Category: Advisor Perspective

Playing it Safe is Risky

The law of unintended consequences is defined as the actions of people (especially governments) that will usually have an unanticipated impact. In fact, the harder we try to achieve something quite often the exact opposite occurs. In the investment world it is very hard to foresee outcomes beforehand, so the final results can sometimes be surprising.

Some of the greatest investing blunders of all time came from the consequences of unforeseen events. Since one of the primary objectives of investing is to grow your wealth, unintended outcomes are very dangerous to investors’ future wellbeing. While the traditional culprits for potential disaster are “get-rich-quick” schemes or penny stocks, a historically safe harbour is slowly entering the lexicon of potential problems for many investors; bonds.

Traditionally, bonds have been seen as safe, low risk investments and the principal means of preserving wealth. They are also viewed as being an excellent way to diversify your portfolio. While this is normally true over the long run, there are distinct periods where bonds have been simply ineffective at building wealth. Considering today’s very low yields and increasing interest rates, investors’ returns on bonds after inflation, fees and taxes, are minimal. So, unless investors are comfortable with only the safe harbour feature of bonds and unconcerned with the less than stellar return opportunities going forward (or you have more money than you need), the only realistic solution is to hold a higher weighting in equities.

For the vast majority of investors, a balanced approach to asset allocation is normal. Historically, as clients age and approach retirement, they become more conservative and seek safety. Traditionally, this has meant more bonds and fewer equities. This is exactly the wrong approach for efficient portfolio growth or to even maintain the purchasing power of assets given inflation. However, this way of thinking is completely opposite to most aging clients’ mindsets of protecting what they have achieved over their lifetime. So a battle is brewing between the markets and peace of mind and unfortunately the markets are always right.

Retirees or near-retirees are scared to death of losing the value of their assets so they have in the past shifted the majority of their assets into GICs and bonds for “safety”. Of course, for the first few years of retirement this works fine. However, with the steady onslaught of inflation, fees and taxes they are slowly dwindling their nest egg. With people living longer and spending more years in retirement the probability of running out of money increases. The decision to become safer has made them less safe and has created a whole new level of risk; running out of money.

There is no such thing as taking no risk. There is only the choice of which risks to take and when to take them. The risk from owning bonds shows up later in your investment life, while the risk of owning equities can show up earlier. Without assuming risk, meagre results are all that is left to investors. In fact, there is a famous quote from Benjamin Franklin that summarizes this nicely: “those who give up return for security deserve neither return nor security.”

While bonds in the near future are not likely to be wealth builders, they are however necessary. The question is: how much? They do dampen volatility during downturns and are an excellent source of liquidity. Also, since investing often comes down to an emotional decision rather than an analytical one, bonds can act as a form of insurance against panicking when things turn ugly in the markets.

With this situation bearing down on all investors, we have created an entirely new fixed income investment structure that benefits from the strengths of bonds (risk reduction) and the benefits of equities (potential for higher returns). The Provisus Multi-Strategy High Yield Fixed Income Fund is designed to target the risk of short term bonds, but generate greater performance. It attempts to provide an attractive cash yield and stable returns, while investing in a broad range of non-equity assets: corporate bonds, convertible bonds, preferred shares, income trusts, REITs, mortgages, secured real estate backed lending, infrastructure products and alternative investment strategies.

It keeps fees client-friendly using the Pay-for-Performance™ model with a fixed annual management fee of 0.25% (which is less than the pro-rata average MER for all the fixed income ETFs in Canada, 0.28%) plus a performance fee only if the fund outperforms a pre-set benchmark (50% FTSE Short Bond Index and 50% FTSE Mid Bond Index). This fee philosophy provides a very strong incentive for the fund to achieve positive results for clients. In this day and age, it may be one of the few solutions available that plays it safe but still generates meaningful returns.

Advisors need to counter growing threat of robo-advisors

As new research shows robo-advisors are gaining traction among clients, advisors should find ways to use these tools as well as provide the unique services that set them apart.

As robo-advisors present a growing threat to traditional financial services firms, financial advisors should find ways of using these tools in their practices and focus their efforts on services that cannot be replaced by technology, according to several investment industry insiders who spoke at the Independent Financial Brokers of Canada’s (IFB) Spring Summit in Torontoon Thursday.

“[Robo-advice] is going to become more and more prevalent,” said Chris Ambridge, president and chief investment officer at Provisus Wealth Management Ltd. and president of Transcend Private Client Corp., an online platform and a subsidiary of Provisus, both based in Toronto.

Ambridge pointed to recent statistics from Strategic Insight showing that assets under management at Canadian robo-advisors jumped by 44.6% to $1.07 billion at the end of the first quarter (Q1) of 2017 from $743 million in the fourth quarter (Q4) of 2016. During that same period, the number of accounts surged by 56.1% to 46,149 from 29,572, while the number of clients rose by 55.2% to 33,757 from 21,752.

The size of those accounts, however, is shrinking. At the end of Q1, the average account size was $23,274, down from $25,126 in Q4 2016.

Nevertheless, research suggests that a growing number of clients are choosing robo-advisors over traditional advisors. Ambridge presented the results of a recent survey showing that 30% of investors believe robo-advisors do a better job than human advisors, and 72% of clients under the age of 40 said they are comfortable working with virtual advisor.

But it’s not only millennials who are making the switch. The average age of a robo-advisor client is 44, Ambridge said: “You would think it’s all millennial people who are just starting off, but it’s not.”

In addition, the survey shows that of the affluent clients who had switched firms in past two years, 45% went to a robo-advisor.

The shift to robo-advisors is being driven in part by consumers’ growing preference to transact digitally, but also by a lack of trust in the financial services sector, Ambridge said. In fact, 70% of the clients surveyed said they question the trustworthiness of financial services professionals.

“Trust in financial services is not at an all-time high,” he said. “In fact, it’s pretty low, quite frankly.”

For advisors, this means that taking the time to build solid relationships and earn clients’ trust is more important than ever, Ambridge said.

Instead of viewing robo-advisors as a threat, advisors should focus on the factors that differentiate them from those online services, countered Ron Fox, chairman and CEO of Toronto-based Glidepath Portfolio Services Inc.

“The human financial advisor is not going anywhere,” he said. “Technology cannot replace you, because the reasons why people value your service have nothing to do with technology.”

Specifically, technology could never replace the empathy and reassurance that clients get from their advisors Fox said. However, he noted that advisors can use technology to improve the services they provide.

“Technology is facilitating customized and enhanced levels of service that weren’t accessible to most in the past,” said Fox.

Specifically, advisors should utilize technological tools to help with tasks that can be done more quickly and more affordably by computers, such as asset allocation and systematic portfolio rebalancing, Ambridge said.

“Don’t spend a lot of time on things that computers can do better,” he said. “All you’re doing is wasting your time.”

That allows advisors to focus on the value-added personalized advice that computers cannot offer, such as comprehensive financial planning, tax planning and helping clients build a legacy, he said. Advisors should also strive to offer a variety of different asset classes and products to differentiate their offerings from those available online.

Embracing technology to automate some of the administrative tasks that previously consumed advisors’ time and resources can also help advisors be more profitable, added Robert Frances, chairman and CEO of Montreal-based Peak Financial Group.

By Megan Harman | June 01, 2017 15:20

Repel the Robo Horde

The investment industry continues to experience seismic shifts that do not appear to be abating any time soon. Besides the seemingly never-ending onslaught of compliance macerations, we have the evolving battle between active and passive investment management.   Also, advisors are increasingly competing with a new and emerging adversary – robo advisors, the “next” devourer of the advisory business. 

Smart advisors should not ignore this threat but instead move to either join the trend or beat the robos at their own game. First advisors need to understand what they are up against. Robo advisors are really just a low cost vehicle that promises to remove the human emotion from the investment process. As research has shown time and again, individual investors have been their own worst enemies, so automated assistance could appear very attractive. But the robos principal strengths (i.e. attractive interface and simplistic automation) are also their biggest flaw because they are inflexible. 

Clients don’t know what they don’t know. Wealth management is not their focus or expertise so they don’t know what questions to ask and robo advisors are generally not very helpful in this regard. They simply cannot offer the personal touch necessary (or if they can it is seldom from the same person each time; similar to your local bank branch).

Robo advisors are starting to sprawl across the world. They are multiplying with increasing speed as financial firms see the opportunity for easy pickings and the chance to get in on the ground floor of a new disruptive service. However, much like Lemmings seeking new pastures to inhabit, the robos’ journey, well-intentioned as it may be, could lead to a very unhappy ending for clients that join them on their pilgrimage.

While it is generally true that robos are “perceived” to be cheap and have simple processes, that is not the be-all and end-all. Something called “value for the money” plays an integral role in the satisfaction of a client’s experience. For many clients value is generated by the care and concern that come from human advisors. In fact, the value of human touch was supported by a 2016 Gallup survey, “Robo-Advice Still a Novelty for U.S. Investors”, where people were asked to rate which qualities were more applicable to robo advisors or human advisors. Unsurprisingly, human advisors outranked robos in nine out of 10 qualities as shown in the table at the bottom of this page. 

Robo advisors essentially try and use the same approach that investment professionals use to aid them in their investment decisions. The main difference lies in the manner in which a client’s money invested; robos merely utilize the algorithms to invest client’s assets. They lack the ability to assist customers with their tax, retirement, and estate planning needs. As well, the robo model has worked fairly well as long as the stock markets keep going up. But declining markets could adversely affect clients of the index-pegged robos. And like the Lemmings, robos could just lead their clients into even deeper water as they struggle to overcome bear market volatility. 

Traditionally, the size of an investment portfolio was directly proportional to the quality of the advice provided. The robos continue this tradition.  However, this reality has opened the door for new and superior services like the Transcend Pay-for-Performance™ platform that assist advisors with low cost, alpha generating strategies. In the long run, traditional advisors will likely co-exist with robo advisors; but too much machine and too little human touch will not ultimately win the day.

Human advisors vs. Robo advisors table

Out Empathize the Robos

While you are reading this there is a good chance that a new digital platform claiming to be able to manage your portfolio for a fraction of the cost just popped up. These ubiquitous, low-cost robo advisors get a lot of press, but most affluent investors aren’t willing to entrust their wealth to an algorithm based on a handful of questions and then trust a computer to manage their money.   What is it about human advisors, even at higher costs, that are appealing to affluent investors?

A study by Vanguard, “The Added Value of Financial Advisors” illustrates how a good financial advisor “may add 3 percentage points of value in net portfolio returns over time.” Portfolio construction, wealth management and, most importantly, behavioral coaching are where the value is added. This highlights the human element of financial advice.

While it was a savvy marketing move of the direct-to-consumer robos to define themselves as advisors, they are basically self-directed investing platforms.  As computer algorithms, robos can’t solve behavioral issues that concern clients when opening their accounts.  Anyone employing a robo advisor for advice will be told to invest all they can, no matter what their personal circumstances, as their product offering is solely focused on investments.

Robos only ask about your preferences for investing and do not consider your financial situation.  For example, if you have debt through credit cards or student loans, good advice might be to pay down that debt before investing in the markets yet you will not hear that from an investing algorithm.  Robo-advisors are merely providing an asset allocation service and not holistic financial advice.

A robot cannot possibly empathize with your worries and concerns while a human advisor can address your questions and have meaningful discussions to act as a guide or a behavioral coach.  You can’t have a valuable discussion with a robo advisor about the effects of a Trump Presidency for your investments.  Or ask as a retiree if you should take CPP payments early or convert your RRSP to a RRIF before age 71.  There is no right or wrong answer that can be given without considering your circumstances, behavior and emotional state.  Only a human can empathize with you to provide the best advice for your particular situation.

The role of a financial planner is to help the client change their behaviors when necessary to navigate the emotional journey of long-term saving. Robos lack basic human characteristics, especially the ability for listening, understanding and empathizing, which make a human advisor attractive for the affluent.  People need to feel heard and understood before they are willing to take someone’s advice about how to change their behaviour and those feelings of connectedness are an exclusively human-to-human domain.

Empathy is about putting ourselves in someone else’s shoes and being able to consider their perspective in order to formulate the right response. Only a human can have empathy, or the ability to discern what someone else is feeling.  This gives a human advisor the best ability to respond in the most appropriate way.

With the trend of robo-advice growing, advisors need to transition from “knowledge workers” to “relationship workers.”  We have nearly a decade of research that tells us when a financial advisor empathizes with clients and develops social relationships their clients rate the advisor’s performance at a higher level. The more affluent clients hear about fees and robo-platforms, the more financial advisors need to personalize the advisor-client relationship. Advisors who personalize the relationship while delivering professional excellence get three times the introductions and referrals as those with only a business relationship.

As an advisor use your natural, HUMAN abilities of listening and empathizing to deepen your relationships with clients and you will never need to be concerned about the rise of the robos.

Fiduciary Duty to Clients is Coming

The imposition of a fiduciary standard on financial advisors in Canada is looking more likely. Higher standards are already in effect in the U.K., where all registrants must act honestly, fairly and professionally in accordance with the best interest of their clients, and in Australia, which has a qualified statutory best interest standard 

More recently, a financial media firestorm erupted in the U.S. as their Department of Labor (DOL) released the final version of its Fiduciary Rule that will impose a best interest standard on those providing advice with respect to many retirement plans. Some have wondered why the Securities and Exchange Commission has been missing on this file. The reason is that the DOL oversees employee savings plans and they have been proactive in managing apparent conflicts of interest among brokers who were advising on the rollover of employer managed plans to broker-managed accounts. The equivalent in Canada would be an advisor advising on a Locked-In-Retirement-Account (LIRA) which had previously been managed by a portfolio manager. If and when the fiduciary rule survives several legal challenges, the small and midsize 401(k) plan market stands to be revolutionized in the U.S. 

The new regulations will likely accelerate a number of challenging trends that advisors are facing, not just in the U.S. but in Canada as well. Morningstar, a Chicago-based rating agency, has thoroughly studied the effect of these new DOL rules and concluded that they will drive three primary trends. Firstly, it will shift customers away from commission based arrangements to fee based ones; Secondly, robo-advisers will likely pick up a large percentage of the $600 billion in low-net-worth IRA balances in the U.S. that are now being managed by full service wealth managers; Lastly it could lead to a significant increase in the use of passive investment products.

In October of 2012, the Canadian Securities Administrators (CSA) published a number of reports beginning with a Consultation Paper, The Standard of Conduct for Advisers and Dealers: Exploring the Appropriateness of Introducing a Statutory Best Interest Duty When Advice is Provided to Retail Clients. The CSA has taken the view that the current Canadian registrant regulatory framework requires improvement and seeks to introduce a fiduciary standard in order to address issues they have identified in the client-registrant relationship, “including to better align the interests of registrants with the interests of their clients, to improve outcomes for clients, and to clarify the nature of the client-registrant relationship for clients.”

According to the financial press there is some apprehension among non-fiduciary advisors that their reputation may be tarnished if they are perceived as acting in their own interest.  The requirements may cause an unintended focus on fees, particularly as the media has demonized the practice of charging commissions and deferred sales charges (DSC). Although it isn’t the intention of the regulations, some advisors may find themselves forced into a fee-based compensation structure and a relatively limited product selection. Advisors are divided on the implications for investment management fee structures, as those who are already fee-based see the new rules as formalizing an inevitable market shift and some commission-based advisors are concerned that commoditizing their services puts them at risk of being undercut by cheaper automated advice services. The impact of technology, irrespective of what happens on the regulatory front, will continue to make it cheaper and easier for investors to get investment advice that’s not conflicted.  That is a trend that will have a big impact on the investment industry over time. 

The reforms under consideration also include amending rules to require firms and advisers to respond to identified material conflicts of interest in a manner that prioritizes the client’s interest, increases the requirement for an adviser to understand a client’s financial circumstances and risk profiles which may be extended to better quantify loss aversion, and limiting titles that can be used by advisers. Advisors are also concerned about the burden of internal scrutiny and compliance due to the increasing volume and scope of regulations which is leading to a feeling of being monitored rather than supported by their firms. At the end of the day, the burden of having to document all aspects of the advisory consultations could add an unintended toll on an advisors’ ability to work effectively on behalf of their clients. Both the proposed targeted reforms and proposed regulatory best interest standard, if introduced, would apply to all advisers, dealers and representatives, including those who are members of IIROC and the MFDA.

With so much at stake the CSA has sought further comments on the proposed regulatory action. They have confirmed that no final decision on the implementation of a best interest standard will be made without a thorough review of the comments received following their recent public consultation and discussion. The most recent comment period closed on August 26. Even within the CSA there have been concerns about the proposed legislation as the BCSC noted, “given the current regulatory and business environment, imposing an over-arching best interest standard may not be workable and may exacerbate one of the investor protection issues identified, that being misplaced trust and over reliance by clients on registrants. Further, the introduction of a regulatory best interest standard over and above the proposed targeted reforms is vague and unclear and will create uncertainty for registrants.”  This leaves open the possibility that some provinces, most notably Ontario and New Brunswick, may proceed with best interest standard legislation on their own.

Build a Compelling Value Proposition

The Canadian investment advisory landscape is being overwhelmed by the challenging circumstances of diminishing fees, increasing regulation and industry consolidation.  Issues like these are putting intense pressure on independent advisors to find their place in this evolving environment. One way to help sort through the data is to look at potential clients in terms of how they seek advice, identify which of these client types best suit your style and then draw up a value proposition which aligns your skill set with the appropriate target clients.

Clients who are looking for investment advice generally fall into three categories; selective customers are in the majority and they look for qualifications, affiliations, products, track records and/or fee levels; traditional customers usually choose an advisor based on a referral or personal recommendation; and assistance seeking customers are those who know what they want but need help to complete the process. It is this last category which is likely the most underserved in the market as there are many tech-savvy individuals who are not familiar with how to put together a comprehensive financial plan. Assistance seeking customers are less fee conscious as they generally understand the value-added benefit of being guided through a challenging process.

Historically, investment management firms have used a one-way style of advertising to promote brands and products. Technology and social media are changing how customers consider their options. To some extent technology is commoditizing the investment services industry but at the same time allowing consumers to find more detail and focus on product benefits and prices. This opens up opportunities to get ahead of the competition and engage customers in a new and relevant way.

Given the rapid changes brought about by social media, advisors have to rethink their role. A key way to do this is to determine the type of client an advisor is best suited to work with and set out a value proposition for these clients stating what they are uniquely able to provide to this target market. In this example there are five steps to putting together a value proposition: first, who are the target clients; second, what is the problem these clients need to solve; third, what can be offered; fourth, identify how this solves the problem; and lastly, contrast how the solution is an advantage over the alternatives.

Using these five steps, an example value proposition could be to target assistance seeking clients. The target can also be narrowed down to clients within a profession such as engineers or doctors. The types of problems that need to be solved could range from thinking their account size is too small for an advisor, to not fully understanding the products they have researched online. The product or service that can be offered as a solution will be determined by each advisor’s affiliation and expertise. The solution can then be evaluated to determine how it solves the problem and its advantages.
Putting it all together, an example of how an advisor can compose a value proposition to help clients in today’s disruptive environment could be; “The goal of my business is to assist small business owners who are computer literate but need guidance in setting up an overall financial plan. My familiarity with drafting Investment Policy Statements, access to a wide range of investment options, and my technological expertise will help my clients develop a financial plan that is otherwise challenging and inefficient for these clients to do on their own.” With such a plan in place, an advisor can then use social media to be identified as a targeted specialist and a sought after solution provider.

Act, React or Just Plan Ahead

Most investors have a consistent and orderly life so it is somewhat surprising that the current choppiness in the markets would trigger investors to want to alter their portfolios or make even more far reaching changes. Volatile market conditions may prompt investment changes, but giving into temptation and responding to short term circumstances should be avoided at all costs. Volatility is just a normal part of investing and if anything is going to be done it should be to re-assess, re-affirm and ensure your clients goals and objectives are accurate.

Although the basics are mother’s milk to most seasoned investors, they bear repeating: focus on asset allocation as it is the most important investment decision your clients will ever make; use high conviction active managers; pragmatically diversify investments with an emphasis on reducing downside risk; ensure the cost and implementation structure is efficient and disciplined; and avoid the latest fads and flavour of the month as your clients’ portfolios are meant to last for years.

One item that is overlooked or deliberately ignored by most investors is the concept of asset consolidation. It is commonly believed that for every dollar clients have with one advisor they have three elsewhere. However, creating a streamlined and efficient portfolio will benefit clients on many levels. Clients use multiple advisors for many reasons but persuading your clients to consolidate their holding will significantly help them meet their investment needs both today and for future generations. The list of benefits for clients is just too lengthy to ignore but include the following.

Asset mix: Consolidation can help manage the asset mix and limit duplication of holdings. It provides a clear picture of the client’s total holdings. Multiple advisors could lead to dangerous levels of concentration of holdings and poor tax efficiency as the household assets are managed for divergent purposes across different providers.

Simplicity: Get a better view of your client’s overall situation. Multiple advisors means multiple statements, multiple solutions and usually multiple (and likely diverging) points of view of the current state of the market and the future outlook. All of these could lead to a great deal of confusion for all but the most astute clients.

Service: In a perfect world all clients are treated equally. Unfortunately larger clients tend to get better service so having multiple small accounts would likely mean clients would get less than the optimal attention at each institution. Consolidation would overcome this issue.

Reducing Risk: In the past multiple advisors were a way to diversify risk. But in reality excess diversification comes at a great cost because it increases the likelihood of having index–like portfolios but paying active management fees. This is a recipe for guaranteed underperformance.

Savings Fees: Clients often pay lower fees when they consolidate their assets. Since it is not possible to guarantee investment returns, ensuring the best potential results is only possible by minimizing fees and taxes.

Creating a Plan: A major flaw of most financial planning analysis is the need to use expected return numbers. If there are duplicate portfolios across multiple firms then determining potential future results becomes a difficult challenge.

Managing Cash Flow: To obtain a complete picture of a client’s financial situation the advisor needs to understand their total level of income earned. This can be difficult to manage across multiple investment accounts.

Estate Planning: Having investments with one firm will simplify estate planning and administration for navigating the increasingly complex probate process.

Monitoring Performance: Comparing the performance of multiple providers is difficult unless there is really a true apples-to-apples comparison, which is seldom the case. It is easier for clients to understand how their investments are performing when the assets are consolidated.

Better Clarity: Knowing the entire financial picture provides clients with a customized and personalized service. For example, if the registered and non-registered accounts are at different firms, tax minimizing asset mix based opportunities become difficult to achieve. As well, consolidation would limit the confusion and number of tax receipts each year and likely reduce the client’s accounting fees for completing complex income tax returns.

For advisors the opportunities for increasing assets and strengthening relationships with clients is very compelling. Recent retirement demographic trends and the potential wave of money that will be released as the inter-generational transfer of assets gathers steam, will drive the need for clients to consolidate their wealth. The objective should be to plan ahead and act now. Simply reacting at some point in the future will likely cause the rewards to slip through the current advisor’s fingers and into a competitor’s hands.

Adapt or be Cast Aside

As clients evolve, they are steadily becoming more financially literate and aware. At the same time they are becoming less trusting and more loathed to be left out of the financial decision making process. All of which will put more and more pressure on financial advisors to adapt and that is when the big challenges begin. Advisors will need to admit to themselves that they cannot continue to operate in the same old way.

The handwriting is clearly on the wall as study after study delivers the same hard truth: change is coming. A study conducted by AT Kearney showed that approximately 50% of the clients surveyed said that they had some interest in using robo-advisors to manage their accounts. A Cap Gemini survey indicated that 64% of affluent clients expect their future wealth management relationship to be digital. Additionally, 65% of these clients will leave their current advisor if an integrated digital experience is not offered. A recent Gallup poll indicated that nearly two of three investors preferred to get financial advice from both online/digital sources and from personal financial advisors. A report by Accenture shows that investment into financial technology tripled in 2014 to US$12.2 billion versus 63% growth in overall venture capital investment, catapulting the digital revolution into the financial services industry at an unprecedented rate.

If these scenarios do actually come true then advisors will need to adapt or become irrelevant. Advisors that fail to react will face severe challenges to their future profitability and growth because change is not optional. Competition will force advisors’ hands. To compete successfully advisors must differentiate themselves, otherwise they will have to compete in price to win or retain clients. So a unique identity will be imperative, to clearly define in the client’s mind a distinct value proposition that helps advisors stand out in a very crowded market.

Advisors need to focus on their core competencies and outsource non-essential processes by streamlining back office and portfolio management activities; and rationalizing services offered where they do not have the necessary skills to meet client expectations. Compliance is an absolute cornerstone of any advisor’s practice, so a sound business model and sound operational processes are non-negotiable. However, in the coming challenging regulatory environment, even this can largely be outsourced or structured to provide opportunities to enhance profitability and ensure growth.

No longer will the product push model lead to successful results. Advisors will need to focus more on solutions that deliver enhanced services. Solutions that meet a client’s personalized goals and objectives will be most highly regarded. Emphasis will have to be placed on delivering customized solutions. By shifting to a flexible service based practice, visionary advisors have an opportunity to benefit from new innovation and provide excellent client satisfaction.
At the end of the day, meaningful growth will only be achieved by embracing change. Advisors need to identify and efficiently exploit niches through specialization and differentiation. If advisors can deliver a unique service platform, successfully build a distinct brand and provide world class communication they can avoid becoming irrelevant. Advisors need to embrace change to win the battle because change is constant; and like sharks, if you are not moving forward then you are going to drown.

Advising the Financial Advisors

Financial planners and brokers are in dire need of advice.  Our industry is going through unpresented changes (some would say attacks) which is a very real threat to current business models.  Without giving it much thought you could list several ways your practice is being threatened.  Regulatory burdens, fee challenges, proficiency requirements, product restrictions, compliance demands, lower cost competitors like robo-advisors and CRM 2 are common examples.  With so many factors potentially affecting the way you run your business, what do you need to do to survive?

Innovation and adaptation are the key determinants of whether a financial planning practice will be able to survive.   Those who are either unable or unwilling to explore alternatives will be left in the dust like the dinosaurs (or stockbrokers).  So what is the first step to ensure your practice not only survives but thrives?

Seek advice:

Curiously, those whose profession is based on providing advice are some of the worst at recognizing their own need for it, how to seek it and how to apply it.  There are three main reasons why advisors are hesitant to seek advice.

Thinking you already have the answers:

Successful advisors need to have confidence in their own abilities to come across as experts.  Our interaction with clients depends on this.  If you have doubt in your abilities then you won’t persuade someone to trust you.  While this characteristic is necessary for success, overconfidence can be self-destructive.  Many advisors feel they don’t need to reach out for advice, or do it half-heartedly, believing they know what is best for their business.

Choosing the wrong advisers:

While some advisors can be applauded for seeking advice, often it’s not actually advice they seek.  They seek like-minded advisers, failing to understand the expertise they need. What they are really seeking is a figurative pat-on-the-back from a like-minded colleague who brings peace of mind by reassuring their perspective.

Discounting advice:

After receiving advice, too often we fail to act on it.  We tend to undervalue it by giving more weight to our own perspective.  When the advice given breaks from our norm, we’re skeptical.  It is only natural to have more confidence in what you think you know than the possibilities offered by others.  The more successful a financial planning practice is, the more likely it will get trapped in a certain operating mindset that prioritizes efficiency of current procedures at the expense of innovation and exploring alternative solutions.

The basic issue confronting a business is the delicate balance between focusing on existing processes to ensure its current viability while simultaneously devoting time to exploring possibilities to ensure its future viability.  Sadly, most advisors are too focused on running their practice based on what has worked for them before that they lose sight of where the industry is going and what is needed to position themselves for sustained success. It’s funny that they don’t recognize this truism while explaining to their own clients that previous performance is not indicative of future success.

How does an advisor know if they are running their practice to the best of their abilities in the most efficient manner making the best use of their time and resources?  How does an advisor decide if they should go independent, if they should be licensed, if they should offer more products as solutions, if they should outsource unproductive responsibilities, if they should modify their book, if they should change their business model, and many other considerations?  By proactively seeking advice.
As Charles Darwin said, it is not the strongest of the species that survive, nor the most intelligent, but the one that is most responsive to change.  The firms that can best adapt to changing market conditions will be the ones to thrive in our new environment.  To ensure that you’re aligning your practice with solutions that guarantees your survival it’s vital to seek advice and understand the industry landscape going forward.  Seeking advice from a qualified industry expert, understanding it, and taking action on whatever decision you make will be essential for overcoming threats to your practice.

Change a Practice into a Thriving Business

Many advisors are not actually considering selling their book, but they are interested in making their practice more efficient by reducing costs, and of course increasing their profitability. How can this goal be achieved without sapping the character out of your practice? To accomplish this goal, advisors must be willing to do their homework and take concrete steps to change their practice into a thriving business.

In the U.S. more than half of all advisors are solo practitioners who work directly with their clients. Based on a 2014 Compensation Survey conducted by, 47% of the respondents work alone and a further 20% were a part of a branch but have very little interaction with the other advisors in the office. In fact, only 33% of advisors actually work in teams and are diligently building a business in conjunction with their colleagues. These statistics appear to be similar to the composition of the Canadian investment advice industry.

There are any number of reasons why solo advisors feel the need to expand out of their current structure and seek like-minded partners: they run into capacity constraints and cannot service additional clients; as clients become more sophisticated they are seeking better portfolio management, or technology, or planning assistance; the industry is quickly consolidating and competition is becoming more intense; and there is the ever present question in the minds of clients as to how long you will be around to personally service their needs. So the question of finding the correct solution for your needs is not really a question at all but an absolute necessity.

In the past many advisors have been prevented from expanding their business because they have not been able to find the right partner; they insist on controlling all aspects of their practice; and after enjoying business life a certain way it is hard to adapt. However, as the old adage goes partnerships are like a marriage, never rush in and always wait for the right one. Establishing the correct partnership will make your life so much better but the wrong one could degenerate into an endless cycle of bickering.

A partnership can take on many forms, from the traditional joining of two solo practices to outsourcing certain functions that lead to synergies between both parties to the outright sale of your practice over time. In the end, partnerships come down to trust, respect and a compatible vision to see the combined business being better in the future. Unfortunately, Newton’s First Law of Physics always seems to apply in these types of situations; inertia.  A body remains at rest or continues upon its same path, unless acted upon by an external force. Certainly, most advisors do not need a bolt of lightning to get them going, but some old habits do need to be overcome.

Once that spark does occur, whatever it may be, the need to transform your practice will become an unrelenting force. From this point there are many decisions that must be made because transformations are complex and risky. While finding the right partner and getting to know them will require many questions, it is a vital step forward. The ultimate issue will be ensuring that the beliefs, values and goals that drive you as an individual can be maintained in your new partnership. Otherwise it is doomed to fail.
While the evolution of an advisor’s practice has the potential to be tremendously valuable, create economies of scale and pave the way for succession opportunities it can also be highly disruptive as well. Fortunately advisors do not need to surrender control in exchange for resources and support; they just need the right partnership that allows them to continue the good work they have been doing thus far in their career. All it really takes is the desire to move forward.