This month's new Financial Planning’s survey on RIAs reveals that more than a third of the largest advisory firms are experiencing a decline in assets and revenues. Why? I believe that the financial planning profession has reached an inflection point. The rate of change is now rising faster than the ability of aging baby boomer founders to adapt.
We’ve all seen this in individual cases. Think of that well-known planner who was considered a leader in the profession 10 or 15 years ago and now is invisible and irrelevant. It happens whenever people think they’ve reached their professional destination — that glorious time when they finally don’t have to change how they operate. It used to be that the profession leaves them behind gradually. Now it happens much more quickly.
What is behind this trend? What changes must we respond to today? I would argue that they fall into three categories.
1. TECHNOLOGICAL CHANGE
You probably think I’m talking about robos here, but in fact the online advice platforms are a symptom of a much larger transition in our increasingly intelligent professional software. Financial planning, CRM and client account management programs are all incorporating alerts into their feature set, telling you whether there’s enough cash in a client’s accounts to cover the upcoming required minimum distribution, whether asset allocation positions have moved more than 10% (or whatever tolerance you set) from their original allocations, or whether last week’s market decline has moved a client’s retirement projection out of the safe zone.
Meanwhile, institutional online advice platforms are becoming increasingly proficient at automating the rebalancing and tax-loss harvesting chores that most advisers are still doing manually. To me, their most interesting innovation is the Automated Customer Account Transfer Service, where they use account aggregation engines to pull in client portfolio data and then allow clients to transfer the money to your management online. Once this becomes ubiquitous in the profession, client accounts will become a lot more fluid — meaning that advisers will be able to change custodians, and tens of thousands of brokers will move into the adviser space and bring their clients with them.
QuoteSoftware is encroaching on a variety of things that you’re accustomed to doing by hand. That’s a good thing, not something to be feared.
Software is encroaching on a variety of things that you’re accustomed to doing by hand. That’s a good thing, not something to be feared. It means that if you can get your technology act together, you’ll be able to spend more time in front of clients and (as we’ll see in a minute) work with a whole new cohort of them.
2. CLIENT CHANGES
I think most of you know that millennials are the clients of the future, but how many advisory firms are going after them aggressively? If they don’t meet your account minimums, they don’t qualify to become part of your client base — and people early in their working careers have rarely saved up millions of dollars.
This lockout of the unwealthy happened so gradually that it’s hard to remember back in the day when the founding members of the financial planning profession started their businesses by taking on, as clients, their unwealthy peers. One of the great untold stories of the profession is that these lucky initial clients, who followed their planner’s advice, became wealthy — so wealthy, in fact, that planning firms all over the country gradually raised their minimums to conform to the increasing wealth of these initial clients — $500,000, then $1 million, and in many cases more. Now it’s time to open up your doors again
Before you do, there’s one other thing to understand about millennials: the ones that I’ve talked to are skeptical about any professional’s ability to beat the market. That means that the traditional value proposition of an experienced planner no longer impresses your next cohort of potential clients. Planners will have to shift their value proposition from asset management to financial planning and providing their experience and wisdom. That’s healthy for the profession but potentially painful for many advisers.
QuoteThere’s one thing to understand about millennials: they are skeptical about any professional’s ability to beat the market.
3. REVENUE MODELS
I’ve written before that there is a movement from commissions to fees, which is accelerating, due to the impact of the Department of Labor's rule. In the fee-compensated community, we’re slowly experiencing a similar shift from charging based on assets under management to retainer fees.
Why? First, and most important, because millennial clients prefer paying that way. Second, and nearly as important, retainers are the only way you can charge people who haven’t yet accumulated assets but have sufficient cash flow to pay you to help them become wealthy. Finally, and most controversially, retainers come with fewer conflicts of interest than the AUM model.
Some readers will want to argue. But I can tell you that I’ve talked with hundreds of advisers who switched from commissions to fees, and they all, in one way or another, told me that it was like a lightbulb going off, how they suddenly realized how much more free they felt to give advice in their clients’ best interests. When I talk with advisers who have shifted from an AUM to a retainer model, I hear them saying exactly the same thing.
Many of you are going to experience this sense of freedom and realization of past conflicts at some point in your careers. Why not go ahead and get it over with?
So how, exactly, can you adapt to these overlapping drivers of rapid change in our profession? Believe it or not, there is a comprehensive solution that covers all bases.
QuoteThis advice, taken together, will open up your firm to the 95% of the people in your area who don’t meet your minimums but could profit from your firm’s advice.
Let’s start with a caveat. If you’re a successful founder of a planning firm, you should not be the person who maps out how you’re going to respond to new technology, new clients and a new revenue model.
Instead, give the millennial planners in your office a new project. Tell them to come up with a service model where they can help their peers become financially successful — just as you did with people your own age back in the day. Let them develop a way to charge these people, via retainers or a monthly fee deducted from the clients’ credit cards, and turn them loose to bring in the clients of the future.
The service model will involve leveraging not only the online advice platforms, but also all the new intelligent features being built into our professional software. This will lower the human costs of working with these unwealthy clients to a point where they become profitable to the firm. At the same time, you’ll impress millennial prospects with something important to them: your technological sophistication.
These changes, taken together, will open up your firm to the 95% of the people in your area who don’t meet your minimums but could profit from your firm’s advice. It could greatly expand your client base with people who will become, with patience and guidance, ideal clients for any financial planning firm.
Yes, this is a whole heap of change for you to endure at a time when you’re going to have to learn a new tax regime and adapt to shifts in the regulatory environment. The good news is that you aren’t going to have map out this comprehensive solution to the trends of the future. Let that be the responsibility of your successors. You’re giving them the green light to build the firm that they would want to inherit 10 or 20 years down the road.