Change is inevitable and the financial services industry is no exception. Craig Markham, Senior Vice President of Advisor Experience, reflects on the changes the industry has faced over the past 32-years.
On Monday September 9, 1985, it was game on! Crisply dressed in my new suit, fresh white dress shirt and tie, it was time. Time to begin my career as a “Financial Consultant” for a national wirehouse. There I was, back from three months of training, Series 7 in hand. I was ready. My desk in the bullpen was also ready – equipped with a state-of-the-art telephone, the reverse phone directory, and a shared Quotron. Forty calls a day to find three prospects, one of which may eventually turn into a client. It was a numbers game, pure and simple.
The time I spent training in New York served me well. I knew every answer to every possible objection I would ultimately face from prospective clients. I also learned enough of the technical side to pique my interest for years to come. However, at that moment, I was a salesperson. With the rattle of the Dow Jones broad tape machine, the scroll of the Trans-Lux ticker overhead and the squawk box blaring, it was energizing. An adrenaline junkie’s dream. I knew I was in the right profession, but wasn’t sure how I was going to survive without clients.
The plan was clear: build enough business on my own and as my rookie peers flushed out, take over selected clients from their books.
Easy enough, right? However, what I failed to factor in were the “guys behind the glass”—the seasoned brokers holed up in private offices that looked out into the bullpen. Their days consisted of “mentoring” a few of us green peas, having three-martini lunches with clients, and, upon their return to the office, execute the trades suggested over lunch. The pneumatic tubes were filled with confirms everyday around 2: 30 p.m. By that point, a smoky haze began to settle in around the office, as the guys behind the glass were halfway through their afternoon cigar. They had a plan of their own: watch the rookies smile and dial for new clients and as they flush out, become the benefactors of their efforts.
Night after night working the phones into the evening hours, I began to see success. My bait? Usually pre-refunded municipal bonds. Who could say no to the healthy tax-exempt yields they were yielding at the time? In addition, the insurance of being secured via the refunding financing was very appealing. People that bought these bonds were by definition already de facto suitable for the bond. Clients who purchased these were conservative investors in a high enough tax bracket to warrant the purchase. Most were fairly sophisticated and they bought from me because, thanks to my firm, I always had an abundant supply. Something that their other brokers could not fulfill.
The financial services industry today looks nothing like it did in 1985. Gone are the wholesale training programs, the stock ticker, the Quotron machine, and the three-martini lunch. The municipal bond market is a fraction of what it once was. The independent broker-dealer model was still in its infancy. Brokers typically executed orders for clients on a non-discretionary, non-advisory basis.
Back then, our industry was about the sale and that sale was cloaked in purported advice. To be fair, some of those sales resulted in exceptional investment outcomes. Many did not, however, and those clients paid the price. That derogatory image of our business remains forever etched into the minds of many clients and ultimately, the regulators.
At the same time, a new player entered the game: the “do it yourself” platforms. Why use a broker when you can purchase a high-flying, no-load fund? Why pay full price for a stock trade when you can use a discount broker to execute a stock transaction? For the first time, investors could cut out the middleman, the broker. In my opinion, this was a main catalyst that led us to reinvent the way we did business.
Change is Inevitable
After a few years in the financial services industry, I had an opportunity to move to a small startup firm that specialized in trading strategies for high-net-worth investors. Thinly capitalized, the firm did not survive the 1987 market crash. I recalled the events of that afternoon as I was trying to work orders with our firm’s floor brokers. When I asked for a bid on a particular stock at the height of selling, the floor broker replied, “There are no bids.” Scary stuff.
The stock market structure today looks nothing like it did in 1987. The change that has taken place has made the market much more efficient and transparent. In addition, while the change was gradual, there were market participants that failed to adapt and eventually became obsolete. However, out of that disruption emerged a new way to transact equity business and it created a whole new level of interesting opportunities and challenges. The disruption that occurred throughout the 1990s was initially borne out of shifting regulation, but accelerated as technological innovation became table stakes in the trading business.
The parallels to what is happening today in the financial services industry are eerily similar. The DOL rule (the shifting regulation disruptor) has forced us to reexamine the way we conduct business. What will likely happen is that we will use technological innovations to enhance how we interact with clients and comply with whatever shape the rule eventually takes. There will be advisors that choose not to adapt and will eventually drop out. There will be others, however, who will embrace the change and whose businesses will flourish.
I am optimistic about what our collective future holds and look forward to being part of the evolution.
About Cetera® Advisor Networks
Cetera Advisor Networks LLC is an independent broker-dealer and registered investment adviser firm that utilizes a unique regional director model to support financial advisors through the entire life cycle of their business. As part of Cetera Financial Group®, a leading network of independent retail broker-dealers, Cetera Advisor Networks is able to build and support regional teams through local service, regional offices and a national home office, facilitating the success of financial professionals.
Cetera Advisor Networks is a member of the Securities Investor Protection Corporation (SIPC) and the Financial Industry Regulatory Authority (FINRA). For more information, see ceteraadvisornetworks.com.