Voiceover:

The latest news, updates, and insights from LPL leaders on what's happening in the industry and at the firm. This is the LPL Share-Cast.

Samantha Davison:

Hello and welcome to this Share-Cast episode. I'm Samantha Davison, your host. How do you continue to succeed in an increasingly competitive environment? What will set you apart from the rest, today and in the future? How do you make sure that you're well positioned to evolve, to meet and exceed the growing needs and expectations of today's investors? It may all come down to thinking differently and that's what LPL is doing when it comes to financial advice and the advisors and institutions we support. I'm pleased to have Rich Steinmeier, Director of Business Development, here with us. Rich, thank you so much for taking the time to talk with us today.

Rich Steinmeier:

Sam, I'm glad to be here.

Samantha Davison:

Before we can talk about where we're going in the financial services industry, we really need to talk about where we've been, and it's pretty much safe to say, Rich, that we have seen a lot of change over the last 100 years. So let's do a little historical deep dive and remind everyone what have been some of the big drivers for this change we've seen.

Rich Steinmeier:

Yeah, Sam, thanks. Look, I'm interested to see where this goes. I think it's interesting to try to look backwards because if you can look and take an arc over a hundred years instead of over 10 years, you might see some trends. And so maybe let's try this on for size. If I look back over the last hundred years, I actually see three distinct phases of externalities that have occurred inside the wealth management industry and then reactions to those externalities that led to material changes in the way not only investors participate in the markets but the way advisors deliver advice and engage investors in the markets.

Samantha Davison:

And obviously one of the biggest ones in our history was the stock market crash. I mean, that changed everything.

Rich Steinmeier:

Yeah. So that actually is exactly right. And, in fact, that leads to kind of my first phase. So if you look at the stock market crash of 1929 and then the Great Depression that followed, what you saw was millions of investors having actually been wiped out of their investments. And at a very delicate time for the development of markets because there were a huge infusion of folks into discipline markets for the first time in the tens in the decades that preceded the crash. What came out of the crash is actually the first externality that I would look at in the first phase of the evolution of the marketplace which is the introduction of regulation. And so post the crash, what you actually saw was the Securities Act of 1933 which is the regulation of new issues, the Securities Act of '34 which is the regulation of secondary markets, the Banking Act of '33 as well which is the separation of commercial banking from investment banking. And then lastly, the Investment Company Act of 1940. All of these acts were put in place largely to instill confidence to the investing public that markets were regulated, that they were safe, that there was discipline, and that they could reenter the markets with the government having oversight into securities and the securities activities that were really undermined in the decades leading up to the crash because there was so much churn in the marketplace, unregulated securities and a lot of activity that really benefited firms and didn't necessarily benefit individuals.

Samantha Davison:

When you look back in time, it really was the wealthy who invested at first and then with all these rules and regulations, it really opened it up to normal people.

Rich Steinmeier:

Yeah. And so actually that is one of the implications of what happened post the regulations was that there was confidence reinstilled. Actually, there's some interesting things here that I think you and I were both reading a book on Charles Merrill, and interestingly Charles Merrill of Merrill Lynch reintroduced the concept of advisors being paid on salary and bonus and not on commissions because commissions actually drove a lot of the bad activity that occurred prior to regulation. And what happened after that was you saw large national brands begin to come to prominence mostly because you put those two things together. You come with regulation and government oversight plus trusted brands, known entities, and they were really trying to write in big red letters "safe", right? This was about safely accessing markets. And what occurred after that was over the next 40 years, as you alluded to, much more participation not only from the wealthy and, this is the concept of moving from investment banking centric to actually broker-dealer centric over the next 40 years, was bringing that concept of "Wall Street brought to Main Street" through these really large brands that really equaled safe or more safe. I think that's what you saw - the implications of that first kind of phase.

Samantha Davison:

But then it didn't end there. It seemed like there continues to be an evolution and changes, but there was more deregulation. So why was that so important?

Rich Steinmeier:

Yeah, so in that post-war period, the creation of wealth, economic expansion, and production, we saw a lot of wealth generation, but you also saw that the regulations began to outlive their import. And so in the seventies - so now we're moving forward nearly 50 years - but in the seventies, you saw a period of product innovation and deregulation. I'd say say the most material event was in 1975, the SEC abolished fixed brokerage commissions, which really opened the door for the discount brokerage industry. But more so than that, actually in '73 you saw Wells Fargo introduce index funds to institutions. But Vanguard very quickly follows with the extension of index funds into retail investors. In '72, you saw the introduction of money market mutual funds, that was using technology to get around the fact that deposit rates were structurally capped at 5% in a high interest rate environment.

Rich Steinmeier:

And so now you saw innovation flouting regulation plus some deregulation. Then maybe if I put the seventies as a great transformative period for foundational elements, the last part of that that is really material, that we still feel today, was the introduction of ERISA (Employee Retirement Income Security Act) in '74. But the implications of the ERISA Act being introduced in '74 was actually Section 401 of the ERISA Act created the opportunity for there to be higher contribution limit individual retirement accounts and that we call today 401ks. But now what you saw in this was the shift from defined benefit and ownership of your retirement being seeded to your employer to that beginning to become an individual responsibility and that deregulation and that structure, the dismantling of formal structures created a lot more onus for and need for individualized advice.

Samantha Davison:

It feels like investors, as they learned and felt more comfortable, and more safe that somebody was overseeing all of this, that it became more personal to them because they could see their money working, they could see things happening. It seems, though, if you fast forward - so we've gone all the way up to now, let's pretend fast forward another two decades - now we're in the nineties ish and then on up, technology made a huge difference in the industry and, again, also the access and maybe it changed the way companies operated and which ones came out of nowhere to reach a certain type of investor. Can you talk about that?

Rich Steinmeier:

Yeah, Sam, you're spot on. So you've reached this kind of third externality as I look back again across a hundred years. The implications coming out of those seventies was the abundance of new players into the marketplace in increased market access, in actually lowering the import of those larger brands. And then this externality that started in the eighties with the introduction of the PC, all of a sudden you had an accelerating event which was - wow, it used to be that mainframes were the only way that you could access material infrastructure firms, this kind of distributed computing that obviously got accelerated through the Internet, but the distributed computing actually allowed for the introduction of a lot more firms to have the "infrastructure" that you might only have in a handful of firms. What that led to was the explosion of business models; a lot of different business models in the way that investors could either participate with advisors or through the discount brokers directly participate in market access.

Rich Steinmeier:

The implication there is you get to a couple of things - you get to "always on, always available" expectations of the end investor. You get to price compression, material price compression, which is "my transaction price is available, is transparent, and I am now as an end investor comparing that transaction price to a firm that either is at $8 or eventually at $0." Another thing that you get, and I think this is very material as we look forward and as we talk about those externalities impacting the evolution of markets over decades, this is the one that I really think is one that is formative as we look forward, not backwards, is this concept that there are a set of players who are now about lowest transaction price and access to markets and the use of computing to emulate human advice. But that is largely on your investments.

Rich Steinmeier:

And what started actually in '69 and ultimately formalized in '72 with the formalization of the CFP exam was that the flip to that is actually the delivery of comprehensive advice, that is about life goals and is much broader than just investment accounts that largely you see as fiduciaries acting in that capacity and forming RIAs. But more broad than that, you get a delta of a bifurcated market, one that is driven by computers - automated - one that is much more customized - personalized - that is delivering a unique set of insights that is more comprehensive to an individual and family's life goal. And I think you will see that being the driver of the bifurcation of the way the market is driven is, I would say simplistic homogenized transactional advice delivered by computers that will continue to advance as artificial intelligence and machine learning advances versus the human who is powered by that and that distributed computing so that powerful computing capability that helps the human isn't only available at a couple of firms. So I think this dichotomy of the market is actually likely to be formative in shaping over the next couple of decades.

Samantha Davison:

It comes down to, in my mind, the personalization and knowing your client's perspective clients and understanding that everybody is different. So some people might want to invest themselves but with a swipe across their phone; other people want to work with someone and have a relationship with them. And I think that comprehensive advice is where advisors can differentiate themselves. If they can offer more to their clients over a long term and understand the needs of all their clients, that's what makes the difference. It really is a combination of technology and the advisor. We're not saying technology alleviates the advisor, but it may make things more efficient for the advisor to do their business and provide that financial advice to someone who needs it.

Rich Steinmeier:

Yeah, and I think there's another element there. There's a reason I went backwards in time, and there's a reason that '74/'78 are really important years. The introduction of ERISA really pushed that big brother/big sister oversight and the safety net of your retirement, of individuals retirement, away from the company and from the government and put that onus on an individual. And similarly, social security becomes less and less relevant as a safety net because it's not material enough to overcome some of the costs, catastrophic risk costs of healthcare, et cetera, and living fulfilling lives. And so while there is greater access to the markets, what I would tell you -because the impetus and the onus for individual success is now driven to the individual with much fewer safety nets, the role of a financial advisor or advice, I actually think it's through a financial advisor, but you can generalize to say advice, has actually increased and will continue to increase because there is no room for error at the individual level. The safety nets are not sufficient. And so I think this continues to promote the role of financial advisors and their need to deliver holistic advice into their clients.

Samantha Davison:

And then what we've seen is many advisors are looking toward independence so that they can create their business how they see it and they can offer the product solutions as they see it. Talk to us a little bit about that evolution to independence and what you see is important about that going forward.

Rich Steinmeier:

Yeah. 33 years ago, our firm really was one of the catalysts, if not the catalyst, in the introduction of this independent market which has evolved dramatically. We used to be called the independent broker dealer market, but at this point it's actually different - it's far bigger than that. It's about having advisors create and craft their own practices in the way they want to serve their clients. But if you think about the impetus for that, it was recognizing early on that there was constraints that were placed by the larger firms. There were restrictions that were placed by the larger firms. At the time, there were proprietary product that were being forced or coerced/economically incented to be aligned in the distribution which felt misaligned relative to the end investor needs. And what you saw, specifically at LPL, was the building of - I would call it a bit of a safe harbor for folks who wanted to put their clients first, wanted to run their own practices, wanted to do things with the oversight of a large institution but felt that their brand should be forward, felt that the Steinmeier Wealth Management brand is actually maybe better than the XYZ Corp brand.

Rich Steinmeier:

Let me tell you something: the folks that ran ahead of that in 2007 and 2008 during the economic crisis - where those brands that used to be hot air balloons and elevate folks became anchors that were absolutely pulling on the ankles of those advisors - those folks all of a sudden felt like they maybe were a couple steps ahead. And I would tell you that's another implication of the financial crisis, and the impact going forward is that brands that historically had always been halos can actually be viewed as albatrosses. And I think more folks are learning that. And if you take that to the next level, what you realize is that this reliance on large institutions is in many cases more constraining than it is liberating. And if you'll allow me, there's another element to this.

Samantha Davison:

What is that?

Rich Steinmeier:

It's the economic element. So let me give you just one example. I'm in San Diego, I moved here from New Jersey, but when we lived in New Jersey, my wife and I, we participated in a farm cooperative. So we paid a fixed share to a farm to get a basket of whatever they grew on the farm which was organic vegetables - we love the tomatoes, we love the corn, but I would get a basket every week or two that had kale. I'm not into kale. It had radishes, not into radishes. It had an abundance - about 60% of what came in that basket, we ended up throwing away. We weren't interested in it; we basically didn't use it. And so this concept of bundling things together, paying for them in bulk, is not actually that efficient unless you don't care about the services or the products that are provided to you.

Rich Steinmeier:

And I would tell you that is what's going to change. It is what folks have realized is changing. So if you are at a firm or if advisors are at a firm where they take 60% of their pay and provide it to the institution to get a basket of services for which they may not want and they may not partake, that is an inefficient model. It's not efficient. The independent movement is about actually paying for the vegetables you want. It's about me taking a hundred percent of my pay - maybe I'd pay 10 cents over somewhere, 10% over where - and then I actually decide what's best for my practice. Do I want PARA planning support? I pay for that. Do I want a sales partner to help me and discipline run my practice better? So I call that a CFO. Do I want to actually have someone who builds my brand, positions me in the marketplace, builds my client engagement strategy, keeps me on social media? That's outsourcing for marketing. All of those things in the latter, that's how we espouse the market.

Rich Steinmeier:

It is so much more efficient to actually pay for the services that you get and hold your partner to account for the delivery of those services versus a best effort scenario where I pay you 60% of my comp, and I hope and cajole that I get the resources aligned. That is an inefficient way for advisors to be supported and that's what is driving, at its heart, the evolution of the independent movement. It isn't just the ability to run my practice the way I want, the need to actually differentiate in the marketplace relative to technology, et cetera. The need to position myself and run my practice the way that I think is best fit to my client base or segment the clients that I want to serve and not say that I don't serve small clients because I don't want to get paid. Not just to not have to position proprietary product, but it is also to have the most efficient model that actually allows for the alignment of our firm, LPL, with our clients. We sit on the same side of the table and you decide how we support you versus other firms where you sit on other sides of the table, and you have got to advocate for yourself to have access to resources that you already paid for. This is what's going to happen over the next 20 years. There is going to be an explosion - if you think the independent movement has started, it hasn't. This is the part that will be revealed as firms like ourselves become much more credible in the marketplace, institutionalized, industrialized, and folks realize there is an efficient way to run my practice and there's an inefficient way. They are made better off every day in the efficient approach.

Samantha Davison:

Ultimately, this all impacts and benefits the investor long term because then they are getting what they want specifically. They're not getting the same thing that maybe a long time ago everybody got. I mean, exactly what you're talking about. It also benefits the investor, as well.

Rich Steinmeier:

Sam, when I was a kid, I wore Rough Rider jeans. I think they were from Sears or JC Penney's. I think there was Lee Jeans, Tough Skins, Rough Riders, and Wranglers. I think there were five different jeans and that was because you had to put together manufacturing at scale, right? It's because everything had to be delivered in bulk. You know, for those that are beer drinkers, it used to be only macro brew and then eventually it became micro brew and then eventually, like in San Diego, the only beers you can get are basically brewed in San Diego at this point. It's insane. But the truth is this is because it's the tastes and unique tastes of individuals are driving the explosion.

Rich Steinmeier:

Sorry I didn't complete my jeans analogy. I'm not super hip, but there's 7 For All Mankind and Guess and there's probably 700 brands of jeans. There are probably 7,000 - I'm making this up I don't know - different types of beers that you can consume. This is the explosion of personalization and the thought of there being five ways that advice can be delivered because five firms decide how that should be done is bonkers and so outdated it's ridiculous. The truth of the matter is that we have 20,000 advisors and institutions and they by and large run 20,000 different ways that they go to market. They're going to be better at figuring out what the needs of their clients are than we are. Our job is to actually enable them to bring their brilliance forward, not to tell them what to do. That model wins, always. That is maybe my last thought - I found this for me, Sam, you put this to me, but I got to look backwards and see externalities led to decades of evolution off of those discreet externalities. There were two of them in the thirties and the seventies. I think the one you would pinpoint is '99 and the explosion of computing and the Internet but that led to personalization and I think you should look out over the forward decades as the implications to that last externality before we have another material externality. I feel great about our ability to support advisors through that externality. I actually think we're the winning model.

Samantha Davison:

Rich, thank you so much. We really appreciate it. I think the industry has certainly come a long way and it's exciting to be part of the evolution that's changing how advisors and institutions offer advice and seeing comprehensive wealth management come to life to meet the unique needs and goals of investors. And at LPL, we will continue to evolve in a way that puts you first. If you're wondering what it's like to join LPL, check out our other podcast to hear from one advisor about his transition.

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This podcast is for financial professional use only and not for public distribution.

The need for financial advice is greater than ever before. In this episode, we hear from Rich Steinmeier, managing director of Strategy and Business Development, about the evolution of the financial industry and the opportunities that exist for financial advisors and their clients.

Topics in this episode include:

  • Historic events that forced the evolution of our industry
  • How to turn challenges into opportunities and effective client communications
  • The growth of independence in the marketplace and what that means for your business

Hear from one LPL advisor about his journey to independence.

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This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Forecasts may not develop as predicted and are subject to change. All company names noted herein are for educational purposes only and not an indication of trading intent or a solidification of their products or services.

Securities and advisory services offered through LPL Financial a registered investment advisor and broker-dealer member FINRA/SIPC.

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