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Growing an Advisory Business in a Rapidly Changing Industry

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Back in 2014, the independent advisory industry was having a tough time. The weak stock market was driving down AUM revenues and making investors nervous, while competition increased from a growing tsunami of breakaway brokers and the new wave of low-cost digital advice platforms, as the client bases of many independent firms was gradually aging.

All of this was reflected in the key financial performance indicators for independent firms. Client referral rates, referrals from centers of influence, closing ratios, lead flows and revenues from new clients all declined, with only profit margins and client retention rates remaining unchanged.

The solution that the industry collectively employed was marketing: getting their message out to larger numbers of the right prospective clients. To beef up those marketing messages, they added more services (their own low-cost digital platforms, transition services, 401(k) advice, tax planning, insurance, health care services, etc.) and more complex pricing structures. Some firms even started hiring sales people.

Then, a funny thing happened in 2015: Referral rates, closing ratios and new client revenue continued to fall, and profit margins dropped as well. The only key performance indicator (KPI) that remained unchanged was client retention. My prediction is that all these KPI figures will fall even further in 2016 and be joined by client retention. What’s going on?

In short, the independent advisory business is changing. While owner-advisors are largely aware that something is going on in their industry, most have yet to identify the real problem, so their solutions aren’t working.

Here’s an example. To support new services and broaden their appeal, many firms have added new pricing structures: flat fees, subscriptions fees, bundled fees, etc. However, rather than the anticipated increase in new clients, they are experiencing just the opposite: Referrals and closing ratios are falling, and client retention is already beginning to weaken.

Intended Solutions Add to Headaches

The problem is that rather than solve the problem that independent advisors are facing, most of the so-called solutions are just adding to it. The basic problem is that financial services is changing rapidly, and in major-league ways.

Compensation methods. Back in the day, there was only one way the vast majority of retail investors paid for financial advice: sales commissions. If they wanted stocks or bonds or insurance or mutual funds or even annuities, folks paid an upfront sales commission. They knew their broker or agent only made money when they bought a product, and understood the conflict involved. Was it the best model for the clients? Probably not, in most cases, but at least everybody understood how it worked.

Today, investors face an ever-expanding array of ways to pay for advice: commissions, flat retainer fees, hourly fees, fee-offset, and a staggering range of AUM fees (from $10 a month on some digital platforms to well over 200 bps at some brokerage firms). If you read the advisory industry discussion boards, people in the industry can’t agree on which method is best, or fair, or even what the benefits and negatives are of each kind. How are retail investors supposed to sort it all out?

Breakaway brokers. During the rise of independent advice in the 1980s, most advisors could have made more money as stockbrokers or insurance agents, but started their own independent firms to better service their clients. The industry largely sold itself as “anti-Wall Street,” but when the independents started charging AUM fees in the late ’80s, everything changed. Almost overnight, they could do better in annual compensation, compensation growth and the value of their firm than their brokerage counterparts. The resulting huge influx of brokers to the independent world over the past decade or so has changed the culture of independent advice, making it much harder for investors to identify sources of client-centered advice.

Larger firms. Traditionally, independent advisory firms were very small businesses, but AUM fees have changed that, too. Today, the largest “independent” firms have annual revenues approaching 10 figures. While that doesn’t rival Fidelity Investments or Wells Fargo Financial Advisors, these firms are big enough to have institutional business issues that can conflict with their clients’ interests.

Financial regulations. The passage of the Dodd-Frank Act, and more recently, the Department of Labor’s new rules for retirement advisors, has greatly increased public and media awareness of the fiduciary standard for some advisors. That’s not to say it’s any easier for investors to sort out who is — and who isn’t — a fiduciary advisor. Many advisors are still allowed to act as “part-time” fiduciaries, offering advice in their clients’ best interests, but implementing that advice under the suitability standard. As far as I can tell, there isn’t one client in a million who understands how this works.

Digital advice. This is a big one. Younger, more technically savvy people are getting older, with larger portfolios. Studies show that they are more inclined to get financial advice online, as are a growing number of retirees — and they’re well aware of the cost savings in most cases. Increasingly, independent advisors will have to compete with these platforms for new clients who are having a hard time understanding and appreciating the benefits of human advice.

I’m sure you can see the trend in these industry changes. Retail investors, who generally have never been very clear about how the financial services industry works, are getting even more confused by the industry’s recent changes. By increasing the services offered and the number of compensation models available, almost everyone involved with today’s independent firms — clients, prospects, employees and strategic partners — are confused about what today’s firms do and who they do it for.

Put another way, the biggest problem facing independent advisory firms in today’s changing financial services industry is clearly articulating what they do for clients and how it is better than other sources of financial advice. Consequently, adding services and multiple methods of compensation is only making things worse. This is not a marketing issue or a sales issue — it’s a communication issue.

Work on Your Pitch

As I’ve written before, today’s independent advisors have to stop trying to offer all things to all people, and just offer a few very important things to people who really need them. Then they have to talk about these things in exactly the same way, every time, to everyone they talk to.

Today’s advisors need to create a pitch; a 20-minute talk that clearly explains what their firm is, who its clients are, what it offers and why, and how to become a client. This may sound like a daunting task, but thanks to the changing state of the financial industry, and the high level of investor confusion, it’s actually quite simple.

First, identify your target clients. While some advisors have had considerable success attracting a defined niche, we’ve found it’s easier to work with a large group that has basically the same needs — retirees, pre-retirees, business owners, etc. — then offer them services that virtually everyone needs. Don’t forget to talk about the issues that most investors are confused about: your duty to clients, how you’re compensated and your overall approach to client care.

Learn the pitch so that you can repeat it word for word every time, and teach your employees to do the same. When everyone describes your firm the same way every time, other people start to repeat it that way, too. Because your employees and clients will have a clear vision of your firm, they’ll be happier about being associated with it, which will decrease employee turnover and increase client retention.

— Read Why a Fiduciary Duty Matters on ThinkAdvisor.


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