Is the branch-based adviser model dead?

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The bank wealth management business is going through a seismic shift, possibly unlike anything in the past generation. The fiduciary evolution and the fallout from low-cost, auto-pilot investing have commoditized (or even rendered obsolete) much of the traditional business model in the bank channel. The old ways will not survive, and the direction you take at the fork in the road will determine whether you’re still in business five years from now.

The middle market has defined the bank channel for years. But the advent of robos, and before them ETFs, not to mention the trend towards fiduciary service levels, makes serving segments from the middle market on down unreasonable if you’re a financial adviser (as opposed to an algorithm).

If you want to get hit by a car, play in traffic
Branch traffic is down. But does that mean your bank is losing customers? Probably not. It just means customers are choosing to interact with your organization in new ways. Your job is to figure out where is the (customer) traffic is in your organization, and get in the way to interact with them in new ways that they prefer.

To be sure, there’s an even more important reason why lower branch traffic doesn’t matter: The typical middle-market branch traffic is not the segment a financial adviser should be adding to their books of business anyway.

Indeed, the average adviser needs fewer clients in his book, not more. That’s especially true when considering that providing fiduciary-level personalized service probably takes a minimum of about six hours per year, per client. Doing some quick math shows that a fiduciary-oriented adviser can accommodate only about 250 clients in his book. Therefore, he shouldn’t be adding more, especially from the less profitable middle market. Let other channels in your organization serve this segment while you focus your attention elsewhere.

The average adviser would become tremendously more productive if she focused on increasing wallet share of the clients in the top third of her book. The wealthier the client, the less wallet share the adviser typically has. Most advisers have a minority of the wallet share of higher-net- worth clients in the top third of their books. The best thing a bank adviser can do for her business is to not focus on bringing in any new clients, but rather focus on getting to know her existing clients in the top segments of her book much better.

If you were in your client’s shoes, would you hire you as an adviser? If the truthful answer is “no,” you better do something about it.

In an ideal situation, advisers should manage a relatively small book of highly profitable clients with whom they enjoy deep relationships and manage a majority of their investable assets. Ironically, the average bank adviser today manages a large book of marginally profitable clients who they have shallow relationships with, and where they manage the minority of their investable assets.

Exploring new revenue models
Obviously, deriving profits based on which products are sold won’t work any longer. Profits must be derived from the value of services provided. The most critical question you must answer is: What do you provide that adds appropriate value to make the fees you charge worth it? In other words, if you were in your client’s shoes, would you opt to be a client of your services… knowing what you do about our business?

If the truthful answer is “no,” then you better do something about it. Our economy is built on value-for-value equations. However, these equations evolve. Successful business models of the future will be based on tiered levels of service. Defined service bundles would enhance the value provided by an adviser as clients move up the tiers. Fees for these service bundles should be based on AUM with annual minimums that increase in-kind. If you clearly define what benefits are included in each service level offering, and stipulate the annual minimum of each offering, then clients can self-select a desired level. In many ways, this is similar to selecting a mobile phone service bundle. (Don’t dismiss this – a family of four pays about $2,400 per year for a vacation club level, a “concierge healthcare” service bundle, or a “country club” membership level.)

You may feel like long way off from being able to implement this type of fee structure, but if you build a solid business with a strong value-for-value equation, there is no reason you shouldn’t be able to justify this type of fee structure in the future. It would eliminate many of the current revenue challenges.

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