Competitors Positioning To Move Onto Fee-Based Advisors Turf

By

New Orleans

If you think the fee-based advisory arena is crowded now, just wait a few years!

That was basically the message that Scott MacKillop delivered at a session here at the Success Forum of the Financial Planning Association.

MacKillop, president of Evergreen, Colo.-based Trivium Consulting, LLC, telegraphed his message for planners in the audience in his presentations title: “How banks, CPAs and wirehouses will vie for your clients.”

A number of trends are driving these channels to the fee-based model, he said. One of these is the fact that revenues from commissions have declined dramatically, and this is what is pushing full-service brokers at wirehouses to look at the independent financial advisor model.

Another trend, he said, is the commoditization of product. “You cant compete based on the product you offer anymore,” he explained, “because you can pretty much get anything you want from anyone.”

The breakdown of traditional boundaries among financial services is also pushing change, MacKillop said. Evidence of this is in the Gramm-Leach-Bliley Act of 1999, in laws that permit accountants to provide advice, in American Express buying accounting firms, and in Schwab becoming the 15th largest mutual fund family, among many other trends.

Further, he said, the affluent market is the target of all these different sectors. And while there is $17 trillion in investable assets spread over 108 million households in the U.S., according to MacKillop, 45% of these assets belong to the 4.3% sliver of households that have between $1 million and $5 million in investable assets.

This makes for fierce competition, and it is the market everyone is fighting for, he said. In this battle, independent financial advisors service 25% of the affluent market, while full service stockbrokers service 43%. But surveys show, however, that IFAs fear other IFAs most, and then full service brokers, he said.

In looking at the competition, MacKillop outlined some reasons why IFAs should be concerned about wirehouse brokers. He said that 60,000 wirehouse brokers became “financial consultants overnight” and their companies are providing them with incentives to get planning credentials.

These companies are also plowing large amounts of money into technology platforms to support their consultants and improve efficiency, he said. They are also offering a wide variety of products that include separate accounts, mutual funds, stocks and bonds.

In 2001, MacKillop said, fee-based assets were 15% of total assets at the wirehouses, and that percentage is expected to grow rapidly in the coming years.

As for competition from CPAs, MacKillop said a significant number are already providing financial planning and/or investment advice. In fact, he said, 90,000 AICPA members (27%) are planners and some 6,300 CPAs hold the CFP designation.

These numbers will increase, MacKillop said, and in three years almost 50% of CPAs will be providing financial services, up from 17% now.

Building on the trust they have with investors, and particularly small business owners, CPAs are pursuing a number of strategies to enter the financial services business. They are not only building capabilities internally, MacKillop said, but they are buying practices, developing formal strategic alliances and working with other professionals on a case-by-case basis.

In addition, there are many firms, which MacKillop called “enablers,” that have emerged to help CPAs enter the business.

Banks are another channel devising strategies for getting to a fee-based advisory model, MacKillop said, but they are running into problems. One tack they are taking is to develop internal capabilities, he said, but “they are having problems finding financial advisors who want to work for a bank.”

Another barrier to their success is their culture, he said, which tends to be mass market and transaction-oriented.

In addition to these three major players, MacKillop identified other competitors such as discount brokerage firms, insurance companies and ultra high net worth advisory firms that are “moving down market to the mid-affluent market.”

To compete effectively, all players need to know what it is that clients want, MacKillop said, adding that financial advisors should check whether they are indeed doing these things. He said clients want comprehensive, personalized, goal-based advice; ongoing relationships with a trusted advisor; proactive, responsive client service; and broad product offerings.

MacKillop enumerated a number of strategies for success in this increasingly competitive world. The first was to focus on clients, understanding their needs, developing strategies based on those needs and interacting with clients frequently and proactively. “Client-centered advisors get more business and new clients than investment-centered advisors,” he said.

Strategy #2 is to provide comprehensive service, MacKillop said, because client satisfaction and referrals increase with the number of services offered.

Another strategy is to reduce the number of clients serviced, he said, because this allows one “to create a better client experience.”

Advisors should also offer a range of investment vehicles on a product-neutral basis, MacKillop said, because this allows an advisor to better service a wider variety of clients.

MacKillop also advised planners to use technology to improve productivity and enhance service. This frees up time to spend more time with clients, and it enhances the ability to customize and personalize service.

Another strategy was to “develop a clear brand and points of differentiation.” To do this, advisors need to assess their strengths and build on them. “This is branding,” he said, “not taglines or logos.”

In this regard, he said, advisors also need to understand their competition and see what they are doing.

Advisors should find ways to stand out and effectively communicate their message, MacKillop said, because “when in doubt, clients will select a brand name.”

Finally, advisors should consider outsourcing, alliances and acquisitions because these can help them gain needed scale quickly.

It is important for advisors to take the time to understand what is going on around them now because “it is only the tip of the iceberg” in terms of competition, he said.

“Many financial advisors are still in denial regarding the competitive threats that lie ahead,” he concluded. “But the competition knows what the financial advisor business model looks like and they are in the process of replicating it, although they may not be there yet.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 14, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.