Last week I discussed four inevitable changes in how Americans invest. This week and next, I’ll focus on four aspects of advisory practices that are unsustainable. These four issues will cause significant changes in the next 10 years – or perhaps sooner:
- A dramatic rise in minimum professional standards
- A redefinition of what constitutes value
- A shift in the structure of advisory practices
- A drop in average compensation
I will discuss the first two issues in this article and address the second two items next week.
The news is not entirely bad. Given current demographic trends, we will see increased demand for financial advice. The growing complexity faced by affluent investors and the proliferation of choices mean that most Americans need help in successfully plotting a path and navigating to a successful retirement.
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As a result, exceptional advisors will do exceptionally well. While online tools have become better at providing guidance on routine issues — and an even more sophisticated new generation of tools is en route — for the foreseeable future, most people in their 50s, 60s and 70s will seek personal assistance on their finances.
The challenge is to position yourself to successfully provide that assistance, given some unsustainable realities that exist today.
My argument is simple. Anytime you identify something as irrational, you need to consider what impact a shift in that reality would have on your business.
Those inevitable changes are “ticking time bombs” – they’re going to go off, you just don’t know when. Even if these changes don’t come immediately, there’s evidence that once change starts, it picks up momentum and assumes a life of its own. Two examples of rapid change in last week’s article were the 1989 collapse of the Eastern Bloc over a two-month period and the downward spiral of the Big Three American automakers.
I’m not talking about investment bubbles like the ones we saw in tech and real estate and may be seeing in today’s social-media valuations. Rather, my focus is on unsustainable realities that run deeper and wider than overheated investments. Here are some of the inevitable changes ahead on how advisors run their businesses and interact with clients.
Shift one: Avoiding the “S” word - A dramatic rise in professional standards
Every advisor wants to be viewed as a professional, garnering the same respect as doctors, accountants and university professors. (We’ll leave lawyers out of this conversation.) And given the critical role that financial advisors play and the extent to which they hold positions of trust, advisors as a whole will be seen more as professionals and less like salespeople 10 years from now.
That’s the good news. The bad new for advisors who do the minimum to get by: To be seen as professionals, advisors will be held to a much higher standard of training, disclosure and continuing education, not all that different from what is required today of certified public accountants (CPAs). Some of this will be driven by regulators, but much will come from more knowledgeable and demanding clients. Some of the inevitable changes 10 years from today:
- Advisors entering the business will have to go through a longer period of “internship” and more rigorous testing before being licensed to provide advice, similar to what is required of a CPA. New advisors will need to meet standards similar to what is required to become a CPA in New York State:
- An undergraduate degree with a C grade-point average or higher
- One to two years of experience working for an accounting firm (depending on the number of accounting and business courses taken as an undergraduate)
- Four different exams, which together take 14 hours to write, with a minimum score of 75% on each exam
- To be considered a professional on par with lawyers and accountants, clients can’t just be comfortable with your competence. They also have to be absolutely confident that you are not putting your interests ahead of theirs and that any conflicts are resolved in their favor. That’s a high bar – but if the advisory industry wants to be viewed as a profession, it’s one that has to be met. Some implications of this:
- All advisors have to impose a fiduciary standard.
- Any products that pay embedded or higher-than-normal compensation have to be clearly disclosed.
- If an in-house solution is recommended, that fact has to be explicitly communicated, along with any impact on overall compensation from sales of in-house products.
- If an advisor’s recommendations primarily consist of in-house solutions, that will have to be clearly communicated. (The U.K. currently requires advisors to disclose whether they are tied, restricted or independent, based on the range of products they recommend.)
- Every profession worth the name has strict requirements for ongoing continuing education, with clear standards on the quality of content and rigorous testing to ensure comprehension. While the financial industry is moving in the right direction, the requirements in terms of quantity, minimum quality and measurement afterwards still lag behind those of doctors, lawyers and accountants.
The inexorable push to elevate the industry’s professional standards has started, and a good number of advisors have already begun moving forward on this. If you’re not among that number, the time to beef up your own qualifications and those of your team is now, while you can do it because you want to, rather than because you have to. By waiting, you’ll still end up having to do the work, but without the credit and recognition from clients you’ll get if you’re ahead of the pack.
Shift two: Where’s the beef? A redefinition of what constitutes value
A hilarious 1980s commercial for Wendy’s popularized the phrase “Where’s the beef?” – pointing out the gap between what Wendy’s competitors promised and what Wendy’s delivered.
That’s exactly the way that I feel when many advisors describe their value to clients. Most advisors struggle to articulate their value in concrete terms, falling back on empty phrases like service, communication, planning and peace of mind. I’ve written in the past about the value imperative. The reality is, a new generation of more knowledgeable and assertive clients will put many advisors to the test. The research on how the new generation of investors uses advisors makes it clear that many younger investors will look to be more involved in decision-making and will use low-cost online sites for basic investing advice. These investors will only be willing to pay a premium for value that is clear and tangible.
To address the commoditization of investment advice, many advisors have already shifted to a total-wealth approach, incorporating advice on tax, estate planning, interfamily wealth transfer and charitable giving. The big change that most advisors still have to make, however, is narrowing their focus to become specialists rather than generalists. Investors should aim to provide exceptional value to a few investors rather than solid value to everyone. In a mercilessly value-driven world, clients will pay for exceptional value, but anyone offering average value will struggle.
It’s not just me saying this.
- Here’s an article in which Harvard’s Michael Porter, today’s top thinker on strategy, says that the biggest mistake that businesses make is trying to be better when they should aim to be different.
- This Financial Timesarticle talks about how advisors can help doctors bridge the gap between their champagne dreams and six-pack savings
- Click here to read about lessons from doctors, lawyers and accountants — professions in which specialists earn double the income of generalists.
Defining your value in terms of investment performance can work as well, provided that you can back it up. I recently talked to an advisor who had a $5-million client question the $50,000 in fees he’d paid the previous year. This advisor showed the client a spreadsheet demonstrating how his portfolio had performed in the previous five years compared to a portfolio invested in an index fund with a 60/40 stock/bond mix. The $200,000 in fees that the client had paid over that time was dwarfed by the excess returns that the advisor had added – and the client walked away happy about the value that he’d gotten for the fees paid. Without that spreadsheet, however, it would have been quite a different conversation.
The need to sharpen your value proposition depends on your timeframe. Inertia is a remarkably powerful force. If your time horizon is three to five years and you’re doing a good job of staying in front of clients, chances are that you can continue doing what you’re doing. But if you plan to be in this business for 10 years or longer, now is the time to start thinking about how you deliver exceptional value to clients.
Next week I’ll cover two final shifts in how successful advisors will operate in future.
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 commentaries, go towww.danrichards.comor herefor his videos.
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