Good Enough Isn't

As our clients age and continue on their journey in life, they create new issues that can have a material impact on the typical wealth management business. A look at these emerging issues can provide elements for thinking about our business models and how we might structure our businesses in the future.

When I first started out in this business, in 1986, I called myself a financial planner and wrote plans for clients, for a fee. Then, our clients asked if we could manage their portfolios. I agreed and quickly discovered how labor intensive posting every transaction into Centerpiece, our portfolio management software program, was. But soon the technology improved and we began downloading transactions from Charles Schwab. That made my job easier and I began to focus more on planning. As other issues emerged, technology provided solutions that made the job easier, allowing me to spend my time on what my clients really valued. Today our clients, vendors, and the competition are creating new issues that are now consuming more of our time and require us to expand our expertise. I am sure that technology will come along again and make some of these issues less time consuming.

We have continued to adapt our business model over the years to meet our clients’ needs and no longer refer to our firm as a financial planning firm. Instead we call ourselves wealth managers, which I believe is a more accurate description of what we do today.

Identifying and Addressing the Issues

So what are the issues we have been facing over the past few years that are likely to change our business model again?

1. Competition: Due to the increased competition from brokers, banks, custodians, accounting firms, insurance brokers, and investment banking firms, clients no longer line up to work with us as they did a decade ago. We now have to aggressively market and sell our services if we want to acquire new clients.

2. Additional Services: As our clients age, live longer, and become wealthier, their needs change. This leads to an increased demand for more specialized services and expertise in areas such as financial geriatrics, philanthropy, and more sophisticated planning for tax, estate, and legacy issues.

3. Commoditization: Technology has leveled the playing field and commoditized services. Today if all you do is manage money, you are a commodity, unless your returns are much better than the averages over a long period of time.

4. Compliance: The corporate accounting and mutual fund scandals of recent years have motivated Congress to implement regulatory changes that are onerous and difficult to implement. This has increased compliance expenses for all of us.

5. Protecting Clients’ Privacy: We know clients’ birth dates, Social Security numbers, mothers’ maiden names, pets’ names, account numbers and occasionally, account passwords. With the advent of the Internet and e-mail, protecting the privacy of client information from identity theft has become increasingly complex. It used to be that all client information resided in your office. Now we back up our data off-site, use web-based software that contains vital client information, and send e-mails back and forth with clients and vendors. We also need to review our vendors’ privacy policies and be sure that they have operational procedures in place to implement those policies. Staying one step ahead of the bad guys adds to the time and expense of running the business.

6. Due Diligence: Demand will increase for new products and services that attempt to address the longevity and more complex needs of our aging clients. As clients’ needs become more complex so do the products marketed as solutions to those needs. We will be spending much more time in performing our due diligence process as these products attempt to differentiate themselves.

7. Distribution Channels: The wealth management industry lacks sophisticated distribution channels for its services. Until recently we never had a formal sales process. Referrals from our existing clients are still our most successful method of acquiring new clients. As our firm grows so do the referrals we receive.

As several industry studies have already suggested, all of these issues point to reduced profit margins and an eventual industry shake out of the commoditized non-profitable firms.

Since R. W. Rog?? 1/2 & Company, Inc. plans to remain one of the profitable survivors, we are addressing these issues in numerous ways.

Adding Value: What can we do to differentiate our services so we don’t become commoditized and don’t reduce our profitability? Each of us has to look hard at our own service offerings and ask if we are truly adding value to our clients lives and if they are willing to pay for that value? Following are some of the services we have recently and successfully added to our business model.

A year and a half ago we became the advisor to our own mutual fund, The Rog?? 1/2 Partners Fund (ROGEX). We use our fund as a courtesy fund for friends and family of our wealth management clients. The process of starting and operating a mutual fund actually made us better analysts of mutual funds, a skill at which we were already very good. At the same time, we successfully figured out a way to offer a new service to clients below the minimum for our wealth management services. This new service empowered them to obtain the information they needed so that they can save for their future and eventually meet the minimum to become one of our wealth management clients.

Another area where we are acquiring knowledge is financial geriatrics. This is already becoming a very big issue for us and for the nation. As our clients age and live way beyond the old life expectancy tables, the financial issues they face are becoming more complex and important to them. In addition, younger clients who are not aware of these issues can now plan for them early to avoid problems later in life. Today we have retired clients whose parents are still living and have run out of financial resources. Our clients who are on fixed incomes want to help their parents. When you assist a client with their parents’ aging issues as well as their own, you can’t be commoditized and you have a client for life.

Outsource or Insource: Wealth managers need to determine what needs to be done in-house and what services can successfully be outsourced. Currently we outsource our accounting, compliance, legal, technology, public relations, and mutual fund back office operations with much success and are now looking to outsource some of the portfolio administration and human resources functions.

We look towards outsourcing so we can continue to focus on what our clients pay us to do — add value to their lives. My strategic coach, Dan Sullivan, calls this our “unique ability.” He says that it generates the cash flow for our “Present Company.” The projects that our “Future Company” is working on today are also funded by the Present Company cash flow. These projects will eventually become our new business model.

A Fair Price for Services: Clients need to know that wealth management is not money management. Money management is just one component of wealth management, so increase your fees to reflect the level of service that you are providing. Prospective clients will wonder why your fees are higher than a money manager but this will give you a chance to explain why that is and the value those additional services will add to the client’s life journey.