Hang Together

During the past two years numerous research papers have appeared offering different visions of the independent personal financial advisor’s (iPFA’s) future and making recommendations as to what actions advisors need to take in order to survive. What has yet to emerge is an integral vision of the future, one that is developed and supported by all the participants in what we call the emerging iPFA Network. The purpose of our research project–of which this article is only an outline–is to lay the foundation for such an integral vision.

To begin, we will take the perspective of the independent personal advisor and the concerns of that advisor’s primary constituency–the consumer. It is this direct personal relationship that generates the opportunity available to independent advisors. It also carries with it, however, immense responsibility, since it directly affects how our clients can achieve financial success. In order to meet this responsibility, the independent personal advisor has to provide more for less. The “more” is better advice based on knowledge and expertise, while the “less” is lower-cost advice and more efficient delivery of that advice. Moreover, the advisor must do it soon, or lose his competitive advantage over rivals that are growing in scope and numbers every day.

The sense of urgency is derived from the fact that the financial service industry is charging the consumer too much for the services it is delivering. No less an authority than Warren Buffet addressed the issue in the March 1998 issue of Fortune: “Investors are dissipating almost a third of everything that the market is earning for them ($334 billion in Fortune 500 earnings in 1998) by handing it over to various types of chair-changing and chair-advisory ‘helpers.’”

By contrast, what we call the iPFA network is in a unique position to deliver what existing networks, offered by the broker/dealers and through direct access services, have failed to do.

A Short History

It’s been more than 20 years since a handful of early adopting financial service agents envisioned being able to offer a new level of personal value to the consumer. This new level was made possible by the unbundling of financial services, which enabled the early adopters to make a fair and objective offer of advice to the consumer.

The networks that existed prior to this convergence, and that still dominate the financial services industry today, are the full-service broker/dealer (bundled) and the direct access (unbundled) networks.

You know how the full-service broker/dealers operate, so we will focus on the direct access network. With the deregulation of the broker/dealer network in 1975, the direct access network emerged. Discount brokerage firms such as Charles Schwab and no-load mutual fund companies such as Vanguard and T. Rowe Price developed the technology and direct marketing techniques that allowed consumers to have direct access to financial products.

The direct access value proposition was, and is, that consumers can do it better and cheaper by themselves by eliminating the middleman and empowering do-it-yourself investors.

Twenty-five years later, the Internet has made direct access ubiquitous. The direct access network delivers significant benefits to the consumer: easier access, investment education, and a wider variety of products. But there were, and are, drawbacks to this approach, notably: 1) an increase in access to products and services without the knowledge required to utilize the access effectively and responsibly; and 2) an increase in available financial assets about which consumers must make their own decisions, such as defined-contribution plans and employee stock options.

The iPFA network emerged partly as a means of addressing the problems consumers were experiencing through the direct access approach. The early adopters realized that the primary problem for consumers was no longer access, but rather how to utilize and integrate financial services to achieve their objectives.

While the vision of the early adopters made sense intuitively, there was intense debate initially over whether this new personal value proposition would succeed. The debate centered around two fundamental questions: Will the consumer value personal advice and be willing to pay a fee for it? Does the method of advisor compensation make a difference to consumers?

Some 20 years later we can definitively answer the first question. Clients will pay fees for financial services. According to CFP Board data, fully two-thirds of CFP professional practices use fees as part of their compensation. Twenty-three percent receive only fees.

The second question is still passionately debated, but the marketplace is speaking loud and clear–consumers want fee-only advice. Common sense dictates that compensation has a direct impact on the type of personal value consumers receive from a relationship. Giving advice is fundamentally different than making sales and it is this difference that gives rise to the unique iPFA equation, which we define as: Objective advice = trust.

We are not saying that advice is better–more ethical or moral–than sales. But they are fundamentally different. It’s the muddling of this distinction that generates ethical and other problems.

Where We Are Now

What do all these signs of change documented by these recent research papers have to tell us about the future? According to Geoffrey Moore, the author of Crossing the Chasm (HarperCollins, 1999), the market that is built by the early adopters is followed by a chasm, a period of no adoption, when the early adopters have already made their choices, but the majority of the consumers, which Moore calls the pragmatists, are still holding back.

The chasm is the consequence of the polar opposition between the visionary who is deliberately going ahead of the herd, and the pragmatist, who is intent on staying with the herd. There are significant signs of this chasm in our industry. There is a fundamental battle, for instance, over what the major fee-only group, NAPFA, should be. Should it be a trade association that seeks the largest possible membership, or a professional organization that seeks to be more exclusive by advocating higher standards for members?

According to most of the NAPFA members that we have spoken with, these paths are mutually exclusive. From the perspective of the entire iPFA network, however, both options–an increase in expertise, or the deeper approach, and an increase in public acceptance, the wider approach–must occur for the iPFA network to succeed.

Another internal sign of a chasm is the loss of interest of some early adopters who fear the erosion of their competitive advantage. In the May 2001 NAPFA Advisor, Dave Drucker, an early adopting fee-only advisor, proclaimed: “Fee-only is dead because within a year or two, the rest of the financial services industry has stolen its message.” He goes on to urge advisors to “find that completely new subversive quality that gives what we used to call the fee-only planner a renewed advantage, at least for a while.”

While the internal battle rages, our competitors are busy attempting to take over the iPFA value proposition. The success of that value proposition in the market has attracted the attention of established vendors like Merrill Lynch and Prudential, who are co-opting the term fee. During the past year every major full-service broker/dealer has introduced a fee-based program.

While on the surface these new fee programs look competitive to those offered by iPFAs, they are not the same in three fundamental aspects:

Personal Relationship In these programs, the advisor is paid by the broker/dealer and not directly by the client.