From the January 2013 issue of Investment Advisor • Subscribe!

December 21, 2012

Revolutionizing Advice

The broker-dealer industry has entered a period of profound change, one that is characterized by fundamental shifts in demographics and attitudes, and in the very nature of the advice model.

Yesterday’s advice model presented a simple choice for investors. They could either do it themselves using online tools and a discount broker, or they could work with an advisor. Today we are seeing a significant convergence of the two models.

The phenomenon is being driven by individuals who want the best of both worlds: the benefits of financial guidance coupled with the comfort of being in the driver’s seat.

Discounters are capitalizing on the opportunities presented by those investors with what I call the “Do-It-Yourself 2.0” model (DIY 2.0), with technology at its core. They offer control coupled with scalable advice using a mix of robust online planning tools and powerful websites.

Broker-dealers may want to explore engineering a similar transformation to reconfigure the current advisor model to what I’ll call Advisor 2.0.

I believe the Advisor 2.0 model may help BDs supplement or even leapfrog DIY 2.0 by taking the core of the model—the advisor—and combining it with online tools and channel integration. Broker-dealers may, as a result, be better able to offer scalable, repeatable advice via a personal relationship.

Creating Advisor 2.0 won’t be easy, but some National Financial clients have shown that it can be done successfully. Based on our experience working with hundreds of broker-dealers, Advisor 2.0 hinges on five key areas:

1. Being laser-focused on your strategy. No firm can be all things to all investors, and the most successful are those that have clearly defined their strategy and aligned their business to achieve it. We are seeing four potential strategies emerge:

  • Focused players who strive to do certain things very well, for example, helping CPAs enter the brokerage industry.
  • New model creators who combine various models into one, such as an “independent wirehouse” where advisors have the independence to give clients fiduciary advice, but are relieved from running a back office because of a centralized infrastructure.
  • Adjacent business acquirers who have grown by adding complementary businesses, such as a bank broker-dealer acquiring a corporate trust and mutual fund business.
  • Scale acquirers who have grown their footprint and gained efficiencies by combining similar businesses.

2. Putting the investor at the epicenter. Winning demands a deep understanding of the end investor and a business model designed to meet his or her needs. The industry has been focused primarily on helping boomers accumulate. Now we should help them navigate the switch to retirement, and also deal with a markedly different generation, with distinct risk tolerances and technology needs.

3. Transforming your advisors. The next generation of investors will consume advice differently from their parents. BDs who can reorient their advisors’ focus to support the new model may benefit the most from this shift.

4. Cracking the product code. Broker-dealers should review their product offering and consider offering more simplified products that have the potential to cut through today’s marketplace proliferation while addressing risk for skittish investors.

5. Driving operational excellence. To enable advisors to provide scalable advice, broker-dealers must increase the efficiency of their infrastructures. Better use of technology to connect investors, advisors and the middle office is the next frontier for efficiency.

Advisor 2.0 should continue to help younger boomers with their retirement savings, but should also help older boomers navigate the switch to decumulation. At the same time, it should help members of Gen X and Y increase their wealth accumulation, though in a wholly different way from their parents.

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