Lessons for Broker Dealers and Wealth Management firms from FINRA Annual Conference

Last week, I attended the annual FINRA conference. While I've been in financial technology. I attended as both a technology executive and a financial professional (I hold a Series 7, 65 and manage a small UHNW/Family Office business); finance professional since 2005, and fintech executive since 2010.

While you can't say FINRA's annual conference is a compliance summit the reality is 99% of the attendees are compliance executives (as well as the vendors). Here were some startling trends: 

  1. Broker dealers  (as an organizational level) have moved away from nontraditional and structured products, even annuities: IBDs have largely abandoned the commission model seeing it as flawed and are all seeking a "wealth management" strategy that is fee based. The issue at hand is that not all commissions are bad and not all fees based revenues are good (aka reverse fee churning). You can't simply put an account into a fee based revenue model and consider yourself free and clear of regulatory burdens. This is certainly a "grass is greener on the other side" complex. 
  2. Fee based revenue is a "thing" now: it's always a thing but evermore so, in the face of rising operational/compliance costs, IBD's are grappling with wealth management. 
  3. Marginalization of commission brokers and compliance people; its all but certain that commission (series 7) brokers are a bad word (or it's made to feel that way). This isn't necessarily the case but it does certainly that way when FINRA makes a huge case of identifying "high risk brokers" and are making it an effort to weed them out. 
  4. Fear of Robo platforms: one thing for certain is the fear of "robo-anything". The advent of technology is creating this immense pressure on financial institutions to examine their value add proposition - justify your fees when robo adviser platforms can offer seemingly comparable services for lower fees. 

Here's what I see as a major need in the entire retirement industry; alternative yield and advanced hedging solutions beyond a "modeled portfolio". Why? because everyone is going and has gone the route of a "model" portfolio and forgoing the risk of being a hands on investment manager. Advisers have been doing this for a long time. And while outsourcing is not a new phenomenon, the concept of outsourcing "investment management" to firms such as Envestnet has gained rapidly over the last 10 years (since 2008/2009). However with the vast majority of wealth management solutions (across every segment) opting for this "outsourced investment management" solution, it will challenge the value add proposition from independent wealth management firms. Why? 

Well,...let's explain this phenomenon of lowest cost value add provider. Clients seeking retirement will always gravitate towards lowest cost-highest comparable combination. If RIAs, broker dealers and bank wealth management firms and "robo advisers" are all opting for a "turnkey modeled portfolio of stocks and bonds" - then everyone will have the same portfolio model given their risk. At the same time personal savings rate stands between 2.5% to 3% (depending on the statistic source). Retirement requires yield and hedges against volatility. So if everyone is offering all the same modeled solution - where is the "competitive advantage" going to come from to help Americans retire? 

Furthermore, consumers will wonder if I can pay a robo-adviser a smaller basis point compared to an RIA but they both offer me similar/comparable portfolio solutions - then is the financial planning and follow up service really worth that difference of fees? This then creates fee pressure on the traditional RIA model. 

The solution: going to back to my earlier point, RIAs and broker dealers ought to consider structured/alternative products that offer smart beta solutions (adjusted for the client's risk and retirement profile). This would be the non-modeled portion of a client's overall retirement portfolio. What this might do for the RIA segment is increase the added value by going upmarket in the value chain of financial services. Certainly something to think about......

Franklin Tsung