As the song goes, “Love is a many-splendored thing.” But it’s not efficient. Dorothy Parker did not write, “My love, he’s cost efficient, my love he is scalable.” Emily Brontë did not write “Love is like a 1-800 number.”
The human relationships we cherish are not measured by their efficiency, but instead by the way they make us feel and what they mean to us. And even though 1-800 numbers and customer service chatbots make us cut to the chase, we hate them with passion that deserves its own poetry.
She talks so flat,
so plain, robotic
of endless labyrinths of Nines.
She is so terse and non-melodic,
And all she knows is fees and fines.
(My own verse here is inspired by Byron.)
Most advisors would agree financial advice is about relationships, yet every business plan I read talks about efficacy first. It’s a goal I struggle to understand. For one thing, it’s self-defeating. It’s like bragging that you’re “commoditizing yourself.” The more efficient you are, in fact, the more generic (and thus easier to replace).
Efficiency is a game best played by the biggest players. Amazon is an incredibly efficient retailer—would you dare try to compete with it on scale and productivity if you’re a small, boutique retailer? McDonald’s has the same advantage—do you want to compete with it on price as a mom-and-pop operation? And any smaller independent advisory firms squaring off against the likes of Vanguard, Schwab, Fisher Investments or the robo-advisors on productivity metrics are likely bringing a knife to a gunfight.
The real advantage small shops offer is actually their ability to create trusted, close relationships with their clients. So they should be using different words to measure success—words like “trust,” “depth,” “quality,” “closeness” and “durability.”
Now let’s go down the other road, and see how seeking efficiency at all costs perhaps goes too far:
• Think of the emails that start, “Happy birthday, dear client” and are automatically generated by your sophisticated marketing software. Even if the software is smart enough to add a name, everybody knows the message is automated. The outcome is quite different if you write a personal note saying: “I hope you are on your favorite beach” (especially if you know my favorite beach).
• Think of an advisor being assigned 400 clients, which leaves her with no chance of ever remembering any birthdays or grandmothers’ names.
• Think about the obsession with client segmentation. It’s worked so well for the airlines that now even cell phone companies are making fun of them.
• Think about how some advisors complain about their smaller client accounts. Younger advisors are particularly prone to this. Yet what may be a small client on paper may be someone who trusted the firm when it was also quite small. What goes around tends to come back to hatch … or something like that.
These might seem like small things, but small things gradually lead to giant cultural shifts (I’m paraphrasing Karl Marx). That would be tragic for advisory firms, because their culture is their only lasting competitive edge.
None of this is to suggest that you should run an unprofitable business. Quite the opposite. The independent advisory industry has been very profitable precisely because it’s focused historically on quality rather than quantity. The intense focus on relationships has won the advisory profession the trust of the clients and the right to charge enough to be profitable.
In a time when your CPA can barely remember your name, when your doctors run through appointments because they have seven per hour, when your bookkeepers are trying to automate their entire job and when your bank’s customer service department is 20 time zones away, financial advisors have made themselves accessible, available and willing to give their clients undivided attention. That’s why clients have largely been willing to pay ongoing fees without haggling over every decimal. No one is paying you 95 basis points for a message that says “Dear client, please call our 1-800 number and if you are Silver level and above you can download your report from our portal.”
And by the way, some of those other professions I mentioned are now regretting their past efficiency decisions. Doctors are opening concierge practices (another way of saying: “You actually get to meet a real doctor!”) Lawyers are charging fixed fees and retainers. Banks are launching services that cater to “private client” experiences.
You don’t have to be a slave to efficiency to be very profitable. You just put in more effort and maintain better pricing, then justify it. Better pricing requires better quality and, what’s more, the ability to communicate that quality to your clients and show them the difference it makes.
Obviously, no one wants to go to the cheapest heart surgeon in town or take their spouse to the cheapest restaurant for their wedding anniversary (or save money on a burger if it’s Valentine’s Day). When the outcome means something, the clients choose quality over price. And it’s the job of a (good) advisor to communicate what that quality is and why the work is important and why differences in quality at this level mean so much.
When advisors focus instead on efficiency they tend to start engaging in price competition, a battle where few survivors emerge. There’s always someone in the crowd who likes this evolutionary process and sees it as somehow desirable. I’ll remind them that evolution only cares about genetic (not individual) survival. Chickens are very successful survivors—we breed billions of them (very efficiently) for dinner. They have succeeded way better than dolphins from an evolutionary perspective. But you don’t want to be a chicken. (Choose your adventure carefully.)
Also, if profitability is your aim, is it about efficiency or greed? If you press the grapes a bit, you get juice. With some fermentation you get wine. Press the grapes a bit more with a machine and you get more juice and a bit more wine. Press the grapes too much and you get bad wine that can only sell at the bottom shelf of the grocery store. The trick is to know how much to press.
There’s place for improvement in every business. We should automate many tasks. We should use AI. But we should also know when and how, and make sure we know the outcome. Of course we can mingle most accounts—but not the one from Grandma who passed away. We can send automated e-mails—but not about a client’s birthday.
This little rant (disguised as an article) is mostly directed at younger advisors. The people who started our industry, and the founders of most things, tend to intuitively understand the importance of relationships. Consider John Adams, who said the country’s founders would be soldiers so that their sons could be farmers so their grandsons could be painters and poets.1
In our industry, the next generation tends to be MBAs, people who fall in love with their spreadsheets rather than the people in front of them. They have been taught that a business should be scalable. But would you ever go to your spouse and say, “I want to scale our relationship”?
This logic was spawned by a generation of tremendous innovation and disruption, upheavals that gave us Amazon, Uber, Airbnb and Tinder, companies that showed us you can scale what were traditionally small, fragmented industries. But look at what that’s done—talk to bookstore owners (if you can find one), taxi drivers and bed and breakfast owners (those are probably on Airbnb). Scale favors the lone two to three surviving megafirms, and clients don’t always capture the benefits.
While investors may love scale and efficiency—which spawn publicly traded companies offering 35% rates of return—clients love your attention.
We need to teach the next generation to understand the importance of relationships and know how to create them. Just as Grandma taught us to say “Good morning!” to the stranger in the elevator—and that “You count your friends when you need them”—we need to teach G2 how much pressing is too much. We need to teach them that to be profitable and successful in the long term, sometimes you have to do something inefficient in the short term.
There is a reasonable compromise, and good businesses will find it. Dell, for example, became very successful with “mass customization.” Even McDonald’s lets you subtract the pickle and lettuce. The trick is to standardize and make more efficient the things that don’t matter much to the client and customize the things that do. Knowing what to standardize and what to customize, though, requires a relationship.
Philip Palaveev is the founder of the G2 Leadership Institute, a two-year leadership and management program that trains and develops the next generation of leaders of advisory firms.
1. This is the paraphrasing of his quote. According to the National Archives, the quote appears in one of Adams’s letters to his wife, Abigail: “I must study Politicks and War that my sons may have liberty to study Mathematicks and Philosophy. My sons ought to study Mathematicks and Philosophy, Geography, natural History, Naval Architecture, navigation, Commerce and Agriculture, in order to give their Children a right to study Painting, Poetry, Musick, Architecture, Statuary, Tapestry and Porcelaine.”