Financial Planning > Behavioral Finance

A Tale of Two Futures: Will You Be the Best Advisor for Clients, or the Worst?

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Since I started my company at the height of the tech boom in 1999, I’ve witnessed a lot of change in the financial planning industry. Many of you reading this probably have as well: we weathered the bursting of the dotcom bubble, 9/11, the collapse of Enron and, of course, the latest economic disaster—the Great Recession. It’s no wonder that today the industry looks completely different than it did in 1999. In 2012, advisors must work harder to reach investors who are skeptical of both financial planning professionals and the economy as a whole.

At Financial Finesse we talk to employees every day, most upwardly mobile, some high-net-worth, working at the nation’s largest employers.  Here’s what they are telling us: 

First, these employees understand that they are responsible for their financial future. This means they realize that this burden rests on their shoulders now, not their employer’s (or the government’s, which is the source of a whole lot of wry smiles and eye rolling these days when it comes to the Social Security discussion). 

And for that reason, they feel a serious urgency; more than ever, they are ready to be proactive about their financial plans.  The problem is they don’t know where to turn, what to invest in, or who to trust.  Two-thirds of U.S. investors do not trust financial advisors and 52% don’t trust the industry as a whole, according to a 2011 Global MONITOR Study.

However, I think this dynamic can be a positive one for the industry.  Slick selling with promises of big returns is out.  Holistic financial planning from an advisor who has built a reputation of integrity is in.

For these reasons, we believe that there will be an increasing bifurcation in the financial planning industry between advisors who don’t adapt to this new client paradigm and cling to a more short-term, transactional financial services mindset and those “white-shoe” advisors who operate as true consultants to their clients and often as fiduciaries.  

At least in the workplace, the white-shoe advisors are already winning with companies becoming more concerned about their own fiduciary responsibility to be prudent in their selection of professionals who deliver advice to their employees.

Over the next decade, advisors will face a “grow or die” proposition.  Those who grow will, in most cases, grow significantly, at the expense of those who are unable to adapt to the new climate.  We believe these advisors—the ones who disproportionally grow their business over the next decade—will share the following characteristics:

1)      They will obsessively focus on building a great practice, and a great brand reputation.  The winning advisors will figure out what they do well and stick to it so they don’t risk losing their reputation by getting spread thin or involved in areas in which they aren’t the foremost experts.  They will get better results, build better relationships and establish more trust as a result.  Social media will reward them with referrals the same way it will destroy advisors that operate with short- term tactics that aren’t in the best interest of their clients.  Social media will upend the golf course. 

2)      To build trust among employees and employers, advisors will establish themselves in at least one of the following ways:

  • They’ll embrace designations.  For wealth advisors, the CFP designation has become the gold standard for financial planning and is well positioned to become more entrenched in the consumer’s lexicon.  For retirement plan advisors, it is less clear which designation will emerge as the undisputed standard, but we fully believe that designations in general will become increasingly important as a way to establish trust.  And we expect to see an increase in organizations that train, test, certify, and monitor advisors who work with plan participants as a way to ensure they are providing guidance that does not jeopardize the plan sponsor’s role as a fiduciary—meaning the advisor is fully educated on the company’s plan options and provides guidance and/or advice that is 100% accurate and with the plan participants’ best interests in mind.
  • They’ll embrace a fiduciary standard.  The DOL’s proposed rule to broaden the definition of fiduciary responsibility could pass in the near future, and the SEC may still impose a fiduciary standard on all professional advice-givers. That means broker-dealers and other financial professionals who were not considered fiduciaries to their clients before could soon owe the highest level of responsibility to their clients. This is a huge responsibility on an individual advisor level, but it holds broader implications for the entire industry. As more light is being shed on transparency, there is a new ‘ethos’ developing for the industry.  As a result, it will likely become a personal requirement for prospective clients seeking an advisor. Advisors who prosper will be those who take this responsibility to heart and show clients their utmost commitment to helping them succeed in their financial plans.

3)      They will have a significant presence in the workplace. As retail customers become even more difficult and costly to attain, the industry will continue to see best practices for reaching new clients transform. Trends continue to point to higher demand for financial guidance and advice in the workplace and as employers seek to deliver these services in the workplace due to deeper concern for their employees’ retirement preparedness, the new model for reaching clients will be through the corporate channel. Currently, 56% of U.S. companies provide financial planning services as a benefit to their employees, according to Bank of America and Merrill Lynch’s 2012 Workplace Benefits Report.

Because of this, we are seeing an increase in demand for advice among large Fortune 500 clients as a way to both help employees achieve financial success and reach their strategic objectives in reducing costs to the company’s bottom line. The challenge they face is offering their employees investment guidance and advice that doesn’t put the company at risk.

With managed accounts arising as a safe option for employees (as a QDIA, or Qualified Default Investment Alternative), they are also realizing there is a safe model for providing investment advice. As a result, plan sponsors will increasingly expect advisors to elevate their practices to the new standard. For those who do operate at the higher standard, this is good news because those who don’t will likely be pushed out of the market. They will want advisors who have impeccable records—those who carry the gold standard designation in their field, who charge clients on a fee-only basis as a way to further protect plan sponsors and reduce their risk, and who take responsibility themselves as fiduciaries for clients’ success.

They will expect the advisors they work with to be more vigilant in how they provide investment advice and guidance and will require they know more about their specific benefits and how their employees use them to achieve their financial goals. For advisors who rise to the occasion, these new standards will actually provide more opportunity to establish deep-seated relationships with plan sponsors and gain access to direct channels of large pools of potential clients. In addition, those advisors will gain an opportunity to establish themselves as experts in a particular company’s benefits and attract groups of employees to become individual clients.

Advisors will need to prove more in order to gain business as the new ‘ethos’ takes hold. Individual clients will require even more transparency, plan sponsors will require more protection and knowledge, and the industry will hold financial professionals more accountable.  Those who choose to rise to the occasion will be seen as role models for a better, more transparent and client-focused practice. Those who don’t will be left behind in a paradigm that no longer works for society. Which will you be?