Three Emerging Trends That Are Upending Our Profession

Consider what that means about how clients view the power in the new client-advisor relationship. They believe they need your permission to better refine their own definition of a prosperous life. No wonder they often feel like the financial plan they receive is not their own!

At the end of that first meeting, McNeill will ask clients to come into the next meeting with a list of their goals in life – not just financially – and, where appropriate, to estimate what they believe the cost of those goals to be. These will be put up on the big screen at that second meeting, clients can make adjustments and refine the wording, and McNeill’s staff will use account aggregation software to upload portfolio balances into her planning program.

In the third meeting, clients will do something radical: they will actually hold the mouse and make changes to their financial plan – essentially bargaining with the future by deciding that they can live with a less expensive car, retire a year or two later or save more between now and retirement.

Between the third and fourth meeting, they will go home and research the actual cost of the goals they had previously only estimated, and a financial plan will be finalized either at the end of the fourth meeting or, more often, after a follow-up meeting that cleans up the details.

The result: clients enjoy the initial onboarding process and look forward to each of the meetings. They leave with a plan that they feel like they, themselves have created, which raises their level of commitment to implement it. And they are more likely to refer their friends and neighbors to a much more collaborative, fun process than the typical initial meeting where you’re working through a shoebox full of financial statements.

Of course, I’m sure you can spot the challenge in providing this level of collaboration: it’s time-consuming and, from a purely time-management standpoint, inefficient. A company called Facet Wealth, in Baltimore, MD, has created a business model that is designed, from the ground up, to squeeze the inefficiencies out of a traditional client service model, in order to provide high-touch collaborative planning services to the blue ocean of middle-market consumers.

It starts with an in-house software solution where the client and an advisor meet remotely by videoconferencing, with the software providing a workspace that both can access and control. The initial fact-finder is filled out online, and clients are invited to spend as much time as they want defining goals and objectives – and perhaps going offline to refine what they want their outcome to be. The software also collects their income, savings and portfolio values. As this information is entered, the screen illustrates a series of scores: how many months of expenses their emergency fund will cover; their savings rate, their debt score (defined as the percentage of income going to debt payments) and their credit score. Call it the first step toward game theory in financial planning.

The software also produces a balance sheet, cash flow analysis and net worth statement, all on one page of the shared screen. At any time, clients can check this information online, see changes in their scores, see increases in their net worth, and monitor progress toward their goals. The planner or client can add tasks to the to-do list, which is checked by both sides, creating an ongoing planning process that is designed to evolve over a lifetime. Clients can type questions into the workspace and get answers in less than a day. As they achieve goals, they can make new ones.

The result is that clients are profitable at much lower price-points than you see at a typical financial planning firm. The average Facet Wealth client has $350,000 in assets, and the average fee is roughly $1,800. The firm is hiring advisors all over the country, and expects that each of them will be able to provide high-touch service to as many as 250 clients– three times the industry average.

For planning firms that don’t have their own in-house tech development team, there’s hope. The same ongoing collaboration concept is driving the new Advisor Engine software, which is built around the idea that clients and advisors will collaborate online on their financial plans through a shared workspace. But with features like investment analytics that stress-test portfolios, automated rebalancing and tax-loss harvesting and model portfolio designs, Advisor Engine facilitates this collaborative planning process across a broader array of clients: the high-net-worth individuals who want a differentiated portfolio management experience, along with the automated onboarding and advice model that can be used to serve less wealthy clients.

In The New Profession, I outlined some of the benefits of collaboration and some models that are emerging. The marketplace is already moving ahead of my predictions.

2. Fee structures

In The New Profession, I argued that everybody in the advisory/financial planning profession needs to prepare for a major shift in how they charge their clients. I didn’t waste a lot of time on commissions, other than to say that it was becoming clear to anybody who looked around the profession that fees are the future. But I also said that the AUM-revenue model is about to become an anachronism.

Why? Charging according to the size of the portfolio doesn’t match the work you do for a client with what the client pays. Everybody has wealthy clients who are hardly any work at all, who subsidize clients who require a lot of attention and have smaller portfolios.

People are increasingly unwilling to believe that advisory firms add value in the form of higher portfolio returns. I remember some years back when the accepted wisdom was that nobody would actually pay money for financial planning. We are moving toward a day when the accepted wisdom will be that nobody will pay money for asset management services. So the fee structure will need to be visibly based on how clients increasingly perceive your value.

Most importantly, the AUM model excludes anywhere from 70% to 90% of the people who need your services and are able to pay for them. If somebody hasn’t yet accumulated a substantial portfolio, or if somebody doesn’t want to turn his/her portfolio over to you (including validators who simply want outside guidance to manage their own portfolios or collaborators who want financial guidance but not portfolio management), then the AUM-based advisor has to turn them away. A fee model that isn’t tied to the portfolio allows your firm to move into the blue ocean of consumers, dramatically broadening the market for your services.

Finally, is there any profession in the world where the customer asks what he’ll pay for your service, and your reply is: it depends on how much you’ve got?

I wrote about a number of alternative fee structures that have emerged in the profession, including flat fees, hourly arrangements that can be “subscribed” to, scaled retainer fees based on complexity and the monthly subscription model favored by the XY Planning Network. But now there’s a deeper dive into a broader range of fee alternatives, courtesy of Matthew Jackson, at Simon Kucher & Partners.

Jackson’s white paper The Future of Fees, profiles a number of advisors, including several that I referenced in my book, and delves into their fee structures in detail. The different models are hourly, fixed-fee, a Chinese menu, the XYPN model, a subscription model and something Jackson calls a “super-retainer.”

This vividly illustrates that there is no consensus yet on how advisors will replace their once-comfortable AUM fee structure. But there is some emerging clarity on what those fee models will need to include.

The first is choice. There is psychologically-based support for offering several options; if you offer just one AUM fee, clients either have to accept it or walk away. If you offer three, or five, or seven different options, based on complexity and the amount of internal costs you’ll incur in providing the service, clients are more likely to choose one of them. This boosts the close rate.

The second feature, closely related to the first, is calibration, where the fees are set in a clear context to the value that will be provided. In one of the models cited in the report, a firm offers a bronze, silver, gold and platinum level service, with the platinum level service coming in at double the cost of the bronze. At each level, the firm specifies the type of client (basic needs, comprehensive individual, comprehensive for a couple, business owner or complex financial situation) and then estimates the number of advisor hours the fee covers. Clients can see at a glance which is most appropriate for them, and more importantly, they see that if they pay more, they get more, in the form of hours of work from the planning firm and greater depth of analysis.

This is actually a feature of most of the plans that Jackson covers. The hourly model that he cites is offered at five levels, with five different tiers of complexity and five different estimates of the time that the firm’s planners will spend, per year, on the case. The Chinese Menu (Jackson calls it a “McDonald’s Menu”) offers four levels of service, and each level comes with an increasing number of services. You can’t choose one from column A and another from column B; instead, you can choose a package that includes basic services, or one which adds two additional services, or one with two more – and so on.

And of course, in each example, clients can adjust themselves up or down as their needs change. They feel more in control of their service level and fee structure—and, therefore, more comfortable in the relationship.

The fee chapter was the most controversial part of my book. People came up to me and asked: why would I want to change something that is working just fine? And my answer was that there’s no reason to change your baby boomer clients who are happy with the AUM model. But be ready to adapt as the marketplace starts to look for a closer tie between what you do and what you charge, and more transparency about what they’re receiving. With Jackson’s new paper, and the examples of forward-thinking advisory firms, that day is closer than we realize.

3. Collaborative investing (crowdsourcing)

In my book, I collected a lot of different studies and methodologies, recommended to me over the years by various financial planners, which showed different ways that an astute professional can identify above-average investment opportunities before the fact. What I found remarkable was that everybody had a different process, that most of their formulas seemed to have a lot of thought behind them and some merit in the real world – and mostly I was surprised that nobody had ever collected this information in one place before.

We’re not going to have that problem for very much longer.

The next new thing in investing is the crowdsourced platform, and it will be a major game-changer. I’m talking here about the TD Ameritrade Institutional Model Market Center, which collects third-party investment models. Not mutual funds, you understand, but models – the actual underlying investments gathered together in portfolios that advisors can “subscribe” to on behalf of their clients. You choose a portfolio (or blend multiple models), import it directly into TDA’s Veo platform, and it has the tools that allow you to provide customized, largely-automated opportunistic rebalancing and a tax overlay for each client. Various studies have suggested that customized opportunistic rebalancing and tax-loss harvesting could add 1-2 percent a year in advisor alpha over the non-customized management that mutual funds and ETFs provide.

The Model Market Center currently offers portfolios designed by, among others, Goldman Sachs Asset Management, Russell Investments, State Street Global Advisors, Wilshire Associates and WisdomTree Investments. But it’s clear that eventually the platform will do what another crowdsourced option – the Folio Institutional Model Manager Exchange – already does: allow different investment-centric advisory firms to post their own portfolios, using individual securities, ETFs and funds, and allow other advisory firms to “license” them. These participants can compare notes on their optimized folios and do what I tried to do in my book: harvest the wisdom of the more astute members of the investment crowd.

You can find a remarkable array of “ready to go” portfolios on the Folio Institutional website, which provide customized exposure to everything from the African continent to Internet-related stocks, to a folio that focuses on wine, beer and spirits. I would expect a robust interaction between the model manager exchange portfolios that advisors post, and the ready-to-go portfolios that can be integrated into them.

Two of the most aggressive and fastest-growing players in the advisor software ecosystem have recently entered the crowdsource investing space. Orion Communities, a part of Orion’s Eclipse platform, includes ready-to-go portfolios from Russell Investments, Blackrock and CLS Investments, and allows Orion users to add their own models, which also integrate with Orion’s rebalancing and tax-loss harvesting capabilities. Orion is also a tech partner in the new Riskalyze AutoPilot Partner Store, which provides portfolios from CLS and Blackrock, plus the American Funds, Morningstar, SEI and eight other asset managers.

To round out the list, there’s the HedgeCoVest SMArtX platform available to Advent users, currently hosting 180 models from 100 private money managers, with advanced capabilities like filtering by Sharpe and Sortino Ratios – and, so far uniquely, incorporating long/short and options strategies. Trust Company of America now offers Money Manager X-Change, which offers portfolios from 10 different money managers – though, as yet, no provision for advisors posting their own portfolios.

The ability to provide a customized tax overlay on client portfolios, all by itself, represents a huge potential “advisor alpha” value for the clients of advisors managing assets. The Pitcairn asset management firm has estimated (here and here) that its annual tax-loss harvesting activities have provided between 1% and 2% of value in individual years, while Parametric in Seattle has estimated that the average tax harvesting alpha runs to about 1.25% a year.

In separate research, Gobind Daryanani, the creator of the iRebal software program, has estimated that active rebalancing can add up to 55 basis points a year over a longer time period.

There is a greater advantage to crowdsourced investing than most advisors yet realize. In the 1980s and before, there was an enormous disparity in the information and thinking available to professionals, as versus retail investors. That information asymmetry has almost been extinguished.

Today, an investor with zero sophistication or experience can get a well-diversified, inexpensive portfolio from Vanguard and do very well through the ups and downs of the marketplace, and probably outpace the portfolios recommended by many professional investment advisory firms. The crowdsourced communities that are growing up in our midst will provide a chance for advisors to harvest the wisdom of the crowd – that is, their most astute peers. This could restore some of the information advantage that professionals once enjoyed, making them, once again, better investors than the public they serve.

The world I pictured in The New Profession looked, to some readers, intimidatingly different from the professional world that most advisory firms are experiencing today, and so of course I experienced a certain amount of push-back. Do we really need to make all these changes when things are going along just fine?

As I look at these three emergent evolutionary trends, I see a profession that is changing even faster than I dared to predict, in the most fundamental aspects of our professional life. In the way advisors deliver their services, charge for those services and invest client portfolios, the future is, more clearly than ever, going to be very different from our accepted practices.

Bob Veres' Inside Information service is the best practice management, marketing, client service resource for financial services professionals. Check out his blog at: www.bobveres.com.

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