The Science Behind Building an Enduring Practice
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“The more things change, the more they stay the same.”
Jean-Baptiste Alphonse Karr
Make a list of the services you provide your clients, and you will find nothing new. You might not have been providing those services 20 years ago, but other financial advisors were.
How those services are provided has changed a lot, though.
Jeff Bezos, the founder of Amazon, made a thought-provoking observation:
I frequently get the question: ‘What’s going to change in the next 10 years?’…I almost never get the question: ‘What’s not going to change in the next 10 years?’ And I submit to you that the second question is actually the more important of the two because you can build a business strategy around the things that are stable over time.
It may surprise you to learn that when Bezos went through this analysis for his own business the answers had nothing to do with technology. In fact, his answers were downright old-school. He believed his customers wanted low cost, fast delivery and vast selection.
He built a company around things he believed would last. The technology he used was a means to an end. It has changed dramatically since he founded his firm and it will continue to change. These technological changes are shifting sand. They are important, but they are not the heart of the matter.
What’s the heart of the matter for your firm? What are the things that will not change in the coming years – the things you can use as the cornerstones for your business? It’s important to identify them. As Bezos said, “When you have something you know is true, even over the long term, you can afford to put a lot of energy into it.”
The services that advisors provide may not change much in the coming years, but you have lots of choices to make about which services to deliver and how to deliver them. Your choices will significantly impact your future success.
Every firm will have a different recipe for how it will evolve. It will be determined by factors like your personal strengths and preferences, your target market, and the size and shape of your firm today. Here are some thoughts to help you sort through the alternatives, no matter which direction you take.
These are thoughts on things that last.
Don’t lose touch with your clients
Humans crave social connection. UCLA psychology professor Matthew Lieberman, author of Social: Why Our Brains Are Wired to Connect, says, “Being socially connected is our brain’s lifelong passion. It’s been baked into our operating system for tens of millions of years.”
Social connection is more than a preference – it’s essential to our well-being. In their paper Social Relationships and Health: A Flashpoint for Health Policy, University of Texas professor Debra Umberson and doctoral candidate Jennifer Karas Montez document the impact that a lack of healthy social relationships can have.
Their paper begins: “Social relationships – both quantity and quality – affect mental health, health behavior, physical health, and mortality risk.” They note that captors use social isolation to torture prisoners, often with devastating impact, and they cite a study that shows the risk of death among adults with fewer social ties is twice that of adults with many social ties.
How many times have you heard someone say, “Being a financial advisor is a relationship business?” This doesn’t mean that every interaction with a client should be in-person. We’ve moved way past that place. But social interaction is a key part of what advisors offer.
As you build your office of the future, new technologies can either bring us closer together or move us farther apart. Technologies that help clients communicate with you quickly and conveniently can enhance a sense of connection. Technologies that leave clients confused or unappreciated, create what New York Times tech columnist David Pogue calls, “software rage.” These interactions degrade the social connections at the heart of the advisory business.
Keep it simple
People like to keep things simple. Our industry hasn’t gotten this message, but that doesn’t mean you shouldn’t keep it in mind as you evolve your service offering.
There are several reasons why people value simplicity. Our brains are powerful machines. They are comprised of over 86 billion neurons and, according to researchers from the Blue Brain Project, can process information in up to eleven dimensions. But as Jory MacKay notes in his article, The Psychology of Simple, “We love simple things because they are easy on our brain – it doesn’t have to work as hard to understand them.”
MacKay points out that humans are hardwired to make snap decisions. It helps us function in the world and relieves the mental strain of processing huge amounts of information. He cites a 2012 study that Google did with researchers from the University of Basel. They found that users will judge a website’s beauty and functionality in between 1/20th and 1/50th of a second.
Another reason that people like simplicity is that it’s associated with three characteristics that they value. In his TED Talk, The Science of Simplicity, Harvard professor George Whitesides notes that simple things tend to be reliable, predictable, and repeatable. These are all qualities that people appreciate, especially when it comes to their money.
Simplicity also shows respect. Making things simple for clients is not easy. It takes a lot of work. Steve Jobs said, “Simple can be harder than complex. You have to get your thinking clean to make it simple.” Putting that effort in for your clients’ benefit shows you care.
Unfortunately, some in our industry would have us equate complexity with sophistication. There are many reasons for this and few of them have anything to do with doing what is best for clients. Have the courage (and be willing to put in the work) to be simple.
Take Albert Einstein’s advice: “Everything should be made as simple as possible, but no simpler.” How do you know when you have reached that point? Take the advice of Antoine de Saint-Exupery: “You know you’ve achieved perfection in design, not when you have nothing more to add, but when you have nothing more to take away.”
Bezos was right
Yes, Bezos was correct in saying that clients want low prices and that’s not going to change. As he put it, “It’s impossible to imagine a future 10 years from now where a customer comes up and says, ‘Jeff, I love Amazon; I just wish the prices were a little higher.’”
The future of the advisory business isn’t going to be any different. This doesn’t necessarily mean that you will need to lower your fees, but it does mean you should develop a strategy for dealing with the undeniable fact that client sensitivity to fees is increasing.
There are a number of approaches you might take to dealing with this issue. One is increasing the value of the services you provide – clients pay the same, but get more for their money.
You can explore alternative fee structures. Charging flat fees or hourly fees for certain services may help. Clients may appreciate the transparency and predictability they provide.
You could also lower your own cost structure. You can do this by gaining efficiencies in your own operations or by reworking arrangements you have with existing vendors. This would allow you to reduce fees to clients without impacting your profit margin.
You can look for ways to reduce the internal expenses your clients pay for investment management services. If the mutual funds, ETFs or TAMPs you use charge high fees, look for alternatives. This way you can lower client costs without affecting your own fees.
Some things never change. Identify the services your clients will always need. Provide them in a way that takes into account their innate desires for social connection and simplicity, and their increasing sensitivity to fees. Build your business on a solid, lasting foundation.
I would like to thank and acknowledge my friend and veteran advisor coach Steve Sanduski of Belay Advisor, for planting the seed that led to this article.
Scott MacKillop is CEO of First Ascent Asset Management, a Denver-based TAMP that provides investment management services to financial advisors and their clients. He is an ambassador for the Institute for the Fiduciary Standard and a 40+ year veteran of the financial services industry. He can be reached at [email protected]
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