Angie Herbers, CEO and co-founder of Kaleido.

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.”

The problem, she says, is that advisors are “over-servicing the client” by providing services that “don’t directly apply to the clients they’re targeting,” listing not only digital advice offerings but also concierge services, technology that “doesn’t enhance the client relationship” and ineffective marketing efforts.

While some advisory firms have recognized that “the rules are changing,” the solution for most firms that not only want to survive but prosper is to first clearly “articulate what you offer” clients. Since investment management is being commoditized, advisors charging a fee for managing assets realize they must offer instead “financial planning services for a specific kind of client.”

In the whitepaper, Herbers lays out a four-step process for advisors:

  1. Who do you want to service? As an example, consider the clients who you’d gain through a robo-advisor offering. “Do you want to work with those kinds of clients?” she asks. “Fundamental business principles still apply,” she says. “Work with clients you want to work with, and do it well—you’ll be successful.”
  2. Of those clients and prospects that you want to work with, determine what their financial needs are. Then ask what they really need from you.
  3. Determine internally what you want to offer clients and prospects. “Just because a client wants it, that doesn’t mean you should offer it,” Herbers says. Instead, make sure you “do what you do really well.”
  4. Finally, determine how you are going to offer those services.

The process is all about determining “what makes you truly unique,” then building the firm’s management structure, human capital, processes and marketing around that unique “DNA.” You then must clearly tell clients and prospects “your story” and build your client service models around that story. Otherwise, she says, “you won’t survive” because the competitive landscape is “moving so quickly.”

Traditional client segmentation “doesn’t really work,” she says, because it “prevents you from doing the hard work, which is defining who you are and “developing your DNA,” rather than determining “who you want to work with, how you want to work with them, building client service models, and making those models profitable.”

What about advisors who say they shouldn’t change, since they’re doing fine? “When our consultants hear that” from clients, “that’s our first red flag” because “they haven’t changed their perspective — they believe that what got them here is what will get them to the next level. But it’s not just true.”

Instead, she says advisors must “change their perspective; accept that the rules have changed and will continue to change. Look at your firm as an experiment to make changes” so that all a firm’s parts are working together.

The falling profitability that Kaleido has seen “will cause damage across the industry,” but “those who figure it out will reap the benefits,” Herbers says. Referring to the recent downturn in the markets, she says that for traditional advisors, “when you have falling profitability and a pricing structure based on something you have no control over, the falling market is scary—you have to switch your strategy before you have any major market downturn.”

By contrast, if the advisor industry’s pricing is “based on what you actually provide clients,” over which you have control, “you’re able to attract the right clients to work with” who value those financial planning and wealth management services you can provide.

— By Angie Herbers on ThinkAdvisor: