Why Independent?

When I opened my own practice I left a very large (and, in fairness, very well-run) banking conglomerate. Some of the people I asked to join me stayed because they felt they needed the security of a big outfit and I can't argue with them. There are pros and cons to any size.

One of the people who didn't make the move asked me in 2009 why I didn't see the crash coming. I bit my tongue on the initial response and eventually mumbled that I spent most of my time looking after my clients' service and planning needs and relied on my firm to do the strategic work (that firm being the tattered remnants bought by the large, well-run firm).

Then and there I decided I never wanted to be compromised or embarrassed or marginalized by my company again. I worked hard to help folks pursue their goals and didn't need senior management trading mortgage derivatives off-balance sheet.

Let me get back to that question, though. If anyone in your life is supposed to have a clue about the future of a business or industry, it would be someone like me. So what is the future of personalized financial advice as a business proposition? It depends on how you deliver value to your clients.

When I started; before the internet or cell phones or reverse credit swaps, the prevailing theory was that you needed mass to supply your retail sales force. Institutional investors used your firm's capital market capability worldwide to distribute their shares and raise loans. Brokers at various points in the food chain sold those to their clients. Mortgages, credit cards, insurance and retirement planning rounded out a full-spectrum to service any need. It took tall buildings and lots of employees. You needed size for access.

Then a strange thing happened. People found they could sell books without a bookstore. They could sell music without a record store or movies without a theater and later without a video store. They could buy American stocks in Italy and sell them in Japan 16 hours later from anywhere in the world using a small portable box. People found they didn't need a huge firm to find the goods and services their clients wanted - or contribute to the overhead.

The results were swift and cruel. The S&P 500 Financial Index ($SPF) lost 85% of its value from July 2007 to March 2009. Great and respected firms failed or lined-up to borrow taxpayers' money. That was when the chickens came home to roost for many of the largest retail brokerage firms. Not too big to fail like the also-damaged banks, they were the weak partner in the shotgun marriages of 2008. Top management was lucky to keep its pension, much less a job with a shot back at the inner circle.

The dynamic of the two businesses doesn't help. Borrowers pay more than lenders. Now that banking is showing signs of life again, that side will get the lion's share of technology, resources, and, of course, compensation. They also don't have to deal with the culture of instant gratification commissioned salesmen enjoy. There is nothing the market punishes as harshly as an inefficient distribution system. Brokers are fleeing the large retail houses.

So where does that leave the retail broker? It depends on why he is where he is. In the meltdown and for a few years afterwards, many companies offered cash or promises of cash to brokers if they stayed for a finite period of time and fulfilled sales quotas. Leave too soon and you have to pay it back. Those arrangements are expiring. A lot of senior brokers have to make a decision whether they stick it out in a world of reduced expectations or walk away from the pot and try to improve their long-term future. It is a tough call and it can create a conflict of interest if the firm wants them to change their product line whether it suits their clients' needs or not.

I made my decision and love it. My firm doesn't loan money to shaky governments or tell me to buy things they want to get rid of. Nobody wants to know why I don't recommend mortgages to 80-year olds. People lie to me less. Best of all, I trust my boss (me).

Let me tell you about it sometime.