In last month’s column, i talked about the premiums that drive up financial advisor compensation. Justifying these charges to clients has always been a challenging conversation. That challenge will be even more pronounced after Phase 2 of the client relationship model (a.k.a. CRM2) is implemented over the next two years and your clients start receiving annual reports with detailed performance reporting and a summary of the fees paid in the past 12 months.
In this series of columns, I have discussed some big-picture trends that will affect advisors, such as rising professional standards, the need for scale and a redefinition of what constitutes “value.” I mentioned the 1980s advertising campaign for the Wendy’s fast-food chain that popularized the phrase “Where’s the beef?” That campaign pointed out the contrast between what other fast-food chains promised and what they delivered. That’s exactly the way many clients feel when advisors describe their value and explain how clients are better off dealing with a specific advisor; too many advisors fall back upon empty phrases such as “service,” “communication,” “planning” and “peace of mind.”
You need to do three things to handle conversations about your value effectively:
1. You must be truly confident in the value you’re delivering. If you come across as tentative or defensive, it’s game over.
2. Be proactive in initiating these conversations. If you wait for your clients to raise the topic, it puts you at a big disadvantage.
3. Most important, shift your mindset away from your process and concentrate squarely on the concrete outcomes you deliver.
– Clients don’t care about your process
If you look at a sampling of advisor websites, you’ll see a proliferation of four- to six-step processes that promote a supposedly unique point of difference. These multi-step processes, developed with the goal of achieving differentiation and conveying value, typically have catchy brands and glitzy graphics.
There are two problems with relying on this approach to convey value. First, these processes often look the same and they can communicate similarity rather than differentiation. As one client put it after interviewing three different advisors: “I’d never heard of the wealth-management wheel. But, after having it explained in detail three times, I now feel like an expert on the subject.”
Second, your process doesn’t address what your clients really care about. It’s no different from running into a problem with your car and taking it to the dealership for service. When you get the estimate for the repair, you have zero interest in the state-of-the-art computer used to diagnose the issue, the hundreds of thousands of dollars invested in the latest equipment or the hours of training that the technicians have received. All you care about is that your problem gets solved, and quickly and at a fair price.
The same concept applies to discussions about the fees your clients are paying. Most clients are only tangentially interested in the hundreds of hours you spent earning your credentials and the process you go through to create financial plans and build portfolios. Rather, they want to talk about what they’re getting for the dollars they’re paying.
Today, many advisors struggle with that discussion. Because of the unpredictability of markets, it’s natural that many advisors are reluctant to rely on the returns that they generate for their clients. But just because you don’t want to talk about what your clients are receiving for the fees they’re paying doesn’t mean your clients aren’t anxious to have this conversation.
– Talk about outcomes
A couple of developments will make your clients pay even more attention to the value for the dollars paid to you. There’s the annual reporting on performance and fees that I mentioned at the outset, with the inevitable media discussion about how much advisors are charging and what’s reasonable. And, of course, we’ll continue to see regular market corrections, each of which will sensitize your clients to how much you are making while the value of their portfolio is down.
Further, new low-cost or no-cost online options for investment advice and financial planning will create a different frame of reference for what’s reasonable. These services, known as “robo-advice” and backed by hundreds of millions of dollars in venture-capital funding, are already available in the U.S. and are on their way to Canada. The impact of these online services will be similar to what happened in the real estate industry and to new-car pricing when lower-cost options were introduced. Even though most consumers have no desire to buy a car on eBay or to sell their house themselves, these alternatives have put downward pressure on margins industrywide.
Just as more and more clients will be laser-focused on the value they get, you will need to focus on the value you deliver.
– Narrow your focus
To drive value, a big change that most advisors still have to make is to narrow their focus to become specialists rather than generalists, aiming to provide exceptional value to a subset of clients rather than providing solid value to everyone. In every profession – accounting, law, medicine – the top earners invariably are specialists.
In a mercilessly value-driven world, most clients will be willing to pay a premium for exceptional value, but anyone offering just average value will struggle.
Perhaps you’re in a large community and your specialty is narrow (such as owners of car dealerships, doctors in the early stages of their careers or business owners who export outside Canada). Or maybe you’re in a small or mid-sized community and your specialty is broad (retirees, farmers or professionals).
Either way, narrowing the focus of your practice will let you deliver superior value and charge a premium as a result.
– Build scale
You will need to “grow big” to be able to provide a full range of advice. To offer competitive value, you’ll need to be supported by a team with specialized roles.
– Demonstrate outperformance
If your focus is on building and managing portfolios rather than on planning, you need to present proof of the value you are adding.
I’ve written about an advisor whose largest client, with $5 million in investible assets, questioned the $50,000 he paid in fees last year. That advisor was able to present the client with a spreadsheet that showed his returns for the past five years compared with that of a 60/40 stock/bond index, which demonstrated that the advisor had added substantial value for the $200,000 in fees over that five-year period.
Perhaps this advisor was lucky that 2008 market performance had fallen off the map. But focusing on longer time frames reduces the odds that your clients will fixate on just one bad year.
And it’s just not on the upside that you can add value. Another advisor, whose value-added is risk management, shows clients data that compare losses in their portfolio in 2008 and early 2009 to the market as a whole, providing concrete evidence of the advisor’s ability to mitigate risk in down markets.
– Document savings
Advisors who take a wealth-management approach often talk about helping their clients reduce taxes. But talking about reducing taxes isn’t enough. If you’ve used strategies such as tax harvesting or trust structures to reduce your client’s tax burden, you need to quantify the savings.
Similarly, if you’ve structured cash flow to increase government benefits, put a dollar amount on the positive impact on your client’s situation. And if rebalancing is part of your value, then document how that left your client better off, whether by increasing returns or dampening volatility.
– Hit clients’ hot buttons
Of course, it’s not always about dollars and cents. Some advisors add significant value and build deep bonds by addressing “hot buttons” such as issues regarding clients’ parents and adult children – whether by helping to facilitate difficult family conversations, assisting clients in evaluating options for assisted living for ailing parents or having a junior associate discuss budgeting and credit cards with clients’ children heading off to college.
Whatever your core deliverable that drives value for your clients, be prepared to point to concrete results. And then, having those tangible results to point to, ask your clients if they’d like to add a conversation about what they’re getting for the fees they pay to the agenda of your next review.
By being proactive in putting this subject on the table, you are sending a positive signal about how confident you are in the value that you deliver to your clients.
This is the final instalment in a four-part series on the future of the financial advisory business.
Dan Richards is CEO of Clientinsights (www.clientinsights.ca) in Toronto. For more of Dan’s columns and informative videos, visit www.investmentexecutive.com.
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