Having watched Stanley Kubrick's
"2001: A Space Odyssey" over 50 times, I observe an nuance that gives me different insight into its meaning with each new viewing. For me, not many movies are as thought provoking.
So this past weekend, when my girlfriend (who hated the movie and fell asleep) and I sat down to watch the film, something became bizarrely obvious to me.
"2001: A Space Odyssey" closely parallels the brokerage industry.
The analogy of evolution is relevant. The shared themes of technology, human change and exploration are relevant.
What are we observing within the securities brokerage marketplace today?
•The evolution of technology to create new product distribution channels and enable operational scale are requirements of profitability.
•The evolution of a financial adviser's role and value proposition in serving retail consumers. •The interest and uncertainty of exploring new frontiers, specifically within underserved consumer markets.
In no other area are the parallels so acutely observed, as brokerage firms' strategic interest to penetrate the underserved mass market.
Excluding discount brokerages, the full-service brokerage industry has not materially penetrated the mass market.
For reasons oversimplified below, I don't see this position changing anytime soon.
1. The brokerage business model
The securities brokerage sector is materially an asset accumulation and management industry. A significant portion of the existing distribution models including RIA, IBD, regional and insurance firms make more money the more assets they have under control. The noncompensable and compensable revenue streams, and gross operating margins increase as more assets come under management. The correlation of assets to firm profitability has only increased, based on increased percent contribution of RIA fee revenue to EBITDA.
2. The mass market consumer needs
The primary needs of the mass market consumer are not prioritized around asset accumulation, income and transfer. The primary concern of the mass market consumer is creating savings. It is managing their personal or household budget and having enough left over to save. This is different from retirement savings, which is affiliated with annuities or mutual funds. As a certified financial planner would say, the critical mass market concern is to manage their personal profit and loss (income and expenses) more efficiently, only then can working capital be generated to invest.
3. The role of an adviser
Similar to the brokerage business model, a dominant portion of the financial adviser population is motivated by assets. Regardless of the
financial planning discipline employed — money manager, investment planner, financial planner or wealth manager — the focus is the same. The more assets under control, the more money the adviser makes. Couple this fiscal motivation with an environment surrounding the adviser and you can understand factors enabling their behavior. The compensation,
financial planning process, technology, applications, products, training, supervision processes, marketing materials and language are designed to support the asset game.
4. Engagement models
Very few brokerage firms offer an adviser support services to penetrate the mass market. The majority of resources and services are targeted to help advisers penetrate and service consumer segments with more investible assets (ultra- and high-net-worth, affluent). In those vital few instances in which a wirehouse/regional firm has chosen to pursue the mass market, a separate channel independent of the full service adviser channels is introduced. This separate channel possesses its own P&L, operating model, pricing, leadership and in many instances internally competes with the other full service adviser channels. In this scenario, the full service adviser does not participate financially and loses control of the client to the other competing channel.
5. Change management
Whether personal or professional, change is tough. Period. The general mood within the industry is defensiveness. This is understandable. It is a pressure cooker for leaders of small- to midsize firms who deal with an array of threats to their P&L including increased regulation, higher payouts, gross margin compression, rising operating expenses, competitive pressures and new competition. It is a rare luxury for management to find the time to think untraditionally and innovatively. For many firms, the change dynamic is compounded by not possessing the necessary working capital to invest in innovative new business models to penetrate the mass market.
My sense is much of the above industry assessment is not new.
We are convinced an innovative advisory business model can be introduced to profitably service the savings concerns of the mass market.
However, like the analogy with "2001: A Space Odyssey," the new advisory business model is going to require evolution.
A material progression in business model fundamentals including the interaction between technology, the role of advice and the services offered to profitably penetrate the new frontier of the mass market.
What the brokerage industry needs now, is "2001: A Space Odyssey Starchild." A true revolutionary entity to enter the marketplace and lead the way.
Jeff Anderson is founder and managing principal of Anderson Strategic Advisors.
