I spend a fair bit of time explaining how our business works. It isn’t very complicated. It’s different from others and for that reason people assume it’s sophisticated. I thought I would summarise how most businesses in financial services work.
There are two business models. The Godfather II model and the Superman III model.
In Godfather II the young Don discovers that he can earn money by using his muscle to protect people in his neighbourhood against petty criminals. His position is initially morally ambiguous. Whilst unashamably violent his acts seem to be the lesser of two evils. However, as the business grows he formalises his position as a protection racketeer and eventual mob leader, not a heroic vigilante. Many businesses generate revenue more through fear of negative consequences than expectation of positive results. It’s easy to draw analogies with big distributors, but it exists throughout most of the industry. One of the biggest mistakes you can make as a consultant or industry commentator, once you gain some profile is thinking you’re being paid for your intellectual abilities, rather than to shut you up. It’s the way it works. I kind of warm to the people that at least have the honesty to admit it. I would go as far as to say a high percentage of acquisitions in financial services have been based on Godfather II principles, usually those where everyone is left scratching their head asking “Why?”.
Superman III is a little more subtle. In the film Richard Pryor (his lowest moment) writes a programme which allows him to shave tiny fractions off every penny transacted, generating millions of dollars for no effort which nobody notices going missing. Your ahead of me already. Many of the wealthiest in our industry have made their money by carefully examining the value chain and wedging themselves into it to siphon off a few basis points for themselves. This has gone on for years and is as strong now as it ever was. Some of the proponents of the Superman III model have had to be a little more creative of late, going to the trouble of offering model portfolios here, a risk profiling tool there, or even splitting the proceeds down the middle with accomplices.
To achieve optimal results it’s preferable to operate both the Godfather II and the Superman III models at the same time. A few have mastered the art, charging protection money from product providers whilst at round the back door emptying the back book and putting it onto a platform or fund where they skim fractions of a penny.
What’s weird is how easy it is. It doesn’t take much effort to pull either of these two models off. The regulator never stops it. I’ve been around the block enough to have seen it all first hand. I’ve allowed myself to be flattered only to realise I was being ‘managed’ on plenty of occasions. I still get it, sometimes I enjoy it, I just understand the game a little better now, so don’t take it all too seriously. Most people don’t even know what’s going on.