The financial advisory business is dramatically changing. While the transformation is apparent, in many quarters the changes are relatively slow-moving, making them easy to ignore. But why would so many, from broker-dealer senior executives to custodians to financial advisors, want to ignore what’s going on? Simple. It is the effective end of their careers.
But for those professionals who understand and embrace the changes, there are tremendous opportunities to excel. The changes will offer them the potential to deliver incredible value to clients, and that will translate into substantial success and personal wealth for them.
However, it is very clear that those more visionary professionals are in the minority. And the changes will push a large percentage of advisors out of the business. Among those who remain, many will have lesser roles (with lower incomes).
Drivers Of Change
Quite a few things are hastening the changes in the industry. Private wealth patterns are shifting throughout the globe, putting greater pressure on financial advisors to perform at higher levels. The shifts are also pushing down their fees. For example, more erudite clients are increasingly questioning the value they receive for their cost of services. The ultra-wealthy (those with a net worth of $30 million or more) are inclined to negotiate their expenses.
Currently, the two biggest harbingers of change are commoditization and technology—particularly when they overlap.
Take a moment to consider what services or products any high-quality financial advisor can provide to a client that other high-quality financial advisors cannot. Think of how many top-notch financial advisors have access to the same array of services, such as estate planning and charitable-giving strategies or investments running the range from traditional products to alternatives. Comparable products are always available that can produce equivalent results.
In reality, any differentiation you offer in your services and products is strictly a function of marketing; it’s not inherently about your unique capabilities.
Without question, in the near future financial advisors’ offerings will be entirely commoditized.
The other major change in the industry has been forged by technology. Intermediaries are being pushed to the side as clients turn to things like robo-advisors. The robo model will only become more sophisticated, taking on financial and estate planning capabilities. Not only will it take clients away from financial advisors, it will slowly, almost imperceptibly, lower their fees, and by extension lower their earnings and income.
Advisors can turn to artificial intelligence to stay employed longer, but many of them will become mere adjuncts serving the technology, which will be commoditizing whatever unique financial services and products they offer.
With more demanding clients, technological advancements and commoditization, the core issue is: “What value does a financial advisor provide his or her clients?”
The Human Element
More than financial expertise, the financial advisory industry is already much more about the human element. Going forward, this will play an even bigger role.
The human element is the psychological and emotional component of financial advising—what allows financial advisors to truly connect with clients in order to determine what sincerely matters to them. It is about delivering exceptional value in accord with the wants, needs and preferences of clients. That means understanding how the various financial strategies and products impact the people involved. The client agendas should determine the ways technical proficiencies are brought to bear.
The human element is already a critical differentiator among financial advisors, and it will become the only differentiator eventually.
It also entails being able to effectively communicate with clients—being empathetic and then expertly framing concepts and recommendations.
The human element, just like technical expertise, can be learned. While certain psychological attributes such as a deep curiosity and real concern for others should be part of the psychological makeup of financial advisors, the micro-skills and methodologies that produce strong rapport can be studied and mastered. These things are essential in building meaningful financial advisory practices.
Stress-Testing
With the super-rich, it’s important to stress-test advisory products and services—to understand and evaluate them in a systematic way to make sure they will hold up in different scenarios and deliver the expected results. This is important for advisors looking to work with more affluent and accomplished clients.
Take, for example, a billionaire family that had all their wealth planning tested. A team of specialists, under the supervision of a coordinator, was brought together to conduct the evaluation.
Quite a number of faults can be unearthed this way. Some of these faults will be technical. Sometimes the plans have become dated. Or sometimes the professionals did not accurately understand what the family wanted.
In this case, the family’s youngest son—currently 6 years old—would, on turning 12, receive an inheritance of slightly more than $250 million. Not many families would hand over a quarter billion dollars to somebody that young. A stress test found that two numbers were transposed: The will should have read that the son would inherit the fortune at age 21.
Beyond that, how many families would entrust $250 million even to a 21-year-old, when that person is only 6 today? Some extremely wealthy families might, but this family was appalled by the idea. Evidently, there was a serious breakdown in communication between the family and the advisors.
After the stress test, the family’s wealth planning was dramatically adjusted and updated. At the moment, it is currently tightly aligned with the family’s agenda. It delivers the framework and structure for creating a dynasty, all the while insulating family members from losing wealth through taxes and litigation.
Stress testing is appropriate for most any client, regardless of wealth. But it’s important to focus on the human element, as opposed to focusing exclusively on the technical aspects.
The Winners
Financial advisors who can build optimal professional relationships with clients are likely to be the ones excelling in this fast-changing advisory world. This is not to say that the highest levels of technical expertise are not important. They are. But technological advancements will level the playing field for your competitors, making the entire gamut of financial services and products available to them.
What does this mean for the financial services industry? The answer is simple: There will be fewer advisors. But those that last will garner greater success.
Such professionals will have the knowledge, skills and insight to use financial solutions to effectively address the concerns and anxieties, the hopes and dreams of their clients. These financial advisors are the ones putting the human element front and center. For the results they produce—results that truly matter to their clients—they will be compensated quite well. In fact, even with a reduction in the fees commonly charged today, these advisors will be more profitable than ever before.
Russ Alan Prince is president of R.A. Prince & Associates.