PHOENIX - Independent broker-dealers and financial advisors could very well be thanking Bernie Madoff and legislators who passed the Dodd-Frank Wall Street Reform Act in the not-too-distant future.
That’s because the ensuing heavy-handed regulatory policies and general consumer distrust of big investment houses will spark innovation in financial markets and new opportunities for growth.
At least that's how author, consultant and ChangeLabs CEO Peter Sheahan believes it will shake out. He offered up his lemons-into-lemonade hypothesis today during the closing keynote address of the 2011 OneVision: Broker Dealer Conference, citing examples of other industries-- insurance and manufacturing, to name two-- that first chafed under increased regulatory scrutiny only to emerge stronger and more profitable than ever.
"You are experiencing tectonic shifts that other companies in other industries have endured before you," he told attendees. "But the regulation you face doesn't have to be a burden. The companies that are first to accept and respond to the burden and reinvent their processes are the ones that will eventually see dramatic improvements to their margins."
Sheahan's spiel would seem to be a hard sell to an audience of independent broker-dealers and financial advisors who just spent the past two days bludgeoned by the ramifications of new compliance and regulatory issues.
But it seemed to perk up the crowd as he offered story after story of companies and entire industries that faced similar challenges but reinvented themselves. These industries survived and, eventually, thrived.
"The fact that you've been profitable to the bottom of the pyramid, the small investor, is important," he said. "The problem now is that the increased costs of regulation will now rob you of the margins that allowed you to essentially service the bottom layer at cost. But it's important that you keep doing this."
In Sheahan's view, regulation is coming and there's nothing the industry can do about it.
"It sucks," he said. "But you have no choice. Research says to embrace it."
Along with increased regulation on multiple fronts, consumers are angry, confused and almost irrationally disinterested in anyone or any company trying to convince them to invest what money or assets they have left in the wake of the Great Recession.
This again represents an opportunity, Sheahan said. By differentiating themselves from "Wall Street," he thinks independent advisors and firms have a window of opportunity to capitalize on the sour taste left in so many investors' mouths in the aftermath of the economic meltdown, bailouts and quick return to outsized compensation and bonuses.
"Consumers still aren't ready [to resume investing]," he said. "They're still freaking out."
He said independents have about 18 months to profit from the chaos, uncertainty and erosion of trust by positioning themselves-- and offering the products, services and personalized touch-- as the professionals who are "taking care of Main Street."
To make it happen, he recommends financial advisors and their firms invest some thought and collaborative energy among themselves to find interesting new ways to use the customer data they have and the new regulatory measures they're being forced to embrace to find new revenue streams.
"Data could be the source of that opportunity," he said. "What you have, what others in your industry have. This explosion of transparency will create data and give you the opportunity to build analytics around your data."
"Don't look at it as a pain in the neck," he added. "It's a chance to improve the investor experience and tailor it."
During a particularly colorful anecdote involving his wife and an expensive Gucci handbag, Sheahan made the point that consumers are inherently irrational and that's in large part why his wife was willing to spend $1,450 more for a bag that had superior stitching than a cheap lookalike knockoff from Malaysia.
"The point is that she knew the difference," he said. "That's what your industry needs. It needs a story and the stitching that will make investors want to come to you."
This differentiator of quality that resonates in investors' minds more than likely will come from the bottom up, meaning from the pool of existing and potential investors, rather than from on high from wholesalers or even within a particular branch, he said.
"All the top-trafficked websites-- YouTube, Google, Wikipedia, eBay, Facebook -- they all exemplify what happens when human beings are left to do what they do," he said. "They push up’’ ideas to the leaders of the organizations they work for or buy from.