Insights of a First Year Mutual Fund Representative

I wrote this letter to my managers within my first four months of being an insurance and mutual fund representative.  In reflection, I find it interesting that almost exactly a year later I have found myself in a firm that recruits and trains advisors in the manner that I describe here.  In my opinion, this type of model will have to be the future of the financial advisory business, especially when the changing regulatory environment is considered.  When I wrote this, I was not aware of the fee based model.  The fee based model is far more conducive to operating in the manner that I describe below, which is likely one of the reasons why the embedded commission model is under so much fire today.


The letter:


The broad expectation that I have for my current position is that I am constantly learning and fuelled by activity.  I will go into more detail later in this document.  When I entered into the position I had a vision of it being similar to a high level law practice.  I will explain what this looks like in my mind and then draw parallels to show how it applies to a high level financial advisory practice.

After performing casual research by speaking with a corporate lawyer and two litigators (one in family law one in intellectual property law) I have learned that when entering into a firm as an associate, excess clients are passed from the partners to the associates to give the associates an opportunity to learn and build their practice.  Associates are allowed and encouraged to bring in their own clients, but the high level business from the partners is what allows them to gain the type of experience required to add value to the firm; clients passed on from the partners also allow the associates to build a client base that fits with the image and quality of the firm.  An analogy that I discussed with one of the lawyers that helped me understand how a high level law firm works compared the way that financial advisors currently enter the business to a lawyer opening up their own law firm on the street; they are starting a practice with no brand equity, no referral base, and no high level cases to work on to gain the experience needed to become a high level practitioner.  This model is not conducive to building an elite practice.  Partners have spent years, if not generations, building a name and a referral base that brings in clients.  This difference in the way that a lawyer enters the business compared to the way an advisor enters the business explain the disparity between the average level of recruit entering a law firm and the average level of recruit entering an advisory firm.  This model also increases the barriers to entry for an advisory practice.  The current model allows managers to maintain relatively low standards when they are hiring new recruits for multiple reasons: new recruits are difficult to find due to the nature of the business, and the high turnover rate is somewhat justified by the relatively low level of investment by the firm.  It is a vicious circle and a chicken before the egg type situation.  If a model representing a law firm were adopted then the quality of advisors coming into practice would increase.  In the event that advisors knew they would be getting clients upon beginning to practice the business would be far more enticing for compensation and experience purposes; referring to my previous analogy, lawyers are far more likely to join an existing firm than to start their own right out of law school.  The reasoning of a lawyer choosing not to start their own practice is similar to that of a high level professional considering financial advisory; it is necessary to start a business from the ground up.  The alternative law firm hybrid model also increases the investment from the firm which will inevitably result in higher risk, but also greater reward.  The risk of high turnover will be mitigated by replicating the hiring standards of a law firm with an articling process, and a progression into the business.  The reputations of advisors in our business are damaged by the lack of an articling period and the rapid succession into practice.  If lawyers were able to write one two hour exam and begin practicing, the public would be as skeptical of them as they are of advisors.

In our discussion yesterday we referred to the trials and tribulations that people will go through to be analysts for Fidelity.  We failed to discuss some key aspects that make this possible, and the ways that they can be applied to revolutionize our business.  The people putting themselves through hell to become analysts for Fidelity are the cream of the crop.  They are top students from top schools competing for a top position that, if achieved, is guaranteed to come with a large payout and huge opportunities for the future.  In contrast to this, financial advisors often enter into the business with little idea of what it is that they are getting into, high hopes for the potential of income, and unrealistic expectations for what the first few years will be like.  Financial advisors are often second career people looking for higher income, or university graduates that were unsure of what they would choose as a career.  It is very possible for advisors to go through their career never making one tenth of what an analyst at Fidelity will make, while continuing to scramble as if they were fighting for a spot.  It is a difficult expectation for the firm to hold that individuals with high income potential will walk into a business with such a high failure rate when they could be entering into fields with guaranteed income.  I understand the argument that the income potential in this business justifies the initial risk, but imagine the advisors that are being overlooked due to being averse to the risk.  Changing the broad business model to the law firm-like approach will make gaining a spot in this firm a cherished opportunity that graduates with high expectations for themselves and their careers will compete for.

The law firm business model sounds attractive and flashy, but is it feasible to apply this model to an advisory practice?  Lawyers are paid on a salary with an opportunity to earn a bonus based on their performance and the revenue that they are able to produce; billable hours are charged to the firm and used in analyzing the performance of associates.  In the event that associates are brought into cases with a partner their billable hours are combined with that of the partner.  The billing system records how files come in and associates are paid a bonus between .5 and 2% of the total bill for that case.   This occurs if the associate refers a case in, or if they are present in the initial meeting and throughout the case.  Associates are given “sales” targets that must be met using either billable hours or set block fees.  The cases handed to associates by partners count towards fulfilling these quotas; the same system could easily be applied to DSC sales and aum, using commissions and assets instead of billable hours.  From the samples that I took, it is common for first year associates to have to fulfill between 1200 and 1800 billable hours per year.  This does not include administrative work, so it is apparently very difficult to achieve these quotas.  Again, this system is very relatable to commissions.  Advisors would still be motivated to sell and gain clientele to meet their quotas, while having the safety of a salary.  When a lawyer is awarded a position in a firm they are required to go through a period of articling which lasts 10 months; they are paid a salary of approximately $40K during this time.  The next step is to become a first year associate, during which time they are compensated with a salary of approximately $65K and incentives based on activity.  A small percentage (.5-2%) of the business that a first year associate brings to the office is paid out to them.

I understood entering the business that it would not look like what I have described in this document, but I certainly did expect it to be somewhere between what I have described and what it is.  I believe that if we are able to build a model that operates in line with what I have described, we will be able to bring in higher level advisors and bigger clients, take advantage of the concept of functional specialists, and create young advisors that operate on a level that usually takes a life time to achieve.

Understanding that there is a small chance that any of this will actually happen, my expectation going forward is that I will be included on large cases, I will be compensated according to the level of work I am performing, which may not be directly related to premium submitted, and I will be given the type of guidance and structure that an articling lawyer would receive.  It is my preference that I am put on a salary as my current lifestyle cannot be maintained with my level of pay, and the clients that I am attracting to try and pay the bills are not conducive to building the type of practice that I envision.  A structure similar to a first year associate in a law firm, with bonus based on performance, is preferable.

A final note that I hope will make all of these ideas make sense when applied to our office:  There are a select few prestigious law firms that were built by charismatic people with affinities for both law and business.  They have built practices that bring the biggest law cases in the world to them because of the name they have built.  These firms employ massive amounts of highly intelligent and well respected lawyers which allow the firm to attract and handle even more business and bigger cases.  If every lawyer at Gowlings had opted to open their own practice instead of joining the firm, not only would they suffer from having to start from scratch, but the firm would suffer due to decreased capacity and an inability to grow.  Asking financial advisors to start from scratch every time they enter the business is inefficient.  A charismatic and talented advisor should be able to build a practice, and then continue to grow it by adding other advisors that he is able to pass his extra cases to and increase the capacity of his practice.  There is a huge difference between having people on a sales team and having people integrated fully into a practice.  Financial advisory fits so well into the model of a law firm; I believe that shifting to this model is the future of the business.