We are experiencing a seismic shift in our industry possibly unlike anything we’ve experienced in our generation. The fiduciary evolution and the effects of low cost auto-pilot investing have bifurcated the old and the new, and have commoditized or rendered obsolete much of the way we’ve historically done business in the bank channel. Our old business models will not survive, and the way you respond to this inflection point will determine whether you are still in the industry five years from now.
The middle market is what has defined the bank channel, but fee compression caused by robo advice and ETFs, and the trend towards fiduciary-centric service levels, makes serving segments from the middle market, and lower, unreasonable if you’re a financial adviser (as opposed to an algorithm).
The branch-based adviser model is dead – now what?
Branch traffic is down. But so what? Does lower branch traffic mean your institution is losing customers? I doubt it. It simply means customers are choosing to interact with your organization in new ways. Your job is to figure out how you should interact with them in these new ways.
If you want to get hit by a car, you play in traffic. So where is the traffic in your organization?
The second, and more important reason why lower branch traffic doesn’t matter, is that typical middle-market branch traffic is not the segment advisers should be adding to their books. Frankly, 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 proves that fiduciary-oriented advisers can accommodate only about 250 clients in their books. Therefore, they probably should not be adding more, especially from the less profitable middle market. This segment should feel the love from other channels in your organization.
The average adviser would become tremendously more productive 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, on average. Most advisers have the minority of the wallet share of the higher net worth clients in the top third of their books. The best thing the average bank adviser can do for their business is to not focus on bringing in any new clients, and instead, focus on getting to know their existing clients in the top segments of their books much better.
In an optimized program, the core advisers should manage a relatively small book of highly profitable clients who they have deep relationships with, where they manage the 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. What worked yesterday won’t necessarily work tomorrow. Will your current value-for-value equation work tomorrow?
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. (Please don’t dismiss this – a family of four pays about $2,400 per year), a vacation club level, a “concierge” 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.
