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Hang Together

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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.

Objectivity The advisor’s compensation is directly connected to the product (in this case it is a product that generates fees over time). In this environment, advisors will be attracted to those programs that pay out higher fees, whether they are better for the consumer or not.

Level of Personal Value Personal value (or advice) is incidental as opposed to primary (refer to the SEC’s so-called Merrill Lynch rule).

If the early adopters cannot distinguish their unique value proposition and do so relatively quickly, the herd of pragmatists will not cross the chasm and the independent fee-only advisors will perish.

A Call to Arms

In order to gain persistent marketplace acceptance, i.e., cross the chasm, iPFAs must take up a position on the side of the pragmatists. In other words, we have to give the consumers what they want. Here’s what has to happen:

Institutionalize the Process

The iPFA must deliver more comprehensive and integrated solutions to the consumer. The process iPF’s use to deliver solutions to consumers needs to be “institutionalized,” by which we mean rigorously developing and designing a process for and by the iPFA. By institutionalization we do not mean the use of black-box systems such as Financial Engines that attempt to remove judgment from the process, but rather the design and development of expert processes that enhance the capacity of the iPFA to personalize the process and make informed judgments. This type of institutionalization will enable the iPFA’s products and services to be monitored, verified, benchmarked, and continually improved.

Strengthen the iPFA Image

We must create a national network and brand that is both wider and deeper than what exists today. Pragmatists only feel comfortable moving in herds. At present there are only 750 advisors who are verified by NAPFA as fee-only. We must increase participation in the fee-only verification process and consumer awareness of our brand before the pragmatists will act. We must provide full disclosure of all compensation issues in a manner that is easily understandable and accessible by the consumer.

Strengthen the iPFA Personal Value

We must continually improve our expertise and be willing to provide proof that we have the expertise and experience to competently guide our clients’ finances and consequently their lives. The consumer needs to know if the advisor has the personal values to meet their concerns. This is a significant challenge for the community of independents not because it requires the development of standards–the standards already exist thanks to the CFP Board of Standards and the CFA board–but because the early adopters will have to settle for a standard that is less rigorous than what they envisioned.

Create the iPFA Network

A trusted advisor is part of a trusted network. Pragmatists evaluate the entire value network, not just the specific value proposition, when buying into a new brand. Therefore not only do we have to simultaneously improve the quality of our own value propositions, we have to improve the quality of each and every value proposition in the emerging iPFA network.

One way of improving that proposition has to do with products. Product providers need to offer product knowledge in a way that does not compromise our position as advisors. They should not design solutions that are biased toward their specific product or type of product. An excellent example of such product knowledge is the Web site built by Barclay’s Global Investors. The site is extensive, informative, and free.

Another improvement would be to have product vendors aid the advisor in his new role as a consumer advocate. To assist the iPFA in this role, product vendors should also help the iPFA use the product knowledge effectively. One idea is to build a network that allows the advisor to place an RFP and have vendors respond.

Yet another way to improve the network is to provide consumers with access to any level of expertise for their particular concerns. We have to offer the consumer at least three levels of access: beginner, intermediate, and advanced. The independent network has done an excellent job at the advanced and intermediate levels, but unless it provides access to beginners it will not survive. There are significant efforts underway to address this issue by NAPFA and the FPA.

Summing Up

The iPFA community is at risk. We have to take action now to create a new network, a Utopia, if you will, or our community will disappear into oblivion. Beyond our own fate, the consumer’s ability to achieve financial success is at risk if we don’t succeed, for two reasons: The first is that the success of the direct access network is enabling more consumers to lose greater sums of money than ever before.

Second, the existing broker/dealer and direct access networks have failed to deliver lower costs to the consumer.

It is the iPFA’s turn to rise to the challenge and deliver to the consumer what the full-service broker/dealer and the direct access networks have failed to deliver–more for less. We agree with the remarks of Rich Lee, another early adopting fee-only planner, who in commenting on the delivery of more fair and objective advice to the consumer, said: “We (iPFAs) are the best qualified to attempt to do it.”

Both the future of the iPFAs and of their clients and potential clients, the American consumer, depend on it.

Albert L. Coles Jr. is managing director of Financial Design Associates, Inc., in Stinson Beach, California, and founder of 800-FEE-ONLY, LLC. Terence Lundy is managing director of marketing for 800-FEE-ONLY, and Michael Mulcahy is executive director, operations, of 800-FEE-ONLY. The complete report on which this article is based can be found at


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