The headline read: "Kodak, once elite, now just obsolete." The article goes on to point out, "Its stock, which topped at $94 in 1997, skidded to an all-time low of 78 cents a share."
In Tom Peters' book Re-Imagine, he identifies the top 100 companies in America as chosen by Forbes magazine in 1917. Sixty one of those companies are no longer in business. Between 1957 and 1997, 426 of the 500 S&P companies ceased to exist.
While each of these companies undoubtedly has its own story, I suspect that many of them neglected or refused to recognize trends and alter their business plans. For Kodak, it was digital photography. For the railroads, it was air transportation.
Cerulli Associates recently reported that wirehouse firms lost 8% of market share during the past three years. Ron Rhoades wrote, "The wirehouse business model is broken ... as clients increasingly depart [their] firms." While many of these wirehouses may seem invincible, think of E.F. Hutton, PaineWebber, Lehman Brothers and Merrill Lynch. So what are the lessons of these failures and how can we learn from them and continue to be relevant in the marketplace?
The danger, as I see it, is to erroneously believe that we are not vulnerable since independent advisors have been the major recipients of the 8% that wirehouses have lost. While that is certainly accurate, we must be careful not to make some of the same mistakes. There are, undoubtedly, many reasons wirehouses are losing market share, but I suspect that the following is a representative list:
The trend from commissions to fees. Twenty years ago, it was unusual for a prospective client to ask if I sold product. Now it comes up in almost all interviews. While there are still a great number of advisors who earn commissions, it is my opinion that consumers will increasingly opt for fees and not commissions.
Without making a value judgment about which method of compensation is better, I am confident that the ultimate decision-maker will be the consumer. And the consumer is voting with his feet. I know that when we eliminated commissions, our business exploded. I suspect that many commission advisors would claim that their businesses are doing quite well and they don't see that trend. They might be right, but I'm sure Kodak probably thought digital photography had no chance of replacing film.
Expecting a fiduciary level of care. I acknowledge that most consumers do not understand the difference between a brokerage firm's "know your client" and an RIA's duty to place the client's interests first and to disclose all conflicts of interest. I am quite certain, however, that those who do will opt to do business with the advisor who must legally adhere to the higher standard of care. If we are to grow this profession and continue to take market share from the wirehouses, we need to have that fiduciary hat on 100% of the time. As confusing as it may be for clients to understand the differences between RIAs and commissioned brokers, imagine how confused they must be when the same advisor acts as a fiduciary in some instances and in others acts as a broker. We need to act as if every potential client has a complete understanding of what a fiduciary standard of care means, because one day they will. This is not something that can be hidden forever, regardless of how much the wirehouses try.
Providing true comprehensive financial planning. While many large brokerage firms claim to do financial planning, the reality is that they are not structured to do it as effectively as independent financial planning firms are. More and more independent firms are recognizing that their basic service offering is financial planning and not investment management. They understand that structuring and managing portfolios are important ingredients of a comprehensive financial plan, but there are many others. Clients want plans that take into consideration their values, transitions and goals in many areas of their lives. They want periodic updates on their progress and course corrections when necessary. Brokerage firms and advisors who "use" financial planning as a process to sell products will, in the future, find themselves with unhappy clients. Client retention rates in the high 90s are very common among firms whose core competency is financial planning. Most of these firms will not invest clients' money without doing financial planning.
Communicating reasonable expectations. I once had clients who, after shopping among several financial advisors, chose our firm. When I asked why they made that decision, they told me that I was the only one who didn't claim that I could beat the market, avoid volatility and give them above-average returns. It always puzzles me that so many wirehouse representatives and others claim to deliver on promises that they must know they can't keep. What they are doing, obviously, is setting themselves up for failure and most likely the eventual loss of clients. And I suppose the fact that they lose so many clients puts an added burden on them to attract new clients. In order to do that they may make unreasonable claims that, of course, may result in those new people leaving-and the cycle continues.
If we are to continue to increase our market share, we need to be completely honest with our clients about what we can do to help them reach their goals. A new client we just obtained told us that she was very unhappy with her current brokerage firm because the returns over the last few years were not what she had expected. I pointed out to her that the performance was not unreasonable in light of what the market had done. Perhaps, she said, but that's not what the firm's representatives said they could do for her when she hired them. Most clients are not unreasonable. They understand our limitations and our strengths. All we need to do is be honest with them.
Providing a culture that delivers outstanding service. How many of us have heard prospective clients complain about the fact that they have a difficult time getting their advisors to return calls or schedule regular updates? When they call, they are given many menu options but are then frustrated when they find themselves sent to voice mail. Perhaps I'm old-fashioned, but I believe clients enjoy speaking to real people when they call. We also believe that client calls should be returned before prospects' calls. We make sure that their issues are dealt with promptly. If the person they want to talk to is unavailable, they are always offered the option to speak with someone else who may be able to help them.
All of the people in our firm understand that our clients are our greatest assets and they are treated accordingly. Wirehouses are losing many of their clients because they seem to be more interested in attracting new ones than retaining existing ones. That is a mistake that independent planners cannot make if they want to continue to increase their market share.
There are many examples of companies and industries that became obsolete because they did not recognize trends that should have been obvious. They stubbornly adhered to a strategy simply because it was always successful before. We cannot make that same mistake. While there are some who believe that the wirehouses will strike back and attempt to make us irrelevant, I am extremely optimistic about where we are going as a profession. Consumers drive these decisions, not boardrooms.
We need to remember the famous Wayne Gretzky quote: "I skate to where the puck is going to be, not where it is."
Roy Diliberto is chairman and founder of RTD Financial Advisors Inc. in Philadelphia.