A recent Research magazine cover (“Fee-Based Business,” February 2007) displayed a numerical reality check for the financial advice profession regarding the migration toward fee-based practices. The article stated that while 87 percent of advisors had begun to do fee-based business, only 16 percent of the assets they worked with were under a fee arrangement. These numbers tell a story of intention being waylaid by perception.
Herewith are a few personal observations of this industry phenomenon that I suspect have a bearing on the statistic, including:
o Transactional Traction: being stuck in the mode and mindset of transactional conversation and behavior.
o Cultural Confusion: being told to develop long-term relationships but being measured on short-term results. Firms must make up their minds on the instrument of choice for measuring results — a tachometer or a speedometer.
o The PERCEPT-SHUN Phenomenon: being rejected by clients on a value proposition because of previously sold and pre-cast perceptions in the mind of the client.
Because this “percept-shun” phenomenon is much more prevalent than we might suspect, and pivotal to overcome in order to successfully transition to a fee-based relationship with clients, I offer the following psychological note for consideration.
Today’s client is a wary client. They are wary because they are weary — weary of past experience and wary because of exposure to stories that do not flatter the financial profession. Many of today’s clients are suffering from PTSS (Post Traumatic Sales Syndrome), which is where they or someone close to them has had a traumatic financial violation. This condition can only be cured with unadulterated integrity. Others you meet are suffering from SFS (sales fatigue syndrome), which is where they are simply weary of being sold — period. Everywhere they turn they encounter another thinly veiled sales pitch. These conditions can only be cured with absolute transparency on the part of the advisor.
Many of these consumers are wary because they were sold on the basis of transactions and now they are being told that transactional approaches are not in their best interest.
The transactional, commission-based approach on which the majority of advisors founded their business will always carry, even if very faintly, the scent of the boiler room for most consumers, if only because the form of the advisor’s compensation (commissions) served the ill-intentioned as much or more as the well-intentioned.
Never mind if you never once entered the boiler room associated with the dank and murky basement of the industry. The hint of suspicion abides in the olfactory mind-space of today’s circumspect client. It’s guilt by association (and as an advisor you are associated). You must prove yourself inculpable and distinct from those on Wall Street who are culpable.
Handcuffed By The Past
Every industry must deal with this at one time or another. The solid center of any industry suffers insinuation on account of the rogue and raffish behavior on the fringes. Such insinuation is all the more difficult to deal with for an industry and individuals who are in the midst of transition. And, in a paradoxical twist, one of the paramount reasons the industry is in transition is because of associative guilt. Aside from the tainting of the transactional approach, another factor is driving the migration of the industry toward fee-based management — the erosion of commissions and the need to survive by annuitizing one’s business.
The ‘percept-shun’ problem effects many more advisors than those migrating from transactions to the fee-based arena. It hinders any professional who is attempting to sell a superior value (and higher price) to clients who may have entered the relationship on another basis or value sold.
Do you find yourself arm-wrestling psychologically with clients over the value-proposition you previously sold? Are you moving from a transaction-based to a fee-based business and struggling to justify the new paradigm? Are you in a fee-based business and struggling to justify the recurrence of fees because the client fails to appreciate a value beyond the asset-management process?
The following story illustrates how a previously sold value proposition can haunt you.
Dave, a successful advisor and admirable gentleman called me one morning and lamented, “I am so tired of these year-end meetings.”
“Tell me about it.” I answered.
“Well it’s the same conversation over and over,” he explained. “How did we do against this index? How did we do against this fund? How did we do against our neighbor who brags (and lies)? This conversation gets so old, year after year and client after client. It’s like financial Groundhog Day (alluding to the Bill Murray film about a weatherman reliving the same day over and over again.)
“Dave,” I replied, “I have only one question for you. Who got this conversation started in the first place?”
“Ouch!” he replied.
“What has happened to you,” I offered, “is that you have fallen victim to the value proposition you sold in the first place. ‘I can do better than XYZ.’ Now you’re living with the reality of this value proposition.”
“This particular value proposition, by the way, is unsustainable over time and ultimately causes major stress in every relationship when the tide turns against you.”
I offered an analogy to this advisor by telling him I was thinking of starting a business called Mitch Anthony’s Weather Advisory Outlook. ‘Bring me your calendar for the next year and circle the dates where you want to have an outing, go to a ballgame, picnic, etc., and I will do two things:
1. Look at historical weather records going back to 1920 and see how the weather performed on those dates, and;
2. Analyze your dates with a climatologic probability analysis program going forward.
After these analyses I will tell whether or not it should be sunny or rainy on the dates you chose.
The silence I heard on the other end of the phone indicated that Dave thought the light on my front porch was flickering. “I take it that you’re not interested in my business proposition?” I inquired.
“I don’t think so,” he answered.
“Can you tell me what the difference is between my value proposition and yours?” I asked. “They are both predicated on factors we ultimately have no control over: the climate and the markets. Offering a value proposition around factors you cannot control is at the very least a formula for stress and frustration, and at worst a predictor of burnout and insanity.”
Many advisors are laboring under the yoke of an unsustainable value proposition:
o If you cannot control the outcome it is unsustainable.
o If you cannot largely control client satisfaction it is unsustainable.
o If the value of your offering continues to erode and the price being paid continues to fall, it is unsustainable.
o If your business model asks more and more of you and pays you less and less, it is unsustainable.