—Bob Dylan
Almost everything affecting the delivery of financial advice is changing. New technologies, regulations, products and business models are transforming the industry. Exploring what future-world might look like can help you position yourself for it.
I’ll start by confessing that my crystal ball is no better than anyone else’s and I have an inherent skepticism about predictions of any kind. But it’s hard to operate without a mental picture of what the world might look like tomorrow. Plus, the act of thinking about what may lay ahead makes us better prepared to deal with it, whatever it may be.
Learn to Love Technology. It’s no secret that technology is changing our world. Every week a handful of new fintech firms and robo-advisors emerge, promising to revolutionize some aspect of the advice business. Some of them will actually live up to their promise.
But don’t let the technology revolution paralyze you.Take a deep breath and relax.The world will not end if you don’t reinvent your technology infrastructure tomorrow. But you also must accept that part of your job going forward is to use and understand technology at some level.
The key is to get started. Technology is not going away and it is not your enemy. Robo-advisors will not be your competitors any more than vending machines are in competition with fine restaurants. But robo technology will be a cornerstone of every successful advisory practice. Stop looking at technology as a necessary evil. It is your friend and will be your salvation.
You will sit in a virtual cockpit. You will be able to compete with anybody. Advisors at the smallest firms will have access to the same tools and resources as advisors at the biggest firms. Activities that were the highest and best use of your time will be reduced to ministerial function. Deliverables that were the core of your value proposition will be available to your clients from many sources and will no longer differentiate your firm from others.
Create a New Value Proposition. When I started in the financial services industry, a significant part of an advisor’s value proposition was access to product. A client who wanted to buy stocks, bonds or mutual funds needed to go through a full-service broker who charged a fixed commission. There was no price competition. Brokers controlled the research too.
Much has changed since then, but the advisor’s value proposition is still largely based on access to product. Today the products are portfolios and financial plans.
In the future, clients will not need to go through traditional advisors to buy portfolios or financial plans. Access to product will no longer be the basis for an advisor’s value proposition.
Instead, their worth will be based on elements that are uniquely human in nature.
Here are three examples of how advisors can change the emphasis of their practices to add value that is uniquely human:
Client profiling. Most advisors have a client onboarding process that involves collecting data about clients, and perhaps having them fill out a risk tolerance questionnaire. That’s a nice start, but behavioral economics research shows clients are far more complex than our rudimentary onboarding processes give them credit for being.
A client’s risk profile has multiple dimensions and risk tolerance is only one of them. Each of your clients differs in:
- their willingness to take risk
- their aversion to losses
- their tolerance for ambiguity
- how risky they perceive the future to be
- how they deal with time (short-term vs. long-term perspective)
- the consistency of their decision-making
These characteristics are all important in counseling clients and they can be measured.
Behavioral coaching. An advisor has responsibilities for both investment management and investor management. Perhaps in future-world we will access portfolios through online vending machines.That still leaves lots of work for us in the area of investor management.
Behavioral finance has cataloged many shortcomings in the way investors make investing decisions and research into different personality types also offers valuable insights into client behavior. Advisors should become more familiar with this body of thinking and the tools being developed to better guide clients based on their unique behavioral and personality profiles.
Client education. Most clients have limited understanding of the investment world. It can be mysterious and scary to them. They are like passengers on an airplane who can’t distinguish between turbulence and a plane crash.
This presents advisors with a great opportunity. If they teach clients how to behave as good, long-term investors, those clients will stay in place for years to come, be less work and serve as better referral sources. If soldiers can learn to operate efficiently with bullets flying, and baseball players can learn to hit a blazing fastball, your clients can learn to hang tough when markets become volatile. It won’t be easy, but that’s what makes it a great opportunity.
Reinvent the Client Experience. If you want to thrive in future-world, you better give serious thought to what it’s like interacting with your firm.
Historically, advisors have put great effort into defining and explaining their offering to clients. The offering was built on the advisor’s technical strengths and was designed to create an efficient process that supported advisor profitability. It was married with great service to make clients feel respected and valued, maybe even pampered. They appreciated the great service.
But providing great client service is not the same thing as creating a great client experience. Start by defining your offering in terms of what your clients want and how they want to interact with your firm. How would it be different if your clients designed it? Not everyone wants the same thing, so designing a great client experience means either having a suite of offerings that are accessed and priced differently or tailoring your offering to a very narrow niche.
But clients want more than options. They want to feel connected. How can you engage them and make them feel they’re part of a community? How can you make them feel you understand them at a deeper level and have tailored your offering to create a human connection that the “bots” and mega-players can’t replicate?
Realize That Fees Are Part of the Experience. In future-world the percentage-of-AUM-pricing approach will still exist, but will be one of many ways in which clients can pay for an advisor’s services. The migration to alternative fee structures has already begun and will only accelerate.
Many advisors today view alternative fee structures as a threat to their businesses. They think flat fees, hourly fees and retainers are necessarily linked to lower revenue and lower profitability. This is a mistaken view.
Alternative fee structures are a way of responding to client preferences and rationalizing the way advisors price their services. Consider using different fee structures for different “service packages” and consider giving clients a choice about how they pay for your services.
Evolve or Perish. Take time from your busy day. Turn away from your computer screen. Lift your head up and look ahead. Start getting ready for future-world today!
- Learn to love technology—it will be the common denominator of successful firms
- Create a new value proposition based on your humanity and that of your clients
- Reinvent your client experience so your clients think they designed it
- Use alternative fee structures to create flexibility and better link value to price
Scott MacKillop is CEO of First Ascent Asset Management, a Denver-based firm that provides investment management services to financial advisors and their clients. He is a 40-year veteran of the financial services industry. He can be reached at [email protected]. This is his 100th published article.
