Is there even one financial advisor in the U.S. who isn’t aware of the increasingly intense focus placed on boomer retirement? Driven by demographics and the sheer magnitude of the amount of money in motion, the entire financial services industry seems to have recognized that boomers represent the most significant business opportunity of our careers.
To frame the questions that we will explore in this first of a monthly series of articles, let’s review an interesting way to segment financial advisors laid out by Morningstar’s David McClellan during last year’s “Managing Retirement Income” conference. The industry is composed of:o Product sellerso Asset gathererso Investment managerso Insurance plannerso Financial plannerso Wealth managers
The behavioral “skews” of these financial advisor segments are as follows:Product sellers are transactional sales representatives. Their primary investment vehicles tend towards mutual funds, variable annuities and individual equities. They are mostly Series 7- and Series 6-registered as well as insurance-licensed. Their primary channels include banks, insurance broker-dealers and wirehouses. There are about 175,000 such product sellers and their average AUM per investor client ranges from $50,000 to $200,000.
Asset gatherers are relationship-driven salespersons who outsource the investment management function. The primary investment vehicles include mutual funds and separately managed accounts (SMAs). They tend to be Series 6- and 7-registered. Their primary channels include wirehouses and independent broker-dealers. There are about 95,000 asset gatherers and their average AUM per client ranges from $200,000 to $10 million.
Investment managers are analytical portfolio managers who do not focus their practice on having high client skills. The primary investment vehicles they use include mutual funds, ETFs, SMAs and individual equities. They often are Series 6- , 65- and 7-registered. They also favor the chartered financial analyst (CFA) designation. Their primary channels include IBDs, registered investment advisors and wirehouses. There are about 50,000 investment managers and their average AUM per client ranges from $200,000 to $10 million.
Insurance planners are sophisticated insurance salesmen who sell life insurance solutions. The primary investment vehicles they favor include life insurance and variable annuities. They often hold specialized insurance designations. Their primary channels include IBDs, insurance broker-dealers and wirehouses. There are about 37,000 insurance planners and their average AUM per client ranges from $50,000 to $3 million.
Financial planners offer comprehensive financial planning processes and are often fee-only. The primary investment vehicles they prefer include fee-based planning processes and software, mutual funds, ETFs and SMAs. Many are Series 6-registered and they favor the CFP designation. Their primary channels include IBDs, RIAs, and wirehouses. There are about 18,000 financial planners and their average AUM per client ranges from $50,000 to $3 million.
Wealth managers are members of high-net-worth teams who act as the investor’s chief financial officer. The primary investment vehicles they use include SMAs, hedge funds and trusts. They hold various registrations, licenses and certifications. Their primary channels include wirehouses, IBDs and bank broker-dealer or trust departments. There are about 24,000 wealth managers and their average AUM per client is greater than $3 million.
A review of this segmentation should foster growing skepticism about one-size-fits-all solutions and product development. Different groups have different needs. Efforts to develop products that try to meet the needs of everyone often result in offerings that are relevant and compelling to virtually no one. When we look at a product, a process, an approach, a recommendation, an insight, it is important to ask ourselves, where does this fit? Who is this for? Is this really something for me?
Given this limitation, it is imperative that we identify what most, if not all, financial advisors may have in common before we start discussing the dimensions that differentiate products, processes and solutions. Only then can we make products that are more relevant to one specific FA segment or another.
A Change Management ModelThe first lesson that we may all share is related to the management of change. Evolutionary change is a model that holds great value for business and industry development. New products and new companies emerge from continuous evolutionary change. Many fail; some prosper. Even those who do well are replaced by other more successful, more innovative organizations. While we are familiar with this pattern as it relates to entrepreneurial and start-up ventures, it is important to note that it also applies to large companies.
For this article, we will describe an iterative three-step process for understanding and adapting to evolutionary change that is expounded by Eric Beinhocker in The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics. These three steps are: differentiation, selection and amplification.
The differentiation phase is characterized by the emergence of solutions in response to new, visible opportunities. Many of these solutions appear nearly at the same time, but there is no way to predict who will be the winners. The early days of evolutionary change from riding horses to driving cars is a good example. Initially, there were many entrepreneurial car companies as well as several power technologies such as steam, electrical, diesel and gasoline. Some entrepreneurs, like Henry Ford, failed early, but then achieved great success. There were slim odds of predicting the winning combination of technology and competitor during this time of great differentiation.