Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
Of the broad trends facing the financial service industry, the most powerful will be greater transparency. It will force everyone – and advisors in particular – to clearly demonstrate the value they provide. How advisors respond to this shift to a value-driven world will determine whether they succeed or fail.
Around the globe, many advisors have become concerned about some of the regulatory proposals around mutual fund fees and compensation for advisory services. Among the options that regulators have identified are:
- Requiring mutual fund companies to have low-cost execution only series (such as the no-load and low/no-12(b)1 share class) available for purchase directly from a fund manager or on a discount broker platform;
- Mandating the unbundling of trailers from fund management fees with fee-for-advice billed directly to each clients as a separate charge;
- Requiring that advisors operate as fiduciaries putting client interests first in all cases;
- Either capping point-of-sales commissions or banning commissions all together on mutual funds. On banning commissions, one regulator’s proposal described this as,” the most straightforward way to align the interests of mutual fund companies and advisors with investors.”
Need a keynote speaker for your conference?
If you’re looking for a speaker to inspire and energize advisors, consider Dan Richards.
Dan shares fresh, leading-edge perspectives on ways to attract new clients and communicate more effectively with existing ones – and helps each audience member create a personalized plan of action to grow their business and better serve their clients.
For more information about booking one of today’s top experts on client marketing for your next conference, contact [email protected] or call 416 900-0968.
Avi Nachmany is executive vice president of consulting firm Strategic Insights and one of the investment industry’s most respected observers. He points to concerns among regulators that the advisor-client relationship is fundamentally based on trust and as a result advisors’ pricing power is significantly asymmetric, even with greater knowledge on the part of clients. That’s because the trusted advisor drives both investment choices and the fee-for-advice price equilibrium. As a result, regulators around the world are looking at mandating practices that they view as being in investors’ best interest.
I’ve recently received several emails asking about the impact of some of these scenarios. As one recent email put it: “ If you believe there is opportunity in chaos, how do you effectively prepare for the new dawn? ”
Regardless of how the current regulatory proposals net out, given trends in Great Britain, Canada and Australia, it’s hard to imagine that we won’t see greater transparency and disclosure on compensation – and not just on mutual funds but for all product solutions. As you think about this trend, here are some thoughts you might want to consider and some lessons from another industry that went through the same fundamental changing-of-the-rules that the investment industry may be facing.
How greater disclosure affects your business
Let’s start with three observations on the impact of greater disclosure on compensation:
-
This isn’t just about mutual funds
I’ve had advisors tell me they’re not concerned, since they’ve shifted away from mutual funds to in-house fee-based platforms or to a discretionary model.
Just to be clear, the conversation here won’t end with any one product – it’s a bigger issue relating to disclosure, transparency and alignment of interests across the entire client relationship. Once there are changes on one product, over time it will inevitably spread to others.
-
This isn’t just about regulatory requirements
The fundamental focus on value by clients isn’t a new one or just limited to the financial industry. In case after case, we’ve seen customers shift from deciding who they work with based on yesterday’s relationship to making decisions on today’s value – look no further than the impact going back to the 1970s of negotiated commissions and competition from discount brokers on stock trades.
That said, regulatory mandates on disclosure and transparency will likely accelerate the move towards greater focus on value that is already taking place. Another contributing factor to this focus comes from the rising profile of ETFs.
I had a conversation with a successful advisor who pooh-poohed the impact of ETFs because none of his clients own them. ETFs will continue to play a key role in focusing clients on cost and value for money – even clients who don’t use ETFs are more aware of lower cost options (with the media obviously playing a role here)
-
Transparency on pricing can have a significant impact
Greater openness about compensation can be an accelerant and catalyst for big changes in behavior. As one example, the practice of law has been transformed in the past 20 years, with huge downward pressure on margins for any work that clients see as a commodity.
In large measure, this is because law firms were forced by more discerning clients to change billing from the norm in the early 1990s of one line that read “for services rendered” to itemized billing, leading to greater scrutiny on value. In many cases, the same scrutiny will occur once clients see more clearly exactly what they’re being charged.
Lessons from retailing
Given all this, what should advisors be doing to position their businesses today?
The retailing industry offers some useful lessons. In the last 20 years, the retailing landscape has been transformed around the world. Among the key catalysts have been the arrival of low-cost value-focused competitors such as Walmart and Costco and more recently the impact of online shopping
Today, retailers fall into three categories – the ones who’ve thrived, the ones that failed (think Montgomery Ward, Filenes, Carter Hawley Hale, Kresge and Woolworth, to name just a few) and the largest group, the ones that have limped along, able to stay in business but experiencing margin compression and generally not having a lot of fun.
Advisors will fall into the same pattern, with the ones who thrive falling into the same four broad categories as successful retailers:
- Value-focused low-cost providers such as Walmart, Costco, Winners and Dollar General.
- Premium and super-premium entries like Starbucks and Brooks Brothers and further up the price chart Tiffanys, Louis Vuitton and Hermes
- Specialty chains like Lululemon, IKEA, Best Buy, H&M, Zara and Staples
- Stores such as Target, Bloomingdales and Nordstroms that offer a differentiated shopping experience through a combination of distinct product offerings and service excellence.
Winning in a value-driven world
In every case, the winners provide concrete, specific, tangible value. Hall of fame football coach Vince Lombardi was noted for saying “ Winning isn’t everything, it’s the only thing.” Advisors who want to ensure future success need to adopt the credo: Value isn’t everything, it’s the only thing. As Avi Nachmany puts it, “ Price is an issue only in the absence of value. For most clients, clearly articulating your value as an advisor will eliminate much of the price dialogue.”
Some tips on how you can ensure you’re delivering the value to position yourself for success:
-
Look at value through your clients’ eyes
Successful retailers provide value from their customers’ perspective, not from their point of view .
I recently had an advisor tell that he provides outstanding value based on doing financial plans for clients and being in regular contact. That may be outstanding value from his point of view, but chances are his clients do not see it that way.
Here’s a simple test of the value you provide. How would your key clients complete this sentence:
“As a result of working with my advisor, I’m better off because ….”
In a more forgiving world, you could get away with vague, murky value. In tomorrow’s world, only those advisors that provide sharply defined, truly compelling value will prosper.
-
Specialize to thrive
A key element of providing superior value is focusing on serving a well-defined niche of clients with common issues – and because you bring specialized expertise being able to serve them exceptionally well.
This is not a new insight, most advisors have been told this for years. In December I wrote a column based on insights from Harvard Business School’s Michael Porter, considered today’s leading thinker on strategy, on the critical need to be different and also why most businesses resist getting out of their comfort zone to focus on the subset of customers they serve the best.
If you look at the winners and losers among retailers, the winners tend to be specialists, the losers generalists. Advisors may have gotten away being generalist in the past, but going forward, a generalist positioning puts you at a significant disadvantage when it comes to delivering compelling value.
Click here to read the column based on Michael Porter’s views.
-
Align value with profitability
We all know the 80-20 rule, 80% of sales come from 20% of clients. Less well-known is the 100-33 rule; research shows that for most businesses, 100% or more of profits come from 33% of clients.
For most advisors, their largest clients are the most profitable ones; in effect many advisors make windfall profits on their largest clients and break even on the rest. This model works provided that your largest clients are content to subsidize the other investors you work with; however, in a more competitive and transparent world, any client who provides windfall profitability is at risk of assault by competing advisors.
As you think about the value you deliver to clients, start with a baseline of solid value that you deliver to every client, but be sure that this value scales up for your largest, most profitable clients, so that all your clients are receiving solid value for the revenue they provide.
-
Take a hard look at costs
When aggressive competition arrives on the scene and starts cutting prices, incumbents often find that they have to take a hard look at their spending and to make tough decisions about cutting anything that isn’t essential.
There are two kinds of costs in every business, including yours. There are the good costs that drive activity where clients see clear value. And then there are the bad costs, which are everything else.
Some bad costs are inevitable to keep your doors open, but the key is to maximize the good costs and minimize the bad costs, being ruthless about every dollar you spend that doesn’t translate into clear value in your clients’ eyes.
Scale is key to reducing the percentage of bad costs. Some costs are essential to stay in business ; to keep them to a manageable portion of your total expenses, spread them over as large a book of business as possible.
-
Choose clients carefully
Irish playwright Oscar Wilde famously said that “ The cynic knows the price of everything and the value of nothing.”
No matter how good a job you do and how much value you provide, for some price-obsessed investors you’ll always be charging too much. Your goal should be to charge a fair price for fair value and to steer clear of clients unwilling to pay a premium for superior value.
This isn’t just true of the financial industry; I’ve written in the past of consumers who go into stores to shop and once they’ve made a selection use their smartphone to take a pictures of the item’s UPC code and then do an instant online search to find the best available price. If you find yourself dealing with a client who is constantly trying to beat you down on price and using discount brokerage costs as a frame of reference for every conversation, you need to question whether this is an investor you can profitably serve.
One final comment on the impact of greater fee disclosure: Based on historical precedent, it will be both greater and smaller than many advisors expect.
It will be smaller in the near term, given that inertia is a very powerful force , especially among older clients… So if you only plan to be in the business two or three years and are doing a good job on client communication, chances are you’ll be fine
In the mid to long term, however the impact of greater transparency and disclosure will be more than many advisors expect. The good news is that you have some time to adapt – but the bad news is that the time to change isn’t unlimited and things may move faster than expected.
The first Walmart opened in 1962; by the early 1980s it was expanding from its original geographical base. Retailers in other regions talked about the possibility of Walmart’s arrival for years before it hit the scene, despite this it was only when Walmart actually entered that most made the painful decisions to position themselves to compete with it … by which time it was too late for many.
Many retailers dithered about the chances of Walmart entering their market for a decade or longer. The best time to make tough decisions about your business is always today, the second best time tomorrow – the longer you wait to make changes in your business, the more difficult those changes will be.
conducts programs to help advisors gain and retain clients and is an award winning faculty member in the MBA program at the University of Toronto. To see more of his written and video commentaries, go to www.clientinsights.ca. Use A555A for the rep and dealer code to register for website access.
Read more articles by Dan Richards