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Advisors at a Crossroads

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We’re at a crossroads; we’re sitting on the precipice of disaster.

Robo-advisors are the best damn thing that’s ever happened to the industry.

Advisors are terrible marketers.

Most advisors are rusting at their desks.

If advisors don’t care about their clients, they’re living a lie and only renting clients.

The words are Ray Sclafani’s, and they were spoken in the first 10 minutes of an hours-long in-person interview that followed several telephone calls in which we discussed the current state of the advisory industry and its future. We also discussed why Sclafani founded his coaching firm, ClientWise, which now counts 32 coaches among its 51 employees, and what he’s learned over the years from providing services to advisors.

If you think Sclafani is simply a financial planning Cassandra who’s seeking self-serving publicity with incendiary comments about the industry and how its only salvation is, well, firms like his, think again. For one thing, he’s been conducting research among advisors to determine which business models succeed, and he’ll be making the findings of that comprehensive research available soon. His insights into the industry and individual advisors are based on actual data, not on his own firm’s value prop. He also remains a firm believer in the power of financial planning done right.

Moreover, ClientWise works with the whole panoply of advisor business models—from the wirehouses to independent broker-dealers to RIAs, on both the enterprise and individual levels. So advisors can profit from Sclafani’s perspective—honed through his years working with advisors at Alliance Bernstein, and in founding and building his firm with the guidance of some of the best minds in the advisor business, like Mark Tibergien, whom Sclafani said helped him write his first five-year strategic plan 10 years ago when he founded ClientWise and helped him update it five years later. Oh, and he has a book coming out in October, which he said is “all about framing,” meaning how advisors should think and talk about themselves, what they offer clients and how they present themselves to clients and the outside world.

Here are some additional quotes from that same lengthy conversation that occurred on a sunny day as summer approached in ClientWise’s expanding Westchester County offices.

The industry is ready for a change.

I believed then, and still do, that financial planning, that wealth management done well, is noble work affecting generations.

One advisor can change a community; 1,000 advisors can change the world.

Sclafani believes that the advisor business as we know it is on the brink of disaster.

He said that the industry is “on the precipice of extinction as an industry if we don’t get serious, get together as a group and decide how we’ll be framed in the future.” The differences among the generations—in how they prefer to run businesses, like advisory firms, and in how they prefer to work together—is only part of that challenge. Applying technology to financial advice in the guise of robo-advisors is a catalyst that will prompt change, he suggested.

Sclafani also challenges advisors’ deeply held beliefs about the overarching value of independence. Advisors’ focus on technical competence has brought the profession far, but competency alone won’t ensure its continued existence.

“We’re a bunch of smart people,” he said, but he thinks the choice at the crossroads is whether financial services professionals “will become a small cottage industry just serving the affluent, or will we rise up like the attorneys and the CPAs and other professionals and establish ourselves more broadly as an industry committed to serving all Americans?”

Of Robos and Bad Marketers

Sclafani believes that the rise of robo-advisors is “the best damn thing to happen to the industry because it’s a swift kick in the tail. There are millions of Americans who need advice and guidance, and it ain’t about 30 basis points; it’s about value and articulating advisors’ value.”

What’s needed to go forward, Sclafani said, is not formulating better elevator speeches, but rather conducting a “really serious introspection about the great work that advisors do and how they communicate it.”

A big part of the challenge is that while advisors “have a lot to say and a lot to offer, they’re terrible marketers.” He bemoans the infighting between the wirehouse and broker-dealer and RIA channels, and envisions a better approach in which they group together to say “Look, let’s all agree that financial planning really does matter; that proper, thoughtful, future-oriented planning really matters and that henceforth that should be the standard; that sales is dead; that we should partner [to] get rid of the evil that exists” in the industry.

On the marketing side, Sclafani said ClientWise has generated over 150,000 leads from its inbound marketing efforts over the past three years. How? “It’s all content marketing; listening to what the needs of advisors are and writing blogs and tips and tools” on the ClientWise website. Since it’s unlikely that those 150,000 leads “will spend $5,000 or $10,000” for a traditional year’s worth of coaching, the firm has built the ClientWise eXchange, where for a fraction of the cost of traditional coaching an advisor can use its content and a virtual coaching arrangement.

Then there’s social media. Advisors who “pay attention to Facebook and Twitter” are “playing it smart,” especially when it comes to attracting the next generation of clients who are “going to inherit all” of your current clients’ wealth, he said. “And who are they interacting with? People like themselves,” which is just one of the many reasons why it’s important for advisory firms to hire younger people. If you’re worried about the compliance issues around social media, he suggests advisors “look at Hearsay Social. I think Clara Shih is a genius,” he said of the social media marketing firm’s CEO.

Overcoming the crossroads challenge isn’t just about next-gen advisors, however. “The aging advisor has more wisdom right now, and the next-generation advisor needs that wisdom,” particularly when the next market decline occurs. “You can read all the behavioral finance books in the world” to prepare for the inevitable downturn, “but I’ll take someone who’s been an advisor for 35 years and has lived through three different rotations and knows how to talk a client through” that downturn.

The Two Big Questions to Ask

That’s just one of the key roles that the older advisor, the pioneer, will continue to play, but that advisor also has to take some specific steps to save the industry—like acting on his or her succession plan. “Are we rising up or are we rusting away?” Sclafani asked. It takes 10 years to prepare for succession, “to do it properly, to transition clients, to train team members, to have a plan, to implement a plan, to build an ownership structure. It takes a decade. But now I’m convinced that we should all go long on oxygen tanks—that most advisors are rusting at their desks.”

Some advisors have built succession plans. “The best in the business are doing it, but it’s a fraction of what needs to happen.” And don’t think that having a buy-sell agreement is the answer.

There are two big questions that advisors should ask themselves that revolve around succession planning and building a business with enterprise value. The answers also point to another big challenge for advisors: how to manage people and build a team.

First, Sclafani said, ask yourself, “How well are you positioned to fulfill the promises made to your clients? If you’ve told your clients ‘Let’s build a plan, let’s design a future together,’” but your team consists of “you and Sally sales assistant,” then you’re “not well-positioned to deliver on these promises.” If you have a large group of clients who “you can’t talk to regularly because you don’t have the capacity,” you don’t have clients, but rather a “basket of customers.” That means you have to partner with others to fulfill those promises. Most teams (the subject of ClientWise’s upcoming research study) fail because “they know how to consult, not partner” (see sidebar, “Coaching and Consulting: What’s the Difference?”).

If the answer to this first question is “‘I don’t want to be on a team,’ then you’re living a big fat lie. That worries me about the industry,” Sclafani said. “This is a great, noble business, but there are too many advisors not thinking about delivering on those promises.”

He said advisors should “look in the mirror and ask how, beyond you, will you serve your clients? If you can’t answer that question, then you have work to do. If you don’t care, you’re living a lie and intentionally choosing to rent clients. Be up front with your clients,” he said, telling them, “‘I hope to be here for you, but I don’t know for how long.’ What you’re telling clients is to ‘Count on me until you can’t. I’ll give you the names of a few advisors you should go talk to in case something happens to me.’”

Sclafani said that when he gives a talk and says this to advisors, “the room gets really quiet.” Advisors afterward tell him “I never thought about it that way—‘renting relationships.’ I wonder if my clients think of me that way.” In those talks, Sclafani said that when he asks how many advisors have had clients ask them within the past year “What happens to me if something happens to you,” 90% of the audience raise their hands. “I know advisors are getting asked this question, even the young ones,” he said. When he further asks whether advisors think they’ve given a good answer, only a small percentage agree. “That’s not research,” he admitted, “but I get that all over the country. They haven’t thought about it that way.”

The second big question for owner-advisors is how they can maximize the value of their businesses. Sclafani said that most advisors “didn’t get into the business thinking about this.” Maybe they were attracted to the capital markets or to financial planning or wanted to help others, but according to his research, they didn’t do it to “create a business with some liquidity event on the back end. Most didn’t have that foresight. They got into the business through the sale of a particular product; now it’s morphed into a business, though most have a collection of clients.” What advisors need to do is transform their practices into businesses with an enterprise value. ClientWise is working on a tool that can assign a dollar value to specific steps taken by an advisor to prepare for a liquidity event, such as having a formal succession plan that is regularly updated, holding family meetings with key clients and their heirs, and putting in place the next generation of advisors in their firms.

Sclafani said of succession planning, “do it because you’re committed to your client or to maximize a liquidity event for yourself at some point. Either is fine.”

It’s All About Teams

As the founder and CEO of a coaching firm, Sclafani joked that he can help advisors with either option for building a succession plan, but his coaching antenna informs the final issue facing advisors at the crossroads. In a nutshell, what advisors need to do for themselves, their clients and the industry is to develop teams within their firms. Fortunately, there are two groups waiting in the wings that have the skills and inclinations to help build those teams: younger people and women.

In his earlier work at Alliance Bernstein’s Advisor Institute, Sclafani said he found that the most successful advisors in attracting new clients built true partnerships with those clients. To succeed in the age of the robo-advisors and the next generation of clients, a successful advisory team must build teams that can better serve clients now and don’t rely on one rainmaker or one relationship manager. He said “you can’t commoditize the relationship component. When a client is going through a divorce or the death of a spouse or a difficult child,” that’s what good advisors do—and don’t charge for. There are different choices in drawing up an estate plan, for instance, but he said “that’s a coaching conversation, not a consulting conversation. The best advisors help clients make their own decisions.”

Most advisors “didn’t get into the business to manage people,” he said. However, if advisors try to build a team by independently getting a client, building a plan and executing on it, “this next generation will quit on you. You need to have a circle. [...] You build a team that coalesces around the client and works in an interdependent way.”

He admitted that for many advisors this is a tough ask, but said you have to “surrender your independence, that fierce, rugged independent-minded way of thinking.” To build enterprise value now is all about tapping into the “interdependent nature of advisors,” where team members work together and clients know they can rely on more than one or two members of the team. Veteran advisors may have been well-trained in sales and technical skills, “but they’ve learned the relationship skills on the job.”

The old method of business was “smile and dial, spray and pray, lone ranger—go out and sell a whole bunch of stuff,” but with the Do Not Call registry, that approach doesn’t work.

Advisors “got into the business as lone rangers, so they think everybody should be that way.” However, that’s not the case with the next generation of advisors. “Young people get framed improperly—millennials are far more capable than people think,” but Sclafani said “you have to give them the freedom to work together and create new ways of doing things. Their creativity is expansive—you have to empower that.”

Millennials “work better in groups; they hunt and find new business better together; they learn better together.” A veteran advisor who “has all this wisdom about the business brings something very different” to the team, he said, and can hire the right human capital and “lead it, not manage it.”

Women will fit more easily into this structure than men, Sclafani said. “We’d have more women in this industry if they knew” that advisory firms constituted “a flexible workplace with a team around them.” In fact, he predicted that “we’ll get lots more women in the industry” as this new, team-based, interdependent way of doing business is more readily known.

“If the first leg of learning for the industry was sales and the second was competency—CFP, ChFC—the third leg, the next leg of this journey of learning, is all about leadership skills and leadership development.” And that learning is eminently doable, he said, for even a veteran 60- or 65-year-old advisor.

Sclafani recalled an African proverb to sum up his thoughts: “‘If you want to go fast, go alone. If you want to go far, go together.’ That’s really true of teams today. The old way, we wanted to go fast—sell a bunch of stuff, gather up clients. Today, it’s about going far and deep with the next generation of clients’ wealth.”