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Making the Connection: Communicating with Clients in Uncertain Times

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When it comes to understanding how advisors are operating amid still-volatile markets and within an economy whose growth prospects are dim, there are multiple ways to get to the truth, such as to conduct rigorous research among large numbers of advisors (as Investment Advisor‘s partners at FA Insight continue to do).

There’s another way of assessing the state of the advisory industry: speaking directly to successful advisors with varying business models, location and clientele, diving deeply to see how they’re operating in the real world. This is the method we chose to follow in a telephone roundtable conducted in July with the principals of three Schwab-affiliated RIA firms–Cheryl Holland, president of Abacus Planning Group in Columbia, South Carolina; Dorie Rosenband, principal of Wealth Partners in New York; and Tim Courtney, CIO of Burns Wealth Management in Oklahoma City.

Specifically, we wanted to know if the highly challenging days of 2008 through March 2009, and the continued uncertainty of the markets and economy, had wrought any permanent change in how these advisors communicated with their clients, and in what they provided to clients, and in what those clients’ expectations were of their advisors. Here’s what we learned.

On What’s Different This Time

Jamie Green: How do you talk to clients now, how do you talk to prospects now, and are you seeing many clients who are considering moving from one advisor to another?

Cheryl Holland: One of the major changes that we have made over the past few years is that our portfolio reporting is almost wholly visual now, instead of clients getting pages of reports, they now get a one-page report–the front and back of one page.

Dorie Rosenband: I only started in business in March 2009, and Cheryl was actually one of the people that I spoke with in the process leading up to making the decision to leave a big wirehouse [SmithBarney, after 12 years]; she was very helpful to me. I decided that I could find a better way by setting up my own firm, so I selected a small group of clients who I felt would best align with the advisory-based model. This was in midst of a lot of the chaos in the financial markets but completely coincidental. One of the more attractive aspects of setting up our own business was that we could offer greater flexibility in how we worked with people. Like in Cheryl’s business, we offer comprehensive financial planning and we only work with people who are interested in taking a financial planning approach in how they organize their financial lives. We offer three different types of pricing depending on what will work best for them. That’s been the greatest change: the flexibility to not necessarily have to manage someone’s money in order to be able to work with them.

Tim Courtney: We started out with an independent broker-dealer many years ago, and back in the late ’90s started the process to become our own RIA, so we’ve been operating in that capacity for quite a while. We also provide full wealth management services to our clients, so we help to not only manage the assets but provide wealth planning in a number of different areas, like tax planning, or something that fits their personal circumstances, like stock option management.

JG: So you’re providing comprehensive wealth management, but do you start with a financial plan?

TC: Yes, we do, and that’s one of the things that we like, one of the reasons we broke away and became our own RIA, because we were limited as far as what we could do when we were with a broker-dealer. Being able to present a plan in the way that we feel is most beneficial for the client is really important for us. We do use some very broad planning software–for generic planning issues–but we also like to use much more specific modular planning tools that focus on the issues that are most pertinent for each client.

On Educating Clients, and Fiduciary

JG: All of you seem similar in providing a comprehensive approach for clients, and you’re no longer as inflexible as you were. That seems to be a clear competitive advantage, but is that something that your clients see as a clear advantage as well, or do you have to inform them about it? Is that what they expect from their advisors now, or do you have to educate clients?

TC: We do have to educate them. I’m sure you’ve probably seen a lot of the same studies where investors were asked what a fiduciary does, and how that differs from a suitability standard. The last time I saw the numbers, a third of the investors knew what the differences were between fiduciary and a broker. A third said there was no difference, and another third didn’t know how to answer the question. There are still a lot of investors who just don’t know what an RIA does, and how an RIA differs from a wirehouse broker, so we do certainly educate them.

JG: Dorie, you recently came from a wirehouse, bringing along certain clients whom you thought might be best suited to being your clients as an RIA. Were they folks who knew what a fiduciary was and knew how that model would be better for them, or did you also have to educate them?

DR: Nobody likes to feel that they are not being treated well, and there are people who don’t really care [about the difference between fiduciary and suitability] because they see an investment advisor as just that–they need access to something, that’s what they’re getting, and that’s just fine.

There are certainly clients that fit well into the brokerage model because they’re able to navigate what the brokerage firm can offer and they can get out of it what they want. Or there are people that are so passive that they just can’t really wrap their mind around the idea that it might not be the best thing for them. Where we found far greater connections for people was the alignment with their best interests and how compensation is rendered. In the traditional wirehouse model, advisors are compensated more for recommending stocks than they are for recommending bonds, and there’s no compensation on cash. When you explain that to people–that inherently there is an absolute motivation [for brokers] to recommend [certain investments], whether subconscious or conscious, they saw that the compensation isn’t aligned to their best interest.

The only way you can be compensated in a wirehouse model is if you’re managing assets. In Cheryl’s example, and it sounds like Tim may have some of these examples as well, they have clients who don’t have liquid assets to be managed, but absolutely need access to the advice and counsel an advisor can offer. There’s no compensation structure in a wirehouse to accommodate that.

I didn’t find a lot of [clients] connecting to the idea of me being a fiduciary because they said, ‘Well, weren’t you looking out for me before?’ They expect that, in my experience.

JG: So they expected that you were already on the same side of the table with them?

DR: Yes. So inherently I think the events of the last few years have exposed that the brokerage model is not necessarily aligned with clients as well as the RIA model, but there are still lots and lots of people who are still at brokerage firms. It’s very difficult for people to connect it, so I had clients saying, ‘Well, it’s free. I stay at SmithBarney and I don’t pay, so why would I move and pay you 1%?’ Even though they’re paying one way or another, they don’t see it, it’s hidden. Nobody likes to feel like they’re not being treated well, nobody’s going to admit, ‘Wow, I must have really made a big mistake! I’ve been a client at a wirehouse for the last 25 years.’ I’m not sure how much ‘fiduciary’ resonates when those people have had a different experience. When you explain it, people value what you’re saying, and of course they’d want their advisor to be held to a higher standard, but I think it’s difficult to say, and the way that I explained it is that as an institution, Citigroup was not held to that standard. That didn’t sit well with me. In many cases, very good, solid ethical advisors at wirehouses are being held responsible for the misdeeds of their peers, which they had nothing to do with.

CH: I suppose I’m the gray-haired one in the room…I think it is difficult to easily explain to someone the fiduciary difference without sounding unprofessional in some ways, but I have great confidence that, with time, it will become a very big differentiator. I am optimistic that it will happen, but also pessimistic in the time frame in which we can make that happen.

On Serving the Middle Class

JG: So you suspect that it will take time, and will it be mostly word-of-mouth from existing clients that will get the message to prospective clients that your approach to doing things–whether you explicitly call it a fiduciary approach or not–is the better way, is the preferred way?

CH: Using the example of how people came to understand what a financial planner is, it won’t be just word of mouth [that will promote the fiduciary standard], it will be in the media, in blogs, and there will come a point when everybody will understand in simple terms what it is. At the same time you’ll have counter-forces that will be trying to smudge that story, or fudge it, or muddle it, but I do think it will prevail, because it is in the best interest of the person sitting next to you at the table; they will begin to understand that in time.

I think the real struggle is that we’ve yet to figure out how to serve the middle market. There are some wonderful opportunities going out there, but until you’re able to serve that mass majority of people in this manner… There are some wonderful, glowing exceptions, but it is very difficult to take on [as clients] a new couple with $50,000 who need the most advice. They have nothing, and they’re beginning their 401(k). So that’s a barrier to the [fiduciary] issue.

JG: You mentioned in passing, Tim, that once you were with an independent broker/dealer. I talk to the leaders of those B/Ds, and what they say is, almost to Cheryl’s point, if you make it economically unfeasible for the independent broker-dealer to have a commission-based approach to serving people, then those people on Main Street that can’t meet the minimums of RIAs will be even more underserved. Does that ring true?

TC: It could. I know that many business consultants say that when you’re ready to start growing your business, one of the first things you need to do is to get rid of your lower-balance clients, your lower-revenue clients. That’s something that we have not done, we’ve maintained our clients. Maybe there’s some merit to that, but regardless, there still needs to be a standard that’s higher than the standard they are operating under now, because then you’ve got people who need probably the most help and they’re being served by advisors who are potentially not working in their best interest.

There are three things we think about a fiduciary standard. One way to communicate that is that we say to prospects, and to clients, that if you were to attend one of our investment committee meetings or business planning meetings, there is nothing said there that we would feel embarrassed about you hearing. You would be perfectly welcome and we would be perfectly comfortable having you listen in to all the internal conversations that we have. Going back to what Dorie was saying about compensation, they wouldn’t hear us talking anything about rep payouts or selling agreements or cross selling or proprietary products, none of those embarrassing discussions would be overheard.

We tell our clients that, look, there are many businesses in this country that would not want you to be overhearing what’s being said in their planning meetings.

Second, when we’re talking to 401(k) groups, 401(k) plan sponsors, fiduciary is becoming more and more important to them. When we go up in competition against a broker who is not serving in any fiduciary capacity, that is a huge selling point for us. Businesses do know the difference between fiduciary and suitability, and whether or not we’re going to be serving as a co-fiduciary side by side with them, so that’s a huge growth area for us.

Finally, two of our offices at Burns Advisory Group are breakaway brokers from wirehouses, and we also talk with potential breakaway brokers about joining our firm. One of the things we tell them is that you want to be proactive and tell your clients about these things right now, and be moving towards the RIA business model, and away from your model, because if they hear it from us before they hear it from you there’s a good chance that we will take that client. I think that the RIA business model is the best model for the vast majority of American investors.

JG: And so many RIA’s are such large parts of the local communities, too.

MP: You become part of the professional community, not because they’re fiduciaries but because that’s how they believe they ought to be doing business, how they ought to relate to others.

JG: In talking about the ways that RIAs interact with clients, Cheryl you mentioned already that there are people at Abacus who can articulate better what your value proposition is, but how do you get all your people to take that approach, and is that something that you use along with technology to help you communicate better with clients? How do you produce that culture of caring for clients?

CH: Often clients or attorneys that work with us will say very complimentary things about the whole team, having a service heart, education, patience, a drive to master humbleness. Every group has its own culture but I do think there is a palpable difference, and it’s not just apparent to clients, it’s apparent to everyone in your community, and to people who may want to work with you.

So one of the advantages of an RIA is that if you’re developing that culture, which is a fiduciary one, you’re often going to be able to attract the best employees, who would much rather be a part of that kind of an environment.

Group Editor-in-Chief James J. Green can be reached at [email protected].


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