Revolutionizing Advice, Pt. 1: Transforming the Broker-Dealer

The broker-dealer industry is entering a period of historic change, one that is witnessing fundamental shifts in investor and advisor demographics and attitudes—and in the very nature of the advice model itself. Yesterday’s advice model presented a simple choice for investors.  They could do it themselves using online tools and resources and a discount broker, or they could work with an advisor on whom they relied to varying degrees for advice, planning and investment selection. But today we are seeing a significant convergence of the two models.

The phenomenon is being driven by “validators,” our term for investors who want the benefits of having an advisor but also want to be more involved in the relationship and with their money. Discounters are responding with what I call the Do-It-Yourself 2.0 model (DIY 2.0): scalable advice enabled by an integrated mix of robust planning tools, one-to-one relationships and powerful websites, all working together seamlessly. DIY 2.0 is particularly attractive to Gen X and Y investors, who tend to be more tech-savvy and less trusting than previous generations. 

Now it is time for broker-dealers to consider engineering a similar transformation, to explode the current advisor model and replace it with Advisor 2.0 and the New Advice Code. Doing so would set the industry up to capture a tremendous opportunity that is starting to unfold. Advisor 2.0 offers an unprecedented opportunity to leapfrog DIY 2.0 by taking the core of the broker-dealer model—the advisor—and combining it with the best of the discount model—online tools and channel integration—to offer a superior version of scalable, repeatable advice.

Investors’ strong embrace of DIY 2.0 underlines the compelling need for Advisor 2.0. By one measure, organic growth at discounters that have adopted the newer paradigm was triple that of conventional wirehouse broker-dealers last year. Clearly, investors are voting with their wallets. The sweet spot for the Advisor 2.0 model is the 27% of investors who consider themselves validators and essentially want the best of both worlds—an advisor plus all the technology available from the discounters.

Revolutionizing the broker-dealer advice model and creating Advisor 2.0 won’t be easy, but the success of some National Financial clients demonstrates that it can be done. The New Advice Code hinges on five key areas:

  • Being laser-focused on your strategy. Broker-dealers should consider reinventing themselves but within the context of who they are. You can’t be all things to all investors.
  • Putting the investor at the epicenter. The focus seems invariably to get pulled onto the advisors in our business, but the most critical path to winning demands a deep understanding of the end investor and a business model designed to meet their needs.
     
  • Transforming your advisors. The disruption in advice consumption patterns already evident will only intensify as the next generation of investors displaces their parents.  Broker-dealers who transform their advisors to support the new advice model are likely to benefit most from this disruption.
     
  • Cracking the product code. Broker-dealers should think about offering more simplified products that help control risk for skittish investors. The shift of $1 trillion in assets from equities to bonds over the past four years and investors’ increasing favor of fixed income speak volumes about the need for this.
     
  • Driving operational excellence. Broker-dealers should work to increase the efficiency of their infrastructures in order to enable advisors to provide scalable advice.

In part two of this series, I will look at how broker-dealers can help their representatives transform themselves to embrace Advisor 2.0 and the New Advice Code.

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