firms, these two in particular. But all across all FSI member firms, are some of the most innovative in the financial services industry in the face of challenges like this. And so the innovation opportunity going forward is for firms individually and perhaps collectively through FSI to solve for the problem that David described of how do we make sure that small investors for whom access to professional advice, and avoiding those emotional mistakes. I would say is more valuable, the advice to them is more valuable than the high net worth client with the most complex financial planning needs, because they don't have as much to work with. They have more at risk. And so how do we solve for making sure that they get advice that's in their best interest and that they can afford and that helps them move towards achieving their mainstream goals.

Gillian: Now, Dale, in an effort to prevent you from personally having to talk about the of DOL fiduciary rule, I'm going to move you over to the broker protocol. If you could kick off our conversation here, this is voluntary, correct, also to [0:34:55] the opportunities and maybe some of the hindrances here.

Dale: Well, I'm probably going to let Bill talk the most about this. But just kind of a broad lens, I don't remember the exact timeframe, but many years ago a group of firms, primarily Wall Street firms got together and said, "Hey, let's make it..." I'm going to use really oversimplified terms, "Let's make it easier. Let's don't end up trying to sue one another. If an adviser wants to move from firm A to firm B, and avoid violating privacy rules when it comes to client information.” Thus resulted the broker recruiting protocol. A lot of independent firms ended up joining the protocol as well, and I think what happened over time is the stream of advisers moving, while they may have been moving within Wall Street firms, a stream of advisers moving from a Wall Street platform to an independent partner has accelerated over the years. And so now some of the major players have decided they're going to pull out. And the question is, in my view, you know, does something resembling the broker recruiting protocol remain in place? The other big questions are what's in the best interest of clients when an adviser moves from firm A to firm B? What rights does a client have to know about the specifics of that move? I think those are some of the questions at play, none of those I don't think have been resolved yet.

Gillian: Bill, what's your take?

Bill: Well, as Dale said, the broker dealer protocol I think was created in 2004. And was at that time the six wirehouses that became signatories of the protocol as a way that limit the litigation expenses between adviser movement amongst those firms. And since then lots of firms have joined the broker dealer protocol. It allows advisors, if they follow the protocol, to take certain information about their clients with them when they leave, and solicit those clients. The vast majority of firms though in the industry, aren't signatories of the protocol. And this trend towards independents, I don't think is going to slow down. I can tell you from our perspective the vast majority of the advisers we attract year in, year out come from firms that aren't members of the protocol. And we provide them, I think a way to make sure that they continue to follow their obligations to the previous firm, and do so without getting themselves in trouble. And so typically when an advisor that is leaving a firm, that does not seem to have the protocol, you need to look at their employment contracts. You need to look at their privacy policy. We recommend that they engage local council to help them walk through those restrictive covenants, if they have any at all. And put together a plan to help them move their assets, move their clients quickly and efficiently. I can tell you empirically when you compare an adviser and how they move their clients and ramp their business, protocol versus non protocol, while individual advisers, you know, there may be differences based on the individual, empirically there isn't a lot of difference in terms of the ability to move their clients and ramp their business. What they need to do is engage local council and make sure they're fully aware of their rights and obligations.

Gillian: So, David, we’ve addressed some of the regulatory headwinds but also the opportunities associated with them and how to navigate them. I want to talk a little bit about some of the demographic trends facing the industry. The first would be this idea, and I believe you floated it to me when we spoke before this panel, the idea that the demographic of the adviser industry is not necessarily matching the demographics of the people seeking advice now. How do we buck this trend?

David: Yeah, I mean it's a complex question. So just to go back to what you mentioned, the demographics of people providing advice in America, the demographics of people who are in the firms bringing in advice providers, don't necessarily match the demographics of America. The demographics of the clients of those firms don't match it. I don't think we should be okay with that. Solving it is incredibly complex. I mean so there isn't a particular sort of one shot answer to this. I do think that if we were to go back and look at this in a bigger picture, we've got to make two things happen. We've got to improve financial literacy across America. And we can't wait until people are in college to do it. So we've got to start far earlier in trying to improve financial literacy, that will give us a leg up. There are probably people who could use financial advice who don't think to ask for it. The second part is, as a career we need to make the profession of wealth management more attractive to people all across America. And again waiting until college will be too late. There are still far too few college programs who actually get a degree in financial planning, there are some, but there are still far too few, who for the college financial planning is a profession. We've got to go back early. We've got to be able to start in high schools perhaps and have high school students be able to see this as an attractive career for them moving forward. I think until we do those two things, financial literacy and making it an attractive career choice in high school, and do it across broad communities in America, I don't think the demographics are going to change significantly.

Gillian: I see. Please go ahead.

Bill: Yeah. Well, there are just two things, one, I agree with David. I think a big part of the challenge is making sure your advisers have the tools to segment their client base. So they can effectively serve the needs of the clients regardless of their net worth. I do believe that as an industry we've got to challenge. You know, we've got an aging adviser population, and we need to bring in more new financial advisers. The demographics of our country are changing as well, and so we need to be committed to diversity and inclusion. And so we need to bring in not just more advisers, but more advisers that are more representative of how the demographics in our country are evolving.

Dale: I would add, I don't think we're there yet to an industry wide solution or set of solutions to the challenge. Maybe we'll find one or more of those at some point. I do see a lot of innovation on this, addressing this challenge in the individual firms and at the frontline advisor and advisory firm level. I think there are firms, it’s a constant topic of conversation at our conferences amongst our CEOs and amongst the financial advisors is, is not only how do we diversify to make sure we’re serving clients of different asset sizes. But how do we make sure we’re in a position to provide that valued trusted advice to a client base that doesn’t look like us at all? Does it have the same background and perspective that the mid 50s, predominantly white male advisor population has now? Firms and advisors are actively trying to solve for that. So I think we’ve identified the problem. And I think lots of folks are talking about how do we solve for a mass across the industry solution, I don’t think has quite emerged yet.

David: I will add to this, right. I mean I think we’re in a stage; it’s probably not the stage that’s going to get us to where we want to go. I mean first we need as an industry to acknowledge that we have not been friendly to the broad demographics of America. Now, that’s changed. But I mean go back 20 years, I mean it probably doesn’t look the way it did today. So we at least need to start with the acknowledgement of that. That reality has caused us to not have trust across the broad demographics of America. The financial advisors look at demographics as a marketing plan. That will not build trust, right. There needs to be something much deeper, much more genuine much more integrated [inaudible] for this to actually work. We have work to do as an industry.

Bill: I would say, historically these large training programs when you bring big classes of college grads into the industry, they’re expensive and they haven’t worked very well. I think any solution we come up with as an industry has to involve engaging our current advisor population today, enrolling them, enrolling them into this process. The only way we’re going to be able to transfer that knowledge base is for that seasoned financial advisor to help us bring new entrants into the business and mentor those new entrants.

Gillian: Well, it’s funny, a question I was going to ask later on, but I think it’s worth asking now is how do you recruit and maintain the best and brightest? What’s the strategy now and then how does that increase diversity as we move forward?

Bill: Well, so we have an interesting model, Gillian. To my knowledge we’re the only firm in the industry that recruits across, at scale across all four major channels. So historically about a third of our recruiting production comes from wirehouses, a third from other independents, 20% from insurance firms and 10 or 15% from banks and financial institutions. We also attract advisors across the business model continuum, so registered reps, hybrid where we process their brokerage business through a BD and service primary custodian for the fee based business, under their own IRA. And then a standalone IFA or registered investment advisor platform. We open up new OSJs, new businesses, we plug advisors into existing businesses. So that allows us to cast a really wide net. It allows us to stay ahead of sort of event driven opportunities in the marketplace. And that, the ability to attract advisors across the business model continuum, across those four channels, also allows us to take advantage of best practices, knowledge, the best ideas in the industry. So that really has been a key driver, not just for our ability to attract advisors, but for organic growth. In terms of attracting brand new registered reps to the industry we have a new program that is launching actually next month. Where we’re going to identify prospective financial advisors, get their license, train them and pair them up with a seasoned financial advisor to mentor them.

Gillian: And that mentorship approach.

Bill: And we’re experimenting with, or testing four specific demographics. We want to bring in more women advisors. We want to work with veterans. We want to work with millennials. And we’re also going to work with LPL home office staff that, you know, have grown up at the firm, are looking to make a career change themselves and go out and become a financial advisor.

Gillian: So looking inside for talent as well?

Bill: Yeah. Our goal is to ramp this program quickly and to be a key feeder into the industry for new advisors.

Gillian: Pose the same question to you.

David: Yeah. I mean this maybe sound a bit silly, but it’s absolutely true. I think First Global’s in the business of working with the best in breed. CPAs are the seventh most trusted profession in America. Financial advisors are down near the bottom of the list with members of congress. I mean we are working with the best and brightest across the industry. And I don’t think financial advisors across the industry have earned that reputation. But statistically that’s where they show up. I think that’s, I mean financial, I mean investors across America are looking for trusted advice that will help them save more, right, save more beyond what their investments, their after tax return. The CPAs are the ones who are able to provide that. The other thing that I think is interesting from a best and brightest standpoint, to the mentorship approach that Bill is describing, the average of a First Global financial advisor has been flat for the past six years, in the face of rising age demographics. And the reason for that is these firms are solving succession challenges. We have an active mentorship program. We are sending First Global people out as financial advisors into the community. We are bringing in second advisors into firms all the time, we’re helping firms recruit in colleges and universities to bring in that next financial advisor. We’re going as far as helping firms bring in the next generation of CPA firm leadership as well in the practice. To us that’s critical.
And I think aside of attracting and retaining the best and brightest, we’re also a purpose driven organization. The purpose of First Global is to enable intentional living. And we lead with that as something that’s integral to making sure that we provide great advice to the American families we serve. That will attract best and brightest as well. But yeah, there’s always more to do in this regard. But I feel pretty proud of the work we’ve done so far.

Gillian: Now, there’s another C-Change that’s occurring. And, Dale, I’m going to bring you into this, which is that we are seeing disruptive technology at a pace unlike any other. And what I always find interesting is that it always seems as if the regulators are playing catch up with, with technological innovations. So I’m curious to know where you think we are on that front, and if you think, for example, that advisors and cyber security protocols, which are probably among the most important are keeping pace with where they need to be?

Dale: I don’t know a firm or an individual advisor who would say they are confident, absolutely iron clad confident that everything’s buttoned up against cyber security concerns. Because the bad guys on the other side of the equation are constantly changing methods, whether it’s individuals in, you know, in their dark basement of their mother’s house or whether it’s a state actor. And so this is one, fighting the challenge of cyber security, to focus on that is one where I think the regulators in the industry are more on the same side of the table than perhaps any other challenge we’ve faced in a while. I’m encouraged that I’m hearing regulators acknowledge more of what they don’t know, which is helpful. And inviting the industry, through FSI, through individual firms into the conversation to explore how do we, how do firms tackle the challenges from a technological standpoint? And then how do we shape the regulatory environment to support that effort and ultimately protect investors.

Gillian: Bill, how do you think about the changing pace of technology when serving your advisors?

Bill: Well, I mean technology is a great equalizer. And I think that the average advisor today has access to better technology, better tools than ever before. That should allow them to really scale their business. And so that should allow them to work with more clients and solve for a broader set of needs than ever before. And that’s increasingly necessary. Again, as we’ve talked a lot about the changing demographics of this country and our industry, and as advisors move towards retirement, making sure they have the tools and platforms to support their clients is critical. This whole succession planning question is an interesting one. We have a succession planning group with inside LPL that focuses on … we launched it several years ago as a way to create an orderly transition for advisors that are retiring from LPL to transfer their practice to another LPL advisor. And so while we turnover 10 or 12% of our advisors every year, typically because advisors are retiring, we retain 97% of the trailing 12 production because of this succession planning program. We’re able to create that early transition. What we’ve found though that is that it’s not just attractive to LPL advisors, increasingly we’re talking to advisors at other firms that are at a point in their life or their career where they need to make a change. But they also need to think about a succession plan. And whether that is coming to LPL and finding a potential LPL advisor, taking over their practice, or come to LPL with the intent to acquire LPL practices. That is becoming an increasing trend for us.

Gillian: And I can imagine technology plays largely into the succession plans as it evolves?

Bill: Well, it does, I mean, David alluded to the satisfaction levels that investors have with their financial advisor. And I see lots of studies. I will say that in our experience and the industry experience is that if you’re talking to your clients, your clients are going to follow you, and so when we look at a new advisor joining LPL, really across the industry, they typically when they move, take somewhere in excess of 75 or 80% of their clients with them. Some they leave behind intentionally for lots of reasons. But the vast majority of their clients come with them, because they are doing a good job of supporting them and because the advisor needs their help, excuse me, because the investor needs their help.

Gillian: David.

David: Technology is a price to play, for firms like Bill’s and ours. I mean you have to have great technology to be in the game. Now, we probably go through cycles where we’ve got cutting edge technology and then it’s average, and cutting edge and average. And we each move back and forth across the industry who’s got what and when. But generally speaking it’s price to play. The challenge across the industry, I don’t think first and foremost is giving financial advisors new and better technology tools. I think we need to do it, but I don’t think it’s the first challenge. I think the biggest challenge for firms like Bill’s and mine is making sure that financial advisors and their staff can adequately use the technology at their fingertips at its full potential. I don’t think we’ve scratched the surface with a lot of technologies in the industry. I would imagine the average financial advisor is probably utilizing 20% of the technological capabilities that firms like Bill’s and mine already provide. I think for us that’s one of the biggest opportunities is to make sure that firms are getting the most value out of what they own.
The other thing which I think is critically important, especially in this world of rapidly evolving technology is to have the core of your infrastructure and technology built well. One of the biggest investments that we’ve made over the past 18 months has been in a sort of centralized hub where we can plug and unplug technology solutions through configuration and not softer development. So we can more rapidly bring in best of breed partners and integrate them into the First Global system by investing in a core capability that financial advisors will never see. They’ll never touch it. They’ll never experience it. They’ll never feel it. Yet the outcomes they receive of us having it there will be tremendous. Again, as the pace of technology moves, we can move much more rapidly with it, so rapid core is vitally important to us. And the last point in cyber security, I would imagine, Bill, your largest capital expenditure is probably technology, it is for us. And I would imagine that within the capital investment and technology, first and foremost is technology products and tools. Second is cyber security. And for us it’s the second biggest capital expenditure that we have as an organization. It is vitally important to building trust with investors. They need to feel safe and secure when they give their confidential information, their wealth, their hopes, dreams and aspirations to you. We’ve got to be invested in. I think we do a great job. But to Dale’s point, there’s always more you can do.

Gillian: Now, I’m mindful that we’re coming to the end of our discussion. So I’m going to make a big ask, but if ever there was a panel that could handle it, I think it’s this one. And, Dale, I’ll start with you, as we frame our closing comments, give me a sense of what the firm of the future looks like. And then where specifically your organization fits into that.

Dale: Wow! So I think in a very broad sense, the firm of the future, regardless of whether it’s a smaller more boutique firm that has the advantage of a deep personal relationship with the advisors affiliated with it or whether it’s a very large firm like LPL with the scope and scale that Bill has described. I think that that firm of the future has made the investments that we’ve talked about here today and ensuring that every client, every advisor serves the best interest of every client every time. If you kind of focus on that pinnacle goal in every structure, every investment and every aspect of that relationship supports that, I think that’s where we’re going. I think we’re going to see firms of the future that are more specialized. Just pick a few spots, I think responding to the demographic changes, I think we may see more and more firms of advisors on the frontlines that may all be of one demographic because that’s their client base. My hope is we’ll also see firms, both of advisors and then partner firms like these that are incredibly diverse to serve the diverse needs of the population. So I think we’re moving in the right direction. The obstacles to get there, one of the main reasons FSI exists is the regulatory environment, our regulators are most of the time catching up to that innovation, catching up to those rapidly changing trends.
And FSI’s focus is constructive engagement to be an active partner with the regulators, active partner with lawmakers in shaping that regulatory environment of the future so that it’s modernized to really fit how advice is delivered to the main street investor in the 21st century. I think we’re moving in the right direction. I don’t think we’ll ever get to a point of problem solved; we can close FSI’s doors and go do something else, because unfortunately we’re never going to extinguish greed out of the human heart. And so there are always going to be people looking to take advantage of clients. So regulators are always going to have folks they’ve got to go after. And unfortunately that’s going to result in negative headlines. That’s going to, at times, provoke negative reactions, overreactions from regulators, from policymakers, thus the role of a collective voice like FSI in trying to guard against that.

Gillian: Thank you, Dale. David, firm of the future and where do you fit in?

David: Sure. I’ll describe to you sort of this pretty quickly. First, Bill’s in my level. I think there’s going to be two types of firms, probably as firm of the future, one will be large scaled enterprises like Bill’s. The other will be sort of midsized and larger boutique firms that serves specific niches, firms like First Global, right, CPAs being at the core of who we are. I think as it goes to the individual wealth management practices themselves, I think one trend, we’re probably not as an industry acknowledging enough, which I think will be very relevant to the wealth management firm of the future, is that over the next 5 years or so, financial planning and advice, which today is a pretty strong differentiator for financial advisors, will be far less so, say 5 or 10 years from now, that in and of itself will become price to play for a financial advisor. If you are not giving high quality comprehensive advice paired with a financial plan, you will not be in business. When that becomes the standard of performance for a firm, I think the next stage is something that Dale began to touch on. I think firms today need to start thinking about what can they be top decile in their state or nation at? I think firms are going to need to find very, very deep and strong specializations. And there’s an infinite number of them, thank goodness, as a way to provide further differentiation service and value to a marketplace that will continue to have more and more complex needs. The generic financial advisor as an advice provider will become very, very difficult to sustain, let’s say a decade from now. So my one firm of the future comment, will be for firms today to start thinking about what’s that thing we can be top decile in the state or nation at. Start working on it today before it becomes a defensive strategy.

Gillian: So identify your competitive advantage and specialize. Bill.

Bill: Well, I think we’ve talked about a lot of the characteristics of a financial services firm of the future. I believe the trends we’ve talked about over the last hour or so are going to increase consolidation. So we’re going to see margins continue to come down. We’re going to see the regulatory environment get more rigorous for all the right reasons. We’re going to see the demand for advice and what an advisor needs to do to serve their clients, get more and more complex. The demand for advice is going to go up. The complexity of what a financial advisor does will continue to increase. The firms, as consolidation continues, I agree with Dale and David, you’re going to see large firms get larger. You’re going to see boutique firms, you know, continue to thrive and be successful. The midsized firms, I think will be under increasing pressure. The financial services firm of the future is going to have the financial stability to be a long term partner. They’ve got to have a history of investing in tools and technology to support their clients. They need to have the right controls in place to protect their investors. Increasingly it’s about practice management support.
Again as the demand for advice increases and as the needs of investors get more complex, time is the most valuable commodity for the financial advisor. So the more time we can provide them the more clients they can serve. That extends to making sure that you’re increasing the efficiency with which they process business. You know, this is still a very labor intensive administrative business. If we can reduce those administrative burdens on the advisor and their staff, it allows them to work with more clients. It allows them to solve a broader set of needs. Increasingly I think advisors are going to be coming to us for things that haven’t traditionally fallen in our wheelhouse. And that is making sure that we’re solving for some of the softer skills that they need to use to leverage to effectively support their clients.

Gillian: Excellent. Well, Bill, Dale, David, thank you for taking the time to give us the state of the industry, to tell us more about your firms. And I look forward to having you back again soon. And thank you for tuning in. From our studios in New York, I'm Gillian Kemmerer, and this was the Broker Dealer Masterclass.