A New Paradigm For The Advisory Profession
Advisors must change the focuses of their businesses.
Every profession experiences an evolutionary process that combines factors unique to its own development with others that are intrinsic to the life cycles of most professions.
As a business or profession matures, it often undergoes a phenomenon known as creative destruction. New products and services are designed and introduced with the goal of making old ones obsolete.
Often after a period of rapid growth, services become commoditized and price, not quality, becomes the primary element of differentiation. Although the financial advisory profession is still young, signs of maturation, and all that comes with it, already on the horizon.
1) The Depleted Industry. Many parts of the legal industry have reached the depleted stage of the industry life cycle. Technology, especially, has eliminated much of the profitable boilerplate billings that provided industry profits. Law firms are searching everywhere for new sources of large billings and contingency fees. Lawsuits, both individual and class action, are a promising solution. The two biggest targets in the tort industry's gunsights for the foreseeable future are food and financial services.
2) Marketing policies, practices and activities of financial services organizations will be increasingly governed by lawyers. Lawyers always work both sides of the street. If greater numbers of the profession are representing plaintiffs, greater numbers will also be working for the defendants. To protect themselves, the executives of financial services companies and organizations are increasingly doing the bidding of their in-house counsel and hired guns. Remember, this is what always happens in a depleted industry. The first strategy is to reduce legal exposure by doing nothing innovative. The second is to prevent financial advisors from doing anything outside of strictly prescribed guidelines. Financial advisors are reporting a quantum leap in legal warnings and prohibitions coming from head offices. All marketing ideas, materials, methods and activities are subjected to batteries of legal scrutiny, approvals and controls.
3) Every product and service of financial services organizations will become increasingly commoditized. The lawyers are forcing a "safety first" conformity on all product and service development, as well as on all packaging and delivery. This conformity means that every product, service and system quickly becomes a low-margin commodity. Financial advisors, as well as the companies themselves, lose their ability to differentiate themselves. In essence, the companies begin to look like strictly controlled utilities, and the advisors like tightly managed bureaucratic representatives, all offering the same thing.
4) Because of commoditization, fees and commissions paid for product and service sales will steadily decline. Commissions and fees to advisors have steadily declined over the past ten years, and most of that was during a bull market. The reason: commoditization of all products and services. The advisors themselves are becoming commodities, increasingly dictated to by gun-shy corporations and regulators. Many advisors, in attempts to soften the blow of falling commissions, have switched their compensation entirely to asset management fees, not realizing that these are also commoditized. It's estimated that when these fees drop from their current average of 100 basis points to 60 (which they will), 40% of fee-based advisors will be forced out of business within 12 months.
5) The complexity and cost of being a commoditized financial advisor will steadily increase. As compensation has dropped for advisors, the complexity and cost of being in business is increasing. The biggest reason is that financial services companies are continually cutting costs by reducing and withdrawing support both for advisors and consumers. In order to create value for their clientele as a commoditized advisor, individuals must increasingly assume rising overhead costs. Unable to compete on the basis of commoditized products or services, more value-added services must be provided to retain client and customer loyalty in a highly technological industry; this also requires continued investments in new equipment, training, and support personnel. While these costs are escalating, there are also increased expenses involved in compliance issues in terms of nonproductive time, liability insurance premiums and, of course, personal lawsuits, So far, trends indicate that when individual advisors are sued their affiliate organizations protect themselves first, frequently abandoning the individual.
6) Financial advisors will increasingly be forced to make a career decision: leave the industry, become a salaried employee or become a privately branded entrepreneur. Many financial advisors facing these pressures and dangers have become paralyzed. Their only strategy is one of hope: that things can't get worse, that the companies will always need and protect them. The most innovative and enterprising advisors will increasingly capitalize on their experiences, skills and existing resources and opportunities by opting out of the current system in favor of entrepreneurship and private branding.
7) The most innovative and independent advisors will transform their practices into a "unique process" in which they are able to charge for their packaged wisdom. Taking this career path requires special investment, work and change on the part of an advisor. The investment and work will involve creating a "unique process" that incorporates the advisor's unique approach to value creation into a multi-stage thinking system that is privately branded. Clients and customers will pay an up-front fee to go through this system, during which they are able to transform their sense of direction, confidence and capability related to their futures. Invariably, commoditized products and services will be required to implement strategies developed within the unique process. The change that financial advisors need to undergo to develop a successful unique process entails no longer seeing themselves as sellers of commodities, but rather as creators of intellectual capital. Hundreds of financial advisors have already developed successful unique processes, and thousands more will do so.
8) The financial services bureaucracies and regulatory bodies will try, but fail, to prevent entrepreneurial advisors from developing their own privately branded unique processes. The best, brightest and bravest financial advisors in all sectors will increasingly decide to develop their own unique processes. Most head office bureaucracies, sensing a dramatic loss of talent and control, will use financial and legal means to prevent this exodus from their standardized structures and processes. Regulatory and political bodies will be asked to intervene to protect "the integrity of the industry." Advisors will be threatened with lawsuits and loss of accreditation, but, in the end, these efforts will be to no avail. Over time, the most entrepreneurial individuals will opt for greater value creation, opportunity, success and freedom. At the same time, some adaptable companies will transform themselves by developing strategic alliances with unique process advisors.
9) Those financial advisors with successful unique processes will increasingly become immune to the forces of competition and commoditization. A unique process by its very nature, and with copyright and trademark protection, cannot be copied or duplicated by anyone else. The advisors who develop their own unique processes will, with one investment and one strategy, bypass all of the obstacles and frustrations caused by commoditization of the financial services industry. They will find, as they communicate with existing clientele and prospects, that they have little or no competition: Everyone else will still be trying to peddle commodities. Regardless of how the marketplace and industry change in the future, their Unique processes, once established, will continually grow in depth, scope, value creation, reputation and profitability.
10) The advisors with the most successful unique processes will be able, if they choose, to relinquish their licenses and escape from regulation. A growing number of advisors are discovering that their unique processes are in great demand in the marketplace. The reason is obvious: To an increasing degree, consumers are frustrated with the reduced value creation that is taking place in a depleted industry. Increased numbers of clients and customers are demanding what Shoshana Zuboff and James Maxmin call "psychological self-determination." That is, the ability to feel that they have greater ownership of their personal and financial futures. This is the last thing that any commoditized industry can provide. On the other hand, psychological self-determination is exactly what is provided to a growing number of consumers within the unique processes being developed by financial advisors. The demand for this kind of value creation is so high throughout the financial services marketplace that revenues from unique processes will convince many advisors to relinquish their industry licenses. They will have the best of both worlds: increased client satisfaction and loyalty, and no regulatory or bureaucratic obligations.
11) Financial advisors, through their unique processes, will create more and more fundamental solutions to economic, political and social issues. The value creation that takes place inside of a unique process leads to surprising new opportunities and markets. Entrepreneurial financial advisors with unique processes are creating fundamental solutions to economic, political and social issues in all sectors of society.
12) The entire financial services industry in all sectors will be continually transformed and improved by the unique processes of innovative financial advisors. Over the next 25 years, increasing numbers of advisors with unique processes will create a general bypass of the reactive bureaucracies that make up a depleted industry. As these "industry bypasses" proliferate, many of them will provide the foundation for an entirely new global financial services industry, in which the psychological self-determination of consumers is the single most important organizational focus.
Dan Sullivan is co-founder of The Strategic Coach Inc., with offices in Toronto and Chicago.