Wednesday, March 27, 2013

We Need Another Rooney Rule


People hate being told what to do, but sometimes tough love is the only way.

Consider pro football, one of the most bare-knuckled games around. It took a hammer like the Rooney Rule to pry open the clubby world of wealthy team owners and bring them into the 21st century.

Named after Dan Rooney of the Pittsburgh Steelers, the Rooney Rule mandated that at least one minority candidate be interviewed for any head coaching job. The reason: From 1921 to 2003, only seven minorities served as head coaches for the mostly white team owners.  Even my friend’s 7th grade son knows this “just ain’t right”.

The Rooney Rule went into effect in 2003, and since then, 13 minority coaches have been hired. There’s an open debate whether more needs to be done to promote minority hiring in the NFL. We’ll leave that for others to discuss, but the point is not lost on us that the financial services industry could use its own Rooney Rule.


Country Club Living
Like team owners, Wall Street has always been a good ole’ boys’ club. The financial crisis exposed the dangers of insular thinking and greed.

The financial meltdown was in large measure the result of compensation schemes that motivated Wall Street to take outsized risks with firm capital. 

Compensation got out of hand because there was an asymmetry between pay and performance. When Wall Street took big risks and it worked, the payday was huge. When big risk failed, taxpayers in the U.S., Iceland and elsewhere picked up the tab.


Enter Tough Love
Did Wall Street know this compensation problem existed? Yes. Did it do anything about it? No. 

This issue needs to be addressed, and it’s already happening.

The first salvo was fired in the European Union. In early March, European Parliament and member states capped bonuses at no more than the annual salary for bankers working in the EU and for those working for European-based banks worldwide.

This week, voters in Switzerland overwhelmingly backed an initiative to give shareholders of Swiss-listed companies control over executive pay. The law limits severance packages, side contracts, and rewards for buying or selling company divisions.

Ironically, 100 years ago, J.P Morgan himself said that the CEO should never make more than 20 times the lowest paid employee!

All Eyes on FINRA
Recently, the spotlight has shifted to wealth advisors in the U.S.

FINRA has proposed a new rule requiring that wealth advisors fully disclose to clients the large recruiting check they receive when changing firms. The rule hasn’t been passed yet, but the comment period for this new statute ended two weeks ago. Surprisingly, two of the largest brokerage firms have already come out in support of the rule.  If it does pass, the prospect of taking a recruiting check is likely to be far less appealing for many advisors.

Our question is, will the proposed rule just hurt advisors' bottom line or will it protect the firms from continuing to make poor financial decisions?

Bottom Line
The Wealth Consigliere is not an advocate of government intervention, but a Rooney Rule in financial services is long overdue. The elephant in the room is compensation and it needs to be addressed.

Sometimes we just need someone to say, “This just ain’t right.”

Friday, March 1, 2013

Listen to your Periodontist



I was at a wealth management event last week when I bumped into one of the industry’s thought leaders. We were chatting, and he said he gets asked a lot about Sanctuary.

My ears picked up, so I asked him what he said about us. Answer: “Sanctuary is the periodontist for wealth advisors.”

 WHAT?

It wasn’t quite the answer I was expecting. Nor a serious contender for our new marketing tag line.

The periodontist, he said, is the person who breaks the bad news that your gums are on fire and you’re going to need surgery. Unfortunately, he said, most ignore that advice unless they’re bleeding or their teeth are falling out. The inclination is to deal with it later.

Yet, as soon as the doctor’s warning turns into a full-fledged dental crisis, the first person you call is the periodontist.  That specialist is the only one who can fix the problem.

Sanctuary, he said, plays the same role for advisors. Many Wall Street advisors realize someday they will need to leave their firm. It’s a festering worry about their future, but things aren't quite bad enough right now to opt for independence.

But then a merger comes (bacterial plaque). Or the payout goes down (tooth ache). Or your company forces you to offer products you don’t believe in (lost molar). Or the technology platform blows up and drives away your clients (root canal).

My friend was correct. Sanctuary is like the periodontist for elite advisors. Many of these advisors know they should be doing something, but are instead standing pat. The recent story in InvestmentNews about the dearth of breakaway advisors is Exhibit A.

Are you a Periodontist?

While Sanctuary-as-periodontist is an apt analogy, the same idea holds true for wealth advisors and clients.

A responsible wealth advisor looks at a client’s portfolio and suggests that a risky portfolio needs to be addressed. The client responds by saying, “My portfolio was up 15% last year. Why should we change?” Then nothing happens until there is a traumatic market event.

In fact, most investors still haven’t gotten back into the market because the financial crisis was so painful. The result is that many are afraid, but that could be just as disastrous if they miss the next rally.

Listen to Your “Periodontist”

There are a lot of well-meaning advisors we don’t listen to in our lives. The list includes our spouse, parents or friends. The lesson learned after we've ignored good advice is that we should have listened. Distraction or hubris is usually the culprit.

The moral of the story: Listen to your “periodonist” before your teeth fall out!