Since Angie Herbers’ newly merged firm opened its Kaleido Scope application to the advisor public, she and partner Kristen Luke noticed an odd thing.
The application, which takes multiple measures of a firm’s operations and financials, showed that while firms’ revenue was rising and their client retention rates were strong, they also reported declining referral rates and close ratios. Most troubling, profit margins were falling.
To find the reason for that decline and to suggest solutions to reverse the trend, Herbers has written a new white paper, X-Cell: The New Frontier of Advisory Client Service, and in an interview Wednesday, she disclosed some of the reasons for the profitability decline and outlined how advisory firms can buck the trend.
The problem begins with increased competition. Herbers argues that “for the first time in the industry, advisors have competition,” which includes big wirehouse breakaway brokers coming into the market on the higher end, and on the lower end, digital advice providers, aka robo-advisors. Advisors are “spending money where they shouldn’t be spending it,” she says, in rolling out robo-advisor offerings and ill-planned and ill-suited marketing efforts.
Herbers, who writes a column for Investment Advisor and blogs for ThinkAdvisor, says the problem comes down to advisors not having a “clear vision” of what they can offer their target clients, and what kind of clients they want to work with.
Putting the issue into context, she says that up until a year or so ago, offering financial planning services was a loss leader where advisors “bring clients in” with the promise of financial planning and wealth management, “but then you sold them asset management.” However, as investment management has become commoditized, most notably with digital advice platforms, financial planning is “no longer a loss leader but a leader.”
But what about the promise of adding robo-advisor services to advisors’ offerings? Isn’t that a way of efficiently attracting and servicing clients who otherwise don’t meet an advisor’s minimums?
“It’s not a bad thing,” Herbers admits, but firms offering digital advice are doing it “without any vision around it. You’re just killing your profit margins; it’s a race to the bottom.”
Moreover, she argues that from a marketing standpoint, “those platforms need volume to work. To have volume, you need a pretty good, pretty expensive marketing plan.”