Inside Information - March 2016

Early Warning

One of the best conferences of the year is in full registration: the FPA Northern California Regional Conference, May 31-June 1, at the Palace Hotel in San Francisco. Speakers include Carolyn McClanahan, Michael Kitces, behavioral economist Dan Ariely, Ross Levin, Dennis Stearns, Steve Wershing and Skip Schweiss. Register at: www.fpaNorCal.org.

Also: the conference registration fee to the Insider’s Forum conference (September 19-21 in Coronado, CA) will go up on March 18, so sign up now and save $50. And the first registrant at your firm can save an additional $150 by using the Inside Information coupon code: INSIDEVIP. (Additional registrants pay an already discounted $595.) Speakers will include Joel Bruckenstein, Harold Evensky, Deena Katz, Tim Kochis, Carolyn McClanahan, and Rebecca Pomering and several amazing panel discussions. (http://www.insidersforum.com)

Seed Succession Financing

Synopsis: Live Oak Bank is now in the business of financing the first stage of successors buying into their advisory firms.

Takeaways: The early stage loans are an alternative to seller-financing, with lower after-tax costs. Initial loans can be refinanced with an SBA loan when the final piece of equity is purchased.

Jason Carroll, managing director of investment advisory lending at Live Oak Bank (headquartered in Wilmington, NC), has made it his mission to facilitate successful successions at independent advisory firms: that is, the transfer of ownership from the founders to the next generation of advisors. In the past month, his firm has started taking one of the biggest obstacles off the table.

“Just 30% of advisory firms today have a succession plan in place,” Carroll says. “We’re going around the country with presentations on how to encourage juniors to buy in. At the same time,” he adds, “we’re rolling out our new Live Oak Partial Equity Buy-In Program, which is designed to finance the first stages of the purchase.”

Live Oak Bank is an unusual entity, to say the least. Where most banks look for tangible collateral when they lend money, Live Oak Bank lends on cash flow to companies (like advisory firms) which have little to no collateral. The bank specializes in financing succession transactions in specific niches—independent pharmacists and veterinarians, and since 2013, firms in the advisory space.

In the past, the loans were all guaranteed by the U.S. Small Business Administration. Because of the black-and-white language of the SBA rules, these transactions had to be for $5 million or less, with a maximum term of 10 years, and had to be allocated to the final stage of a succession buy-in. The SBA mandates that the selling advisor could not continue to be an owner after the loan, or manage the day-to-day operations or otherwise control the company. (Owners could, however, continue to work at the firm, typically in a client-facing advisory or rainmaker capacity.) There was, until now, no provision for the bank to finance the early stage successor buy-ins.

So far, the company has lent $264 million to advisory firms under the SBA program—with, Carroll says with more than a hint of pride, zero defaults. But from inception, he has wanted the bank to help advisors get started on the path to succession, by financing the earlier rounds of internal buy-ins. That, of course, means lending its own capital without the SBA guarantees.

In fact, this was the most common feedback we received when this newsletter profiled Live Oak Bank in April 2014. Advisors wanted their successors to start buying them out, but

1. they didn’t want to exit ownership right away, and
2. the successors didn’t have the money to buy that first 10-15% of the company.

Until this year, Live Oak Bank didn’t have a solution for that first couple of tranches. What changed? “We rang the bell and went public on the Nasdaq exchange on July 23 of last year,” says Carroll. “It put a lot of money on our balance sheet.” The partial equity buy-in loan program received approval shortly thereafter and is being rolled out as you read this.

How does it work? Live Oak Bank will finance your succession plan in stages. In the first stage, successors might receive financing to buy 10% of the company per year, moving closer to the 50% ownership line but almost certainly not crossing it. “The first generation probably isn’t going to want to give up 51% control until there’s a final succession deal in place,” Carroll explains. “So let’s say the loans are for 10% in each of the first four years.”

Each loan is for a 5-year term, but they will amortize over 7 years, which makes the payments more affordable for the successors.

Then the owner and second generation reaches an agreement for the remaining 60% of the firm to be purchased under the provisions of the SBA-guaranteed loan program. This loan will typically pay off any remaining balances on the earlier loans.

The rates will be the same for the earlier (nonguaranteed) and the final (SBA) loans, and will be based on the size of the amount borrowed. “We don’t make commissions here, so it works exactly the reverse of what you might think,” Carroll explains. “Everything is based on prime, which is currently 3.5%. The lowest rate will be prime plus 2%, up to a high of prime plus 2.75%, and the smaller loans will carry a higher rate.”

Why? “It costs us just as much to underwrite a $100,000 loan as it does one for $5 million,” Carroll explains. “To offset our underwriting costs, we have to bake in a little higher rate for the smaller loans.”

How does that underwriting work? As mentioned earlier, Live Oak Bank lends on cash flow rather than collateral, so underwriting is really an analysis of two things: the creditworthiness of the second-generation borrowers, and the financial health of the firm they’re buying.

Start with the borrowers. “They have to show they’re a responsible financial advisor in two aspects,” Carroll explains: “One, that their personal credit and their personal financial statement is okay. Two: that they’re in good standing with the SEC—and FINRA, if that’s applicable.”

He adds that Live Oak Bank’s underwriters recognize the financial challenges facing a professional who might be 35-45 years old. “If they’re anything like me,” Carroll says, “they have a mortgage, a HELOC, a couple of car payments, and maybe they’ve finally climbed out from under their student debt. They don’t have a million bucks to buy into the firm, which is why they’re coming to us. We don’t expect them to have that.”

Underwriting the firm requires a sophistication in the advisory business that your bank down the street will not possess. “Our main question is: Can the firm afford itself?” says Carroll. “If the successors were to say, hey, I want to buy out the whole thing; the seller is done—from an internal succession, without that seller’s salary in there, can they afford it based on the cash flow of the firm itself?”

Carroll says that the sweet spot for his firm is advisory firms with between $100 million and $1 billion in AUM, but they are better described by the internal facts on the ground: founding advisors who have identified their successors and are ready for them to start buying ownership, but the firm has grown so quickly that the next generation is having trouble affording the first couple of purchases. If they can just get that first 10% of the firm in the hands of the next generation, everything else becomes a lot easier; the profit distributions help pay interest on the loan.

“The founder is saying, ‘I like this arrangement because I don’t have to leave for five years,’” says Carroll. “They can start the process with this next generation advisor who has been saying, please let me buy in, but when they run the numbers, he doesn’t have enough money.”

Carroll says that Live Oak Bank’s biggest competition, when it comes to financing successions, is the sellers themselves, who may negotiate a 10% return on their loans to the next generation. This forces the bank to stay competitive. “It’s why we have to stay at that 5.5% level,” he says. “And because it is a business loan, you’re writing off your business interest on your taxes. So, net, the successors are coming in at 3.5%.”

Of course, the bank also offers working capital loans, to address the not-uncommon situation where the successor generation wants to invest in the firm they’re buying into, and the founder responds that this future investment would be coming out of his distribution, to improve the value of a firm he won’t be owning.

Carrol hopes that the availability of outside financing will help move the needle on all those succession plans that aren’t happening currently. And, interestingly, he’s finding that some owners have changed their minds about retiring only when somebody finds their lifeless body slumped over the desk in their office. “Some of the founders we talk to, when the find out what we’re offering, they’ll say, hey, where’s my ejection button?” he says. “I’ve already identified my successors, and I’m ready to get started on retirement. Can I accelerate it?”

LINC-ed Initiatives

Synopsis: TD Ameritrade Institutional’s national conference gave us three significant initiatives, and a semi-gloomy view of our global geopolitical scene.

Takeaways: Take time to contribute your video to the Human Finance Project, and look for the first Big Data foray into the practice management arena. Look for slower growth in Europe, a generation of chaos in the Middle East and potentially slower future growth in the emerging markets.

TD Ameritrade Institutional puts on a great show, with famous keynote speakers, flashy guitarists playing the intro to a blockbuster Van Halen song as TDAI CEO Tom Nally takes the stage, the BareNaked Ladies in private concert for 3,200 attendees, two exhibit halls including a technology sponsor habitat called Veo Village—and I think sometimes the substance can get lost in the flash.

Despite his upbeat attitude, Nally’s introduction set what I considered to be a somber tone for this year’s conference at the TDA World Center Marriott in Orlando. He talked about advisors being audited just once every ten years—a statistic which has been used like a cudgel by the brokerage industry to erode trust in the independent advisor profession. (Fee only advisors are really just unregulated ‘rogue brokers’…) Nally told us that, despite rapid growth and accreting market share, advisors still have a huge communication problem when it comes to their value. He talked about evolving compensation structures, the fact that advisors provide much more than asset management, but they charge a percentage of assets—and expect the consumer to figure out where the real value is provided.

He talked about a profession that is growing rapidly, but hinted that managing that growth is becoming a challenge for professionals who are not trained as business owners.

The Human Finance Project

In my mind, the 2016 meeting came down to three major initiatives and two keynote sessions that I wish everybody could have seen.

First on the list is something called the “Human Finance Project” campaign. It’s such a good idea that I was scratching my head trying to figure out why nobody has thought of it before: Let many fiduciary advisors say, unscripted and in their own words, what real professional advisors think and do and hope to bring to the lives of their clients. The more raw, emotional, realistic and differentiated these conversations are from the slick advertising campaigns put out by the brokerage firms, the better.

The long-term goal is to change the narrative about what it means to be a financial advisor, from what the public thinks (sales agent, Wolf of Wall Street, Bernie Madoff, broker at one of the firms that nearly took down the global economy, took public bailout money, paid themselves enormous self-congratulatory bonuses and then immediately lobbied to exclude themselves from any precautionary regulations that would prevent them from doing it all over again), to expressions of idealism, client service and the personal satisfaction that comes from helping people—inspirational, aspirational, idealistic expressions that, taken together, are much closer to the beating heart of the profession that we all know and love.

At LINC, advisors could visit a Human Finance Project booth and record their own personal stories and passions. You’re going to see that booth, with video equipment plus a professional facilitator, at other conferences around the country over the next few years, and I hope you’ll take the time to share your own description of what it means to be a real professional planner. As the stories are collected, they’ll be made available on the www.HumanFinance.com/project website. The delivery vector is thousands of advisors, who will post photos to Twitter and Instagram (hashtag: #humanfinanceproject), and put your own video, and the more moving videos of others, on your website, your social media pages and blogs. Meanwhile, TDAI will promote the videos through its own digital channels and reference them in industry publications.

Big practice management data

The second major initiative has the potential to change the way advisors manage their practices. TD Ameritrade Institutional has purchased FA Insight—the company run by former Moss Adams Consulting executives Dan Inveen and Eliza DePardo. Most of you know that FA Insight collects operational data from thousands of advisory practices around the country, and publishes revenues, growth, profitability, salaries and other key numbers and ratios in its yearly reports.

The intention is to include all of this historical data in the Veo platform, so advisors can go online and compare their growth, their revenue per staff member, their profitability, number of clients served per advisor etc. with the rest of the profession, and get a better handle on whether they’re managing their firms as efficiently as their peers.

Nally called it “big data,” and I suppose the total database of thousands of advisor financials over a decade would qualify as “big.” But for the end user who logs into Veo, it’s going to be a very specific search for the aggregated data of similar firms, and doing a better, more informed job of tracking their own financials. This could usher in a new era in more informed practice management.

Qualified initiative

The third initiative happens to overlap with what I consider to be one of the major tectonic shifts in the profession. TDAI has created a set of tools which make it not just possible but easy to start managing qualified plans like 401(k) assets for local companies.

You know that the Department of Labor’s fiduciary rule is coming soon, and that it will disadvantage all those cozy, fee-laden proprietary plans that were sold by insurance agents and brokerage reps—a development which, I would argue, will greatly benefit workers as they save for retirement. The TD initiative is designed to help you dislodge those relationships with a fiduciary-managed alternative. You can find the details here: http://www.tdainstitutional.com/corporate-retirement-plans/td-ameritrade-retirement-plan.page, and pay particular attention to the Playbook, which answers all your questions about how to get into this business, market the new service, and service the accounts and employees.

The tectonic shift I’m predicting is that middle income workers are going to start receiving basic financial planning advice through their companies’ HR departments. The larger firms will hire a financial planner to fill one of their employee benefits positions, while smaller firms will buy planning services for their employees from their 401(k) plan provider—which, given your fiduciary status in light of the DOL rule, could be you.

Okay, not you; instead, you would assign the employee planning work to a newly-hired young advisor. Caleb Brown, at New Planner Recruiting (www.newplannerrecruiting.com), says that the single biggest factor in successfully recruiting talented new college graduate advisors—more even than salary—is the opportunity to work with clients early in their careers.

I spent most of my time at the conference attending the sessions which talked about the tools that TDAI has created for advisors, which also outlined the best practices of advisors who have moved into the 401(k) space, and the investment options (including your own model portfolios) that advisors are creating and could be offering on the turn-key platform.

Three things caught my ear.

First, the advisors on a “best practices” panel said that adding 401(k) plan business to a traditional planning practice is a far easier way to maintain growth rates than what so many ambitious firms are doing: acquiring smaller practices, and taking on all the attendant cultural and management issues.

Second, advisors getting into the 401(k) business fear that all the workers in the plan will start calling their offices asking for advice, planning help and predictions about the markets. The panelists said that simply doesn’t happen. You’ll have to prod the workers with seminars and outreach to get them to engage in a basic retirement sufficiency analysis and asset allocation conversation with your young advisor. The young advisor will have to actively market to the worker base in order to get appointments.

Finally, the biggest hurdle that many advisors have to get over is the complexity of the plan document itself, with all the technical provisions, the means testing, conforming the package to what the small business owner is looking for. TDAI handles that conversation for you, by having its in-house experts engage in that conversation and draft the plan document according to the business owner’s and DOL’s specifications. I’m hoping that as advisors realize they’re the logical person to take over the small- and mid-sized retirement plan market, you and others will execute the biggest, fastest shift in AUM market share the industry has ever seen.

Portfolios and political risk

Now let’s get to the two keynote sessions that I wish every advisor could have seen. The first, and I thought the best, was a presentation by Ian Bremmer, founder of the Eurasian Group think tank, author of “Three Choices for America’s Role in the World.”

Bremmer’s topic was global and political risk—and how they impact not only your clients’ investments, and also the long-term stability of the world order. Right from the beginning, he refused to sugar-coat the news.

“For the last 50 years, if you had wanted to simply disregard geopolitical risk, you could do that safely,” Bremmer told the audience. “Whenever you saw bad news in the world, it was a buy signal, because you knew that the markets were going to come back up. The bad news,” Bremmer added ominously, “is that you can no longer do that.”

To illustrate the point, Bremmer listed a number of problems that he believes will introduce long-term uncertainties in the global economic system, including six failed states in the Middle East (Yemen, Libya, Iraq, Syria, Mali and Afghanistan), a refugee crisis in Europe and a gradual, long-term unwinding of historically important geopolitical relationships.

As an example of the latter, Bremmer told us that the trans-Atlantic relationship between the U.S. and England (and the rest of Western Europe) is weaker now than it ever has been in the last 75 years.

“In Britain,” Bremmer said, “there is no special relationship with the U.S. any more. They want money for their infrastructure. They look to America, but America is not going to write checks. They look to China, and they get checks. So they say, we’re going to be the first country to join the Asian Infrastructure Bank.”

Other examples? The French are recovering from their own version of 9/11. “To address their security,” Bremmer said, “they didn’t go to NATO. Instead, they used a chapter of the Lisbon Treaty. Why? Because they realized that the U.S. is not going to help them in the Middle East. The Russians are doing more, so they decide to engage more with them.”

The American relationship with Germany has been similarly weakened by the refugee crisis. “When the Wall came down, Americans were there for the Germans,” Bremmer said. “Now, when the Germans look to the U.S. for help with the flood of refugees, the American response is: not our problem. So they look to Turkey, and say, you have two million refugees, and we’re going to pay you to keep them there, and we’ll also help you get into the EU.”

Bigger picture, Bremmer said America and Europe no longer know what they stand for in the nuanced political environment of the 21st century. “Historically, the U.S. stood for promoting democracy as the indispensable nation, the world policeman,” Bremmer said. “The Europeans stood for open borders, the rule of law and open transit. Not any more.”

Bremmer added that the way forward is much clearer for rivals of the former TransAtlantic partnership. “I know what China stands for,” he said: “growing their economy to ensure the political stability of their one-party regime. I know what Russia stands for: national security at home and a little sphere of influence around their borders, plus a strong state, a strong Kremlin, a strong Putin, frequently shirtless.”

But what are the investment implications of this fragmenting geopolitical reality? Bremmer offered a tour of the world, starting with the U.S., which he described as the safest haven for investors because it is the farthest removed from the growing chaos abroad. “In this time of political and sometimes military uncertainty, look at America’s neighbors,” Bremmer invited us. “Canada. Mexico. And two really big bodies of water. Those are awesome neighbors,” he added. “Turkey wishes they had neighbors like that.”

The result: capital inflows from all over the world. “That means the Americans aren’t going to come under much pressure to deal with their long-term fiscal issues, because people will fund us,” Bremmer told the group. “Even Latin America will benefit.”

What about China? “Everybody has been freaked out about China lately,” Bremmer said. “Their economy is slowing! What does that mean?”

Bremmer’s answer: not much. “One of the wonderful things about China is their ability to influence their internal market—which is dramatically greater than that of any other major economy in the world,” he said. “If things go badly in the Chinese markets, truly badly, and the Chinese government tells you, as a market participant: we need you to support this bank with a bad loan. We need you to put money into this sector, because otherwise there’s instability. We need you to jump. Your response,” Bremmer continued, “is: you know, I’ve been practicing my jumping for years, for just this moment. I am ready to jump. I will jump frequently. You tell me when and exactly where.”

The good news, Bremmer said, is that this jumping hasn’t been necessary. “The Chinese government feels very comfortable that they can handle the downturn so far, without taking those measures,” he told the audience. “You’ve seen a Chinese leader who has reached out and had two summit meetings with the Japanese prime minister just in the last six months. He met with the former Taiwanese president in Singapore, first time in history a Chinese president did that.”

The broader message is that while European and American politicians are playing politics to uneasy populations, Chinese—and, he added, Japanese and Indian—political leaders feel comfortable enough to plan for the long-term. “They’re focusing on the economy, instead of having nationalist conflicts,” Bremmer added. “I feel good about this. For now, we are not going to see geopolitical tensions raise their ugly head in Asia.”

In other good news, Bremmer noted that peace is breaking out between India and Pakistan, where Prime Minister Modhi became the first Indian leader to travel to meet with Pakistani leaders, where the Columbian government is ending its civil war, Argentina is settling its outstanding debt obligations and Cuba is opening up.

“Let’s not pretend, when we look at the daily barrage of horrible headlines, that everything is going to hell,” Bremmer added. “It’s not at all.”

But… Bremmer turned darker when his tour landed in the Middle East. He all but said that he expects Saudi Arabia to collapse into a failed state. “I don’t know what keeps the Saudi government in place,” Bremmer told the group. “The one thing that has kept them in power is their ability to take money out of the ground and give it to their people. With oil prices low and new production coming on from Iran, they can’t do that any more.”

Bremmer’s presentation came not long after the country had decapitated 47 people, including a prominent Shia cleric, which led to Iranians storming the Saudi embassy, which, in turn, led the Saudis to call for a worldwide boycott of Iran. “Do you want to know who did it?” Bremmer said. “Bahrain, which is basically a province of Saudi Arabia, plus Sudan and Djibouti. That is not much of a portfolio,” he added. “All of Saudi Arabia’s traditional allies in the Gulf Cooperation Council—the Emirates, Qatar, Oman, Kuwait, Egypt, and even Pakistan—all said, we condemn this… but we’re not going to do anything about it, because we all want to do business with Iran.”

Why does this matter? If you’re hoping that the Syrian conflict will be resolved soon, if you hold out hope that peace talks will work, then you are also hoping that the participants in those talks are stable regimes. Bremmer believes they are not. “Failure is not only an option in the Middle East; it is inevitable,” he said bluntly. “The question now is: can we contain it? In Israel and Palestine, yes. But in Europe, countries are going to feel more like police states, and the agreement that allows free transit between borders is gone, and there is no way it is coming back.”

That, in turn, impacts investments. “When free travel comes down, the impact on trade is such that it could reduce GDP growth by 300 basis points a year,” Bremmer warned. “Plus you now have a whole bunch of governments overspending on security, which means fiscal imbalances getting more out of whack.”

Bremmer does not believe that Britain will leave the European Union, and he does not expect that fascist governments will take over European economies. “What WILL happen,” he said, “is that the establishment parties will tack more to the extremes to guard their flanks, and growth will slow. It is not the end of the Eurozone,” he continued, “but it is nearly the end of what Europe stood for, which from a human perspective is more depressing.”

Looking out longer term, Bremmer said that the current levels of income and wealth inequality in the U.S. and Europe could worsen—for the same reason that emerging markets might deliver subpar returns over the next 20-30 years. “Oxford University recently came out with a study that looked at 720 different kinds of jobs,” he told the group, “and concluded that 47% of them are at high risk of being automated in the next 20 years.”

That, in turn, will cause U.S. and European unemployment rates to go up, raising the inequality levels. This will have an even greater impact on emerging market economies which have enjoyed above-average growth over the last 30 years.

“This is important,” Bremmer said. “For the last 30 years, if you wanted to invest in emerging markets, it was high risk, high reward. They would screw up occasionally, but then grow faster than the rest of the world.”

But what did these countries build their growth on the backs of? Cheap labor. If automation reduces demand for cheap labor, it means that emerging economies are no longer a safe long-term investment.

“If you want to bet on emerging markets,” Bremmer said, “you have to pick and choose. I like Indonesia. I like India. I don’t like Brazil right now, but when they get through the scandal in 2017 I might like them again. I don’t like Russia. I don’t like the Middle East.”

At the end, Bremmer said that after meeting with the CEOs of 20 of the Fortune 100 companies, he is convinced that none of them would change their investment plans based on who wins this year’s Presidential election.

“Nobody looks at the U.S. right now and says, oh, my god, low oil prices, low food prices, incredible entrepreneurship and technology creating unicorns all over the place, best education in the world, incredible neighbors, Syrians can’t swim there, good demographics, but if there is an American president I don’t like, I’m going to have to invest in China,” Bremmer concluded. “Nobody.”

Geopolitical tectonics

The second presentation that I would have liked for all of you to see was a speech by Michael Hayden, who happens to be the only person to have served as the director of the CIA and the National Security Administration—America’s two major intelligence agencies. His resume also includes time spent as commander of the Air Intelligence Agency, director of the Joint Command and Control National Warfare Center, and foreign policy advisor to Mitt Romney’s 2012 Presidential campaign.

Hayden warned the audience that he would not be optimistic in his global assessments. “If you wanted somebody to lighten up your lunch,” he said, “then you should not have invited a career intelligence officer.”

The talk focused on tectonic shifts in the global political and economic scene, starting with the decline of nation-states and an entirely new nature of power.

“In the industrial age, power floated to the center, and everything you worried about was related to nations,” Hayden told the audience. “In the new post-industrial age that we find ourselves in today, where there is instant access to information and we are all interconnected and globalized, power generally tends to bleed from the center. Powerful, potentially disruptive technologies and capabilities which were once only available only to nation states, we now find within the reach of sub-state groups, gangs, actors and individuals. We have come from a world where we fretted about malevolent state power to where the threats are nurtured by the absence of state power, by state failure.”

The second tectonic was the new fluidity of international boundaries. Hayden showed us a map of Europe 100 years ago, which looked very different than it does today. But so too does a map of just 25 years ago, which includes Czechoslovakia, Yugoslavia and the USSR. Other European nations, like Spain (with a separatist initiative in Catalonia) and England (Scotland) may be breaking up as well.

The Middle East is seeing these boundaries being redrawn as you read this. “The bottom line today is that Iraq no longer exists, and it is not coming back,” said Hayden. “Lebanon and Libya are probably gone as well.”

He said that the Middle Eastern national boundaries that were drawn 100 years ago by the representatives of French and British governments were indifferent to political, social, geographic, cultural, historical, commercial, religious and ethnic differences on the ground. This set the stage for what we're seeing today.

“All the artificial impositions of power that kept the lines in place are gone, and all the tensions that were flash-frozen 100 years ago are suddenly bubbling out and spilling over,” Hayden told the audience, adding that the Islamic world is trying to decide whether or not to treat differences in religious doctrine as (or as not) a reason to wage wars.

“The point I want to make about Tectonic Two is that the world order, where we organize the world according to nation-states and separate the sacred from the secular, those are all a jump ball in the Middle East right now,” said Hayden. “We are looking at a multi-generational war in the Middle East as this sorts itself out.”

The third tectonic is nation-states that are brittle, ambitious and, most importantly, nuclear. The poster child for this dynamic is North Korea, which claimed to have detonated a hydrogen bomb—actually a garden-variety atomic with some tritium added to the core. “This is a petty, pathological little gangster state with about a dozen nuclear devices,” Hayden told the audience. “ Meanwhile, Russia is trending nuclear again, and investing in nuclear modernization. In ten years, Iran will have an industrial-sized nuclear program and be three weeks away from having enough fissile material for a nuclear weapon.”

Hayden cited a report by an organization called Fund for Peace, which ranks nations from top to bottom according to a variety of indicators that characterize failed states and those about to fail. “I would call your attention to the country tucked comfortably between Haiti and Zimbabwe,” Hayden said. “Pakistan has 120 fully-perfected nuclear weapons in its arsenal, and is cranking them out faster than any other state on Earth.”

Okay, so that was depressing. The fourth tectonic? The rise of China.

“The good news,” Hayden said, “is that China is not an enemy of the United States of America, and I can’t think of any good reasons for China to ever be an enemy of the United States of America. Competitive? Yes. Occasionally confrontational? Probably. Never does it has to escalate to the level of conflict. In fact,” he added, “people of my background spend as much time worrying about Chinese failure as we do Chinese success.”

Hayden has similar concerns about China that Bremmer has about Saudi Arabia, although to a lesser degree. “The communist party stays in power in China based on the reality that the party has delivered 10% GDP growth for about a generation, and pulled 400 million people out of poverty into the middle class,” said Hayden. “But now that growth is beginning to nose over. And then what is the party going to do?”

The implicit social contract, Hayden said, is: the government is going to be autocratic, but don’t worry about that, because you citizens are going to be rich. “Now that the party can’t deliver on the back half of that sentence, what does the party rely on to maintain the overall support of the Chinese people?” Hayden asked rhetorically. “States under that kind of stress tend toward nationalism in order to maintain popular support.”

Finally, the fifth tectonic is what role the United States is going to play in the world going forward. Hayden talked about the personalities of presidents, and how they each had different agendas and tendencies which led the U.S. to sometimes deviate from a straight line in its foreign policy. “I may argue that we should go this way or that way,” he said, “but I think we can all agree that going one way and then the other and some other direction after that is really bad when it comes to the world’s only superpower.”

Later, Hayden said that the strength of the U.S. is its private sector, which has been the bulwark against cyberthreats these last ten years. “The government is going to be permanently late to the game in defending America’s cyberspace,” he told the group. “I tell my friends in government, get out of the private sector’s way. Give them room to operate.”

Later, talking about China, he said that the business community has more and better contacts, and intelligence, than the CIA analysts in Langley.

At the end, Hayden told us that the security agencies in the U.S. are going to have to become more transparent if they hope to win the trust of the American people. “But all of us have to remember that if we let 320 million people in on everything we’re doing,” he cautioned, “then more than 320 million people will know, and that is going to shave points off of our operational effectiveness. But I believe that is just a cost of doing business in a 21st century society.” The audience applauded.

There were many takeaways from this: Worry about European growth rates over the next… how long? Bremmer and Hayden seemed to think that the Middle Eastern conflict will last generations, which means the refugee crisis will as well. Worry about a fundamental change in the old assumptions about emerging markets, and also about a growing disparity between the rich and the poor as technology hollows out the lower-paying jobs in economies around the world. A potentially unstable China down the road. New emerging nuclear threats, and increasingly potent technology in the hands of terrorists and individuals who have a grudge against the U.S. or society at large.

But ultimately, the U.S. is a haven in this increasingly disorderly world, with peaceful borders and neighbors who are unlikely to attack, with a strong society and private sector. The bad news is that this country doesn’t (yet) know how to recast its role in the more complicated 21st century world. The good news is that it’s better off, politically and economically, than anywhere else you happen to be looking. Give financial planners a voice with roving video systems, help consumers know the difference between advisors and brokers, and investing in America might even get a bit safer still.

The Whole Puzzle

Synopsis: Advyzon is three programs in one, with tighter integration and a more consistent user experience than you could get from three different vendors.

Takeaways: The program’s CRM offers amazing flexibility to relate different tasks, clients, investments and outside professionals, which can be used for compliance reporting. The client asset management component provides unusually-detailed tax and performance reporting on individual bonds.

It’s been a while since the last time somebody tried to create an all-in-one software system for financial planners, and the promising beginning at IFS back in the 1980s never panned out. It’s not hard to see why. Software that tries to be all things is competing against firms that specialize in financial planning, CRM and portfolio management. The specialized programs have a better chance of being best-of-breed, and with today’s ever-tighter integrations, advisors can cobble together a software stack that talks among itself almost as if they were one program—and, with custodial programs like Veo and NetX360, even access them all with single sign-on capabilities.

In fact, I thought it was a fool’s errand for one company to try to write the three major software categories into one program until I encountered the Advyzon (http://main.yhlsoft.com/main/index.html) booth at TDAI’s Veo Village, and then, driven by curiosity, headed back to their booth at T3. After comparing notes with several Advyzon users, I’m coming around to the idea that advisors might want to consider a single solution.

Advyzon was created by yHLsoft, Inc. in Chicago, founded by Hailin Li. Most of you may not recognize him, but Li is well-known in the advisor software ecosystem as the former Director of Technology at Morningstar, later Morningstar’s VP of Advisor Software, which is basically the head of the division. Li hired John Mackowiak, who had managed the Morningstar Office sales team and later became product manager for Morningstar Office. “We are determined to be the whole puzzle,” says Mackowiak. “Advisors spend far too much of their time and energy trying to learn different systems, and get things to integrate. They’re becoming like part-time IT people, and that’s not their highest and best use.”

He adds that the program is brand new; 2014 was spent refining the product for a small group of users, and 2015 was spent adding features that an expanded group of users were requesting.

As a quick introduction, most advisors will start with the CRM system, which offers business card views of clients, and immediately allows you to tag them any way you want: hobbies, charities, affinity groups, client tier (A, B, C…) or relationships with other clients and/or outside professionals like CPAs or attorneys. You can attach notes relating to your conversations and meetings, assign projects or self-defined workflows to one client or a tagged group, and use the tags to decide which clients are going to receive which performance report in the asset management piece of the program. A document management system keeps a copy of each client’s documents: wills, trusts, powers of attorney etc.

One interesting feature: for each client, the program will automatically search the web for their LinkedIn account, and display a picture of the client.

At the firm level, you can create and track staff activities like the three steps needed to prepare for a client meeting, and group which clients will receive which emails, based on tags that relate to interest or affinity—for instance, which subset of your clients will be invited to a particular event.

The asset management program links with Quovo to pull in client account information and account aggregation for assets held away in a 401(k) plan. It will also pull in banking information to track expenses and liabilities, and you can input insurance coverages. For prospects and new clients, Advyzon displays the current asset allocation at the account and household level (both pulled from the Morningstar X-ray information based on the client’s fund allocations) and a broad target allocation that the advisor recommends.

The system shows the assets, and if there are different custodial relationships, that is reflected on the page, as is available cash. A graph shows, in one line, the aggregate contributions and withdrawals overlaid on the total portfolio amount, so clients can see the value the markets (and the advisor) have added to the total wealth picture. The advisor can call up a page that shows realized and unrealized gains and losses for each position as of the end of yesterday’s market close.

The firm has built 20 different performance reports, ranging from four pages to many more (depending on the level of detail a client would want), and a report builder tool lets you drag and drop different graphs and data charts from the program into different parts of the page to create your own format, and then drag in security-level data for clients who want that included in their report. Then, if you want, you can customize the colors.

These reports will most likely be viewed through the client portal that Advyzon creates and manages on the cloud. Check a box, and a particular report is created for a particular group of clients and sent to their portals.

Advyzon’s financial planning component is somewhat less feature-rich than many advisors are accustomed to, although it seems to function well enough for middle-market clients who don’t have complex estate and tax planning challenges. The client’s goals are segregated into “needs,” “wants” and “wishes,” and in a particularly nice touch, all of them, color-coded, are placed on a timeline that might extend over a short period (a child’s 4-year college expenses or, even shorter, a trip to Europe) or a long one (retirement).

After you get past the detailed client balance sheet, you can see current resources (investments plus pension income plus Social Security projected income) graphed as a vertical bar which is compared with a color-coded stack of goals: needs on the bottom, wants and then wishes at the top. All of these numbers are discounted back to the present value, so the client and advisor can see at a glance that, for instance, the client’s current assets are sufficient to fund the future “needs” goals, and some of the “wants” goals, but none of the “wishes.” (Fortunately, this particular client family has another 10 years of savings ahead of them.)

The system also shows a variety of model portfolios as pie charts with each portfolio’s asset allocation, which the client or advisor can select as the target. As before, we see the client’s current allocation and how (or whether) it differs from the model. The system also creates an investment policy statement for the clients who want or need one.

Mitchell Keil, of Integrity Financial Advisory in Fountain Valley, CA, likes the company’s responsiveness to suggestions. “Early on, I was making recommendations and they were actually coding right while I was talking,” he says. “It was different from any company I’ve ever worked with.” Among his requests was the flexible tagging of clients, which he uses to manage his compliance-related documents.

“With a push of a button, I can get all of my RIA contract dates, and the privacy notice delivery dates, ethics code delivery dates, ADV annual update delivery date, IPS approval dates, for one client or any group,” he says. “I don’t know any other CRM that will give you exactly what the SEC auditor asks for.”

He also likes the custom project applications in the CRM. “Most CRMs don’t permit you to create one-off projects easily,” says Keil. “If a client asks me to follow up with his CPA and estate planning attorney on a particular issue, and I have five or six things I need to make sure I do, I can create the project and include the client plus the family’s CPA and attorney, using the linking capabilities, right there on the spot. I can link in four phone calls and two appointments and some notes I took and maybe link in a particular security that’s involved. Basically,” he adds, “you can link anything to anything.”

The portfolio management tool has (as you might expect) a very strong integration with Morningstar’s Office 365, including its customized Outlook system and the investment data. Meanwhile, if, like Keil, you charge a blend of retainer and tiered fees, the flexible billing module could be a huge plus. “You can do AUM, flat fee, hourly and anything else directly in the program,” he says. “The billing work that used to take me two hours manually is now a report that generates a file I can check for accuracy before I send it on to Veo.”

Keil added that he uses MoneyGuidePro for his client planning work, and uses the CRM and portfolio management parts of Advyzon. “But I can see the planning component would be perfect for somebody who is mostly focused on asset management, or working with middle-market clients,” he says.

Ron Alberts, at Alberts Investment Management in Brookfield, WI asked for a somewhat larger customization from Advyzon.

“One way we differ from a lot of other RIAs is we invest in a lot of individual bonds,” he says. “And it isn’t easy to get the accounting right. Most software products don’t handle individual bonds particularly well, especially when you’re talking about mortgage-backed securities with prepayments and factors and all that kind of stuff. If you buy a bond at a premium and it amortizes down, it affects the cost. If you’re just holding the bond, it affects the unrealized gain or loss. But if you didn’t amortize the bond, and then it was redeemed at par, it would show a big loss. That is not how it’s supposed to work for tax and accounting purposes.”

Alberts, a former bond manager at Northwestern Mutual Life’s fixed income department, was unhappy with how Advent’s Axys program was handling the bond-related tax reporting, and asked Li if he could provide the kind of tracking that he couldn’t find in the much less institutional world of financial advisor software. “Advyzon built it out for us,” he says. “When we first looked at them, they had the same limitations that other providers had, and we pointed them out. They worked with us, and it’s perfect now from our standpoint, as far as amortization and accretion. I don’t know of anybody else’s system that I can say that about. In that respect, it is in a class by itself, on individual bonds and amortization and accretion.”

Alberts also asked Li to create a fast, easy export protocol to Excel, so he and his staff can check the accuracy of quarterly reports using their own algorithms. “That one took months,” he says. “But most of the reports can now be exported into Excel, not just PDF. If we were working with Black Diamond and we had asked for that, it would have cost us an additional $10,000 to $20,000.”

I know a lot of readers are going to be skeptical about the idea of an all-in-one professional software program in this age of increasingly sophisticated integrations, and as I said at the top, I initially shared your skepticism. But Advyzon already looks much more comprehensive and feature-rich—and user-friendly—than the other attempts at this I’ve seen. Li’s track record at Morningstar adds to the credibility of the product, and the tight integration with Morningstar’s workstation will be attractive to some advisors.

And I should add that not everybody is as skeptical as we are. When I visited the company’s station in Veo Village, and its booth at T3, each time I had to fight my way through a crowd of advisors just to see the screen where Li and Mackowiak were showing their demos. This article won’t be the last time you’ll hear about Advyzon.

Parting Thoughts

Shameful Shell Game

This year, the SEC is planning to come out with some kind of “harmonized” “fiduciary-related” set of rules and regulations for brokers and advisors. There is little indication what, exactly, this will look like, but the most furious lobbying has been around, of all things, requiring brokers to register as RIAs with the SEC.

I think most of us have wondered why the Wall Street firms have been so adamant on this issue, especially since dually-registered advisors are able to engage in sales-related activities on behalf of their independent BDs.

Now I think we know. It may be the most cynical, self-serving lobbying position you’ve ever heard of, and it looks like the SEC will cave on that issue.

A few months ago, TD Ameritrade Institutional held a fiduciary summit meeting which, among other guests, brought together four former SEC chairs to talk about whether a fiduciary rule is desirable or even possible. But for me, the most eye-opening part of the day came when an attorney for the Public Investors Arbitration Bar Association took the stage.

Christine Lazaro is Director of the St. John’s Law School's Securities Arbitration Clinic, and a board member of the Director of the Public Investors Arbitration Bar Association (PIABA). She is also the co-author of a report on investor confusion and securities arbitration (you can find it here: https://piaba.org/system/files/pdfs/PIABA%20Conflicted%20Advice%20Report.pdf), and presented some of findings that demonstrate exactly how the brokerage industry gets away with sales activities to consumers who think they’re working with a professional.

Lazaro offered examples of brokerage advertising that clearly positions the firms as fiduciaries who sit on the same side of the table as clients—whose brokers should obviously register with the SEC. She cited UBS’s “We will not rest” campaign, whose advertisement read: “Until my client knows she comes first, until I understand what drives her and what slows her down, until I know what makes her leap out of bed in the morning and what keeps her awake at night, until she understands that I am always thinking about her investments, even if she isn’t, not at the office, but at the opera, at barbeque, in a traffic jam, until her ambitions feel like my ambitions. Until then, we will not rest. UBS.”

“UBS described the “we will not rest” campaign as reflecting UBS’s desire to always work in the best interests of clients,” said Lazaro, “and highlighting its uncompromising dedication to the detail of delivering the products and services that best meet their needs.” Okay… So what’s the problem with registering these brokers who always work in the best interests of clients as RIAs?

Then Lazaro turned to Morgan Stanley, whose web presence has stated that: “It is important to have an intimate knowledge of you and your goals. Today, Morgan Stanley states that it is meeting your needs at every life stage, whether you are starting a family or planning to retire. Looking fund your childrens’ or grandchildrens’ education, or the purchase of a vacation home, seeking to address healthcare needs or transfer the family business to the next generation. You need a wealth plan. Our financial advisors work with our clients to create this roadmap to their future, adapting to changing circumstances over time, helping clients achieve and protect their goals.”

Lazaro pointed to Merrill Lynch’s advertising and website, which talks about “the evolution from a conversation to a relationship,” and went on to say: “Creating a financial strategy that reflects your personality. Getting to know you is your financial advisor’s primary goal. An approach built around your life’s priorities. It’s time for financial strategies that put your needs and priorities front and center. Adapting the approach as life changes and goals are reached. As goals and priorities change, so does your approach.”

“John Thiel, the head of Merrill Lynch Wealth Management, included his views on working with the company on the website, too,” Lazaro told the group, and read his statement:

“Our organization has all the tools and technology and ease of use that you could want. But ultimately, the real measure is when you sit down with your advisor and build that trusting relationship. At any time, you know exactly where you stand when you think about progress towards what it is you want to accomplish with your finances and with your money. Our entire company’s purpose is to help you achieve the best life for yourself and for your family.”

Wells Fargo, Lazaro told the group, wants its customers to feel their “best interests are our top priority.” In relevant part, the website says: “A healthy relationship with your financial advisor should make you feel that your best interests are the top priority no matter what is happening in the market, and no matter the size of your portfolio. Furthermore, you should like your advisor, and both you and your advisor should feel that all concerns are heard and addressed.”

“In every one of these cases,” Lazaro summarized, “the firms presented an image to the public that they will work with the customer to reach their financial goals. You’re in good hands. We will not rest. Meeting your needs. Committed to maintaining the highest standards of integrity. Ethically obligated to act with your best interests at heart. Build that trusting relationship. Integrity. Acting in good faith. Your best interests are the top priority. We can help you reach your goals.

“If you were a customer, looking at these websites, what would you think?” Lazaro asked the group. “What type of relationship would you think you were getting when you were going to work with these firms?”

So, okay, the brokerage firms are offering an advice relationship to their customers; advice is clearly central to their model. I think most of us were expecting Lazaro to press the case that these firms should register their relationship-hungry, high-integrity, your-best-interests brokers with the SEC as RIAs, as the law plainly requires. (None of these advice-related promises sound incidental to some other activity, do they?)

But instead, Lazaro reported on some data that most of us never see: the experiences of plaintiff attorneys in arbitration hearings—the only venue that customers who have been ripped off have the option of appealing to.

“Every single one of these firms said the same thing when they were sued in arbitration for breach of fiduciary duty,” Lazaro told the audience: “that a broker does not owe a customer a fiduciary duty. A broker’s duty is limited to executing a transaction that the customer has authorized.

“The firms took no responsibility past making the recommendation,” Lazaro continued. “So long as the recommendation was suitable, and matched the customer’s investment objectives, their responsibilities ended. They had no responsibility for their advice or lack of advice. They shifted that responsibility to the customer, because the customer approved the transaction, notwithstanding the perception they created by their own actions, their titles and their advertisements. They said that all they were doing was executing the transactions.”

And they got away with this? Evidently, in the FINRA arbitration system, the fact that these advice-giving, relationship-seeking brokers had not registered as RIAs was proof that they should not be held to a fiduciary standard. They got to tell their customers one thing, and then be held to a very different standard when their brokers got a little too greedy.

This finally explains why the brokerage firms are so adamant about not registering their brokers as RIAs. Registration would require them to live up to, in arbitration hearings, the advertising they promote to the public. They would have to give up the clearest example of bait-and-switch in the American business sector.

Of course, the brokerage firms enjoy a home court advantage in the form of a credulous arbitration system, run by their subsidiary called FINRA. “We found that arbitrators don’t understand the distinction in responsibility or the circumstances under which a broker may be held to a heightened obligation, or the special circumstances when a broker should be held to a fiduciary standard,” Lazaro told the group. “Generally, it is permissible in arbitration for a broker to provide conflicted advice if the broker can argue that the transaction was suitable for the customer, even when that broker should be held to the higher fiduciary duty.”

Recently, I came across a terrific view of exactly how the incentives work on Wall Street, courtesy of Tom Nally, CEO of TD Ameritrade Institutional. Take a look at the accompanying chart, published by On Wall Street, a magazine that serves the brokerage world. The magazine profiled the “Top 40 Advisors” who happen to be under the age of 40. Right at the top of the list is a Morgan Stanley broker who managed to generate $9.5 million in commissions on $441.6 million in client assets.

Now turn your attention to number 40 on that list, another Morgan Stanley broker who has even more client assets ($552 million), but who only managed to generate $2.575 million in commissions off of that asset base—just a quarter of the money the number one “Top Advisor” is raking in.

What do you suppose that broker down there at #40 would have to do to move himself up to the top spot, and become the number one broker (the way Wall Street, and the magazine, measures people)? The answer is not: get more assets in the door. It’s not: do a better job of serving clients. It’s: take in a higher percentage of your clients’ money. Sell investments that carry higher incentives. Boost your gross dealer concessions on the existing client base.

The SEC is taking its time on the harmonized fiduciary rule, and meanwhile allowing Wall Street to continue to bait and switch the public, evade consequences in arbitration, and have it both ways. The industry tells the public it’s on their side, and then tell the credulous arbitrators that it only engages in arms-length transactions with willing buyers of what it’s selling. It trumpets trust and doing what’s right for the public, and then its own industry magazine gives accolades to those who can turn the highest percentage of client assets into commissions.

And it has drawn a line in the sand on having its brokers—despite the very public promises that you can trust them—register as RIAs. Will the SEC give in on this issue? If it does, then it will have clearly forfeited its role as a guardian of the investing public—and, sadly, nobody will be surprised.

Read more articles by Bob Veres