Editor's Note: This is the first in a series of best practices articles based on the authors' report, The Refinement of Advice.
Financial advice is an important component of a healthy financial environment. Professional advisors provide people with unique skills and expertise and the results of their efforts help shape millions of futures and secure retirements. However, the 2008 interest rate crisis and Wall Street bailouts prompted distrust among consumers, especially the high-net-worth segments, and there is still a fair amount of skepticism about the profession, its objectivity and its usefulness.
Suffice it to say that the advisory business is at a crossroads. Practitioners and firms that are committed to the field must take stock of their capabilities and performance and adopt measures that will enable them to emerge stronger than ever and regain the faith and loyalty of their affluent clients. To assist with this process, we collected detailed information and insights from more than 600 advisory professionals whose core offering is investment management services. The advisors in our survey came from three categories: slightly more than half were registered reps; about one-quarter were independent advisors; and the remainder, less than 20%, were registered investment advisors (Figure 1).
An advisor's industry origins are not the best indicator of his or her business approach. Using other factors-the range of products and services used, the average net worth of clients and the types of problems they face, and the network and resources used to find opportunities and create solutions-we used the statistical technique of cluster analysis to understand how advisors functioned and find similarities in their business models. The majority of advisors, or roughly two-thirds of our sample, operate as investment consultants; almost one-quarter are wealth managers; and just a small group, 11%, are best described as elite practitioners (Figure 2).
Investment consultants, as the moniker suggests, principally deliver investment-oriented products and services and generate more than 90% of their revenues from such offerings. Wealth managers encompass a broad array of issues that contribute to the successful and effective oversight of significant assets and liabilities. This model often requires a more holistic approach to client relationships than that employed by investment consultants. Elite practitioners have taken wealth management to the next level. They are professionals who prioritize their personal goals and leverage the social capital of their clients and professional networks to be more profitable.
Not surprisingly, how an advisor chooses to structure his or her business has a direct impact on earning potential. Our findings reinforce the premise that advisors with the most refined and complex business models and the wealthiest clients earn the highest income on a consistent basis. Investment consultants had the lowest average annual compensation at roughly $200,000, wealth managers earned just over $400,000 and elite practitioners took home the highest overall income, at just over $1 million (Figure 3).
Although most advisory professionals are capable of adopting any business model they choose, there are certain proclivities that prevail. For instance, advisors that began their career as registered representatives are most likely to operate as investment consultants and registered investment advisors are least likely to reach elite practitioner status. Business origins aside, one of the key tendencies of successful advisors is possessing the right frame of mind. This is manifested in how effectively they deal with challenging situations, how flexibly they approach client interactions and how well they stay focused on personal and professional goals.
Being consultative is a quality that helps build customer loyalty and increases an advisor's ability to bond with a client and make important links between needs and solutions. Nearly three-quarters of elite practitioners and almost two-thirds of wealth managers are highly consultative, while less than 10% of investment consultants regularly act in a consultative fashion on behalf of their clients (Figure 4).
Being consultative at a minimum includes a cooperative orientation toward working with (not for) clients, clearly defined contact parameters that are driven by client needs and preferences and tailored communications that increase understanding and adoption.
When it comes to the future of advice, advisors generally agree that there will need to be greater efforts from investment companies in the form of consistent performance, better products and support to secure their loyalty (Figure 6). Value-added wholesaling, a nascent part of the advisory world just a decade ago, is now the norm as asset management firms try to build stronger bridges between their internal sales force and their distributors.
Beyond their relationships with product sponsors, advisors have varying perspectives on the future, depending on their business model. Investment consultants expect more competition, more emphasis on specialization and a bigger role for the Internet. Wealth managers and elite practitioners envision a smaller and more skilled group of advisors, greater emphasis on the principles of wealth management and the multifamily office construct.
When asked about future concerns, most advisors agree that finding wealthier clients and forging relationships with professional referral sources top the list (Figure 7).
FIG 6 AND 7