The Next Challenge Facing the Advisory Profession
Advisors won the last war – true professionals achieved victory by adopting fiduciary principles and providing comprehensive planning. But a new battlefront has emerged – what I call the “next argument” – and achieving victory will be slow and painful.
The financial planning profession has evolved quite a bit over my 40-year career. When I started in the business, the chief revenue model, employed by roughly 100% of the people calling themselves financial planners, was to sell “stuff.” Insurance agents would use financial planning software to create an impressive plan, seemingly endorsed by the objectivity of a computer (they were new and sexy back then). The software would take in a client’s financial information and, whatever that financial information happened to be, recommend that the customer buy copious amounts of high-commission whole life (and later universal and variable life) insurance. Tax shelter salespeople would do the same thing to sell their ”clients’ on “‘investments” that ‘promised’ a 7:1 tax write-off on their retirement money.
Early in my career, a small handful of individuals were arguing that advisors, to be real professionals, should be paid by fees rather than commissions, and that financial planning was more than just a streamlined way to make sales. I remember when they were loudly ridiculed, and then hated, and finally accepted as the mainstream of the profession.
Today, that argument is largely over. Even wirehouse brokers claim not to be selling anything.
Another, less contentious argument broke out in the mid-1990s over asset gathering versus comprehensive financial planning. A lot of advisors converted from commissions to fees and hardly changed their behavior or services. They would sell a financial plan for a fee, and then, going forward, their primary service was to generate a quarterly performance statement on the assets they were allegedly managing – but, in many cases, these assets were being managed by a TAMP or the advisor’s broker-dealer.
A small handful of advisors argued that real professionals should offer comprehensive financial planning on an ongoing basis. One of the major skirmishes of this argument came in 1995, when George Kinder, at an ICFP retreat, introduced what we would later term ”life planning.” (I credit Cynthia Meyers in Sacramento for co-creating the concept.) I remember introducing the idea in my speaking engagements, and roughly half the people in the room (all men) would fold their arms across their chests in a defensive and dismissive posture. In post-speech conversations, they would poke my chest and tell me that they are not psychologists.
Today this argument is largely won. Most advisors offer ongoing planning services (more or less comprehensive, depending on the firm), and even the crudest Neanderthals in the business ask clients about their goals and objectives before offering advice.
The question becomes: what is the next argument? Where should we look for further evolutionary progress? I’m going to offer a few suggestions, and then tie them together into something more comprehensive.
Start with fees. I once got a call from a fairly prominent financial columnist in the consumer space, and he was perplexed. “Bob,” he said, “I need you to help me out. I have an advisory firm here in my town that charges 1% of a client’s assets to manage their portfolios, but he spends pretty much all his time marketing, and his staff churns out quarterly performance statements that he reviews with clients once a year. And I know of another firm that has much less assets under management, but charges the exact same fee, and they do comprehensive soup-to-nuts financial planning, meet with their clients twice a year, and do tax projections and evaluate their insurance coverages, and monitor their progress toward their personal goals.”
What’s the problem?
“How [this columnist asked me] do I tell people how to tell the difference, up front, between these two firms that each call themselves financial planners?”
The problem is compounded by the fact that the brokerage industry now markets itself as ”fee-based,” and brokers (I would call them asset-gatherers) tell their customers with a perfectly straight face that they only collect fees from their customers. True that! The firm bills on the total assets and gives the brokers (asset gatherers) a cut of the percentage. No commissions, right?
The next argument is, just like back in the day when a few rebels stopped taking commissions and changed the profession (it only took 40 years), we need a few rebels to create a new distinction between their professional activities and the sales activities disguised as asset gathering.
What form will that take? Anything other than AUM: flat fee (quarterly or monthly), hourly, subscription, most likely a combination of all that. It would be interesting to see how the brokerage firms and sales (asset-gathering) organizations would mimic this compensation arrangement and still conduct business as usual.
I don’t think they could.
And notice how an ongoing fee structure, independent of whether the advisor is managing client portfolios, starts to force the profession to provide ongoing value and service in return for those fees. And it communicates that the value of a planner (like the value of all professionals) lies in expertise and constant guidance toward desired outcomes. A shift in compensation structure effectively solves several problems with one solution.
Of course, some advisors have given up AUM fees, and many advisory firms (more than half, according to my 2020 survey) are experimenting with non-AUM fees with some (mostly middle-market) clients. We need an organization, like NAPFA, to bring together all these advisors under one umbrella, and then argue to the press that its members have created a business model that puts the advisor more firmly on the client’s side of the table than those who follow a conflicted model.
In fact, I’ve already advocated that NAPFA become that organization. Painful? Of course, this would be a difficult shift for many firms to execute, but not as difficult as the shift from an earlier argument: the transition from commissions to fees.
Another component to the next argument lies in life insurance/annuity recommendations. In case you missed it, the insurance industry is reluctantly joining the consumerist movement that most industries adapted to in the 1960s and 1970s. Prices and costs became transparent (think of mutual funds) except in the insurance industry, where every dollar collected passed through the hands of a salesperson. If you did miss this development, you can be forgiven, because the industry is still dipping its smallest toe in this water. But if you go on the DPL or RetireOne websites, you’ll see a variety of life insurance and annuity products that meet the standards of a fiduciary advisor.
And there are services that will let you outsource the insurance business in a fiduciary manner: Low-Load Insurance Services and Ryan Insurance Services are the most prominent.
The first part of this argument is that there is now no reason for advisors to receive commissions for their insurance recommendations unless their goal is to line their own pockets. That sounds harsh, but any true fiduciary is going to recommend the leanest, most transparent product that is appropriate for clients. This is never going to be something where the company has to pay them to recommend it. (If you disagree, prove me wrong – and don’t even try to do it with policy illustrations.)
The second part of this argument is that the fee-only, fiduciary, professional financial planning community is going to have to incorporate these complicated solutions into their client recommendations. Have to? If your client wants to limit the downside market loss in any given year and is willing to give up some of the upside to get that protection, then any fiduciary is obligated to consider those options – especially if it’s a fair trade.
Bigger picture, the insurance industry is fundamentally a big provider of risk pooling, which means cutting off the fat tails of mortality. You buy car insurance, and your financial upside is diminished by the amount of the premiums, and your downside risk of losing a lot of money in an accident is virtually erased – up to the deductible. It’s the same with homeowner’s, health, and flood insurance – and now what we might call investment insurance. The annuity marketplace – assuming you stick to fiduciary products – is another way to cut off the fat tails on both sides of the total outcome graph (or cutting off the fat tails of longevity).
A final component of the next argument is to shift the focus of advice from the future to now. Years ago, many people calling themselves financial planners sold insurance telling their customers that when they died, they would make their heirs financially well-off. Since then, most advisors have moved the beneficial timeline back to retirement: Work with me, and I’ll help you be well-off when you retire.
But many of today’s clients, and all of tomorrow’s, are going to want that timeline moved back to now. The value proposition moves all the way from:
I can help your loved ones live a better life when you’re dead
I can help you live a better life now.
That means planning for short-term goals like an extended vacation or a sabbatical, a trip, prudently spending now while saving for later, which might mean reallocating the monthly budget to divert some of the minor expenditures toward a bigger goal.
But most planning software solutions aim directly at some point in the future, and it’s not easy to get them pointed back to now. There are programs that monitor a client’s financial health in real time and provide instant evidence of the benefits of a planner’s advice – an example is the relatively new Elements program. But for the most part, the planner’s unspoken pitch to clients is still: “Work with me for five or 10 years, pay for my advice along the way, and by the end of that five or 10 years, you’ll know whether I was any good.”
What we’re talking about here is life planning on steroids: becoming not just a thinking partner, but also a guide to reaching milestone goals that are carefully tracked and evaluated – and, if necessary, things the advisor will nag the client about. In my speeches, I’ve recommended the advisors ask their clients to articulate 30 goals. Few can get past 10 on the initial try until they start to think about the shorter-term things they want to achieve. Many of these goals will not be financially related, but the advisor can provide the very important service of periodically reminding their clients that they need to spend time working on the goals that they defined as important to them. That foregrounds those issues in a world where everything and everybody is clamoring for their time and attention.
Finally, the next argument includes something that has been overemphasized – and yet, I think, has not been articulated clearly. I’m talking about client specialization.
Am I talking about a niche? No. A niche is a marketing term – a darned good one, but not what I’m talking about at all. I envision firms of the future specializing the way doctors do: in a narrow slice of the economic landscape, a community of people who all face the same challenges that are unique to them, challenges that a general practitioner advisor would not understand.
If a niche is a marketing term, specialization is a service and practice management term. It is service in the sense that when somebody in your area of specialty walks in the door, they already know some of their most complicated challenges. Just about all business and career challenges are financially related and relevant to the planning relationship. The real estate broker has a unique income feast-or-famine challenge that requires an extraordinarily high cash buffer, and of course that requires a creative way to manage cash. In the meantime, there are costs associated with reaching out to the community that can be modeled and compared to industry averages – and so forth.
When you have a specialty, your advice becomes orders of magnitude more valuable than that advisor down the street who will model how much you need to save to move the retirement safety needle up to 90%.
Specialization is a practice management term because advisors who have a specialty don’t have to build a new model for every new client. My friend and colleague Tracey Beckes, who coaches and counsels financial planning firms, says that the single most important factor in the profitability of an advisory firm is whether it has (and sticks to) a specialty.
Add these up, and what does the next argument consist of? I envision an organization of advisors who have given up the AUM revenue model and proclaim that to the consumer press, who incorporate fiduciary insurance products into their recommendations and tell clients and the press that they implement insurance solutions without commissions, and further, that they take the time to evaluate these solutions when so many others do not.
The planning work that these advisors offer will be different in depth and degree: in depth due to a deeper understanding of the client specialty, in degree because the initial discovery process has a center of gravity that weights short-term goals at least as heavily as the longer-term ones (like retirement).
And if there is an organization that provides an umbrella focused on the next argument’s various solutions, it will become a cross-referral network. If one firm specializes in doctors coming out of residency, and a real estate broker walks in the door, that firm will know who best to refer that broker to and may receive a number of referrals in its own area of specialty from other members. It would be like a neurosurgeon referring out somebody needs cancer treatment. Giving up clients to professionals better suited to addressing their needs would take the fiduciary concept to a whole new level.
The next argument will be as big as the transition from commissions to fees, and just as consumer friendly. Yes, it will be painful for many advisors. Your choice, as you are reading this, is to start making these changes and prepare for the ridicule (and soon, the hatred) that the early NAPFA pioneers had to endure. Or you can stand aside and ridicule others who take these issues seriously and then hate the ones who have successfully transitioned to a more consumer-friendly model, and finally discover that you have to start following the lead of those you hated.
What do you think?
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.