Fee-based: You Can Get There From Here

Since 1995, I have spent a great deal of my time trying to convince advisors that transitioning a book of business from a primarily commission-based model to a fee-based model was not only in their clients’ best interest, but theirs, as well.

We discussed the benefits of transitioning, such as:

• A consistent revenue stream for their businesses

• A consultative relationship with their clients (instead of a sales approach)

For many advisors, the desire is there to transition. It’s the idea that seems daunting, when you consider mapping out a plan, selecting a platform, and (especially) discussing the switch with clients. What you need is a “how to” guide to get from idea to implementation.

Help is on the way

Chances are, you have thought about transitioning some or all your business to a fee-based model, but don’t really know how or when to start. The good news is that next week, I will be hosting a webinar with Chris Rice, called, “The Why and How of Having a Fee-based Practice.”

Chris is a 15-year veteran of SEI and specializes in working with advisors who are making the transition. He and his group have helped hundreds of advisors and can give you the “plan” to help make the change.

Chris and I will have a candid discussion about:

• The benefits of converting your book

• Eight steps to making the conversion

• Knowing your value and the breakeven per client

Whether you’ve already converted part of your book, or you are completely commission-based, this webinar has tips and tactics for you. And, there’s never been a better time to listen.

Join Chris and I this Monday at 4p.m. EST

Register Now:  https://info.seic.com/servlet/formlink/f?kLpJQBAUB

Image Courtesy of FreeDigitalPhotos.net. 

Is It Time to Reboot Your Approach to Clients and Prospects?

Last week, I presented to a fairly large group of successful advisors at the annual SEI Strategic Advisor Council meeting. One of the points I discussed was “the coming intergenerational wealth transfer.” To make it a bit more challenging, the event had a western theme (the meeting was in Dallas, after all), and each presenter was asked to share his/her favorite western movie as a way of introducing themselves and showing a more personal side.

But which movie to pick! My mind went back to some of the most classic western movie scenes:

• Gary Cooper’s eyes and expressions as the clock ticked in High Noon 

• “We don’t need no badges!” from The Treasure of the Sierra Madre

• And of course, cowboys around the campfire from “Blazing Saddles” (no way I am adding a link to this one!)

But what about the new westerns? When considering which movie to share, I was actually caught between the old classics and some of the newer “reboots” that have come out. Movies that have been updated and retold like:

• 3:10 to Yuma, with Christian Bale and Russell Crowe

• The Coen Brothers version of True Grit, which received 10 Academy Award nominations

After giving it some thought, I realized that the movie analogy of “new versus classic” was perfect for my topic on intergenerational wealth transfer: Making a successful reboot means being in tune with your audience (clients) and understanding their current situation and needs.

First, some statistics on two wealth segments in the US Market

Next Gen prospects are wealthier than most people believe. In fact, according to SEI analysis of 2011 Phoenix Marketing International Data, within the mass affluent, investors under age 50 have 44% of the total assets. That’s nearly half!

When it comes to the high net worth segment, Next Gen investors have over $9 trillion in investable assets.*  And they will only grow wealthier.  Starting now and continuing over the next 30-40 years, trillions of dollars will transfer from Seniors to Boomers and even more from Boomers to Gen X and Gen Y.

Back to our reboot

The next generation of consumer is going to force you to change the way to talk to and meet with them. They will expect clear and transparent value. Think about it the next time you meet with a prospect and take your cue from rebooted movies. Specifically:

• Upgrade technology. Today’s movies aren’t shot on a back lot using fake scenery. They use the most advanced technology available to them. Think about the technology you employ in areas like planning and communication. Is it consumer-friendly? Does it allow you to communicate with your clients in a way they prefer? They are not going to go back to using old technology just because you use it; they will find someone new who understands them.

• Be authentic. The characters in today’s movies are more real, more authentic, and more believable. Today’s prospect is more careful, educated and can sniff a salesman from miles away. If you meet with a prospect and “go for the close” right away, they will know they are being sold. Let them get to know the real (should I say reel?) you, not the salesperson in you. Meet with them in a neutral “non-threatening” location. It is not about the financial markets, but about creating a plan to work together — that’s what they are looking for.

• Change your service model. I watch a lot of movies, but I only go to the theater about once a year (with my kids usually dragging me). Although theaters still do a pretty good business, the real money today is in DVDs, streaming and downloading. Do you really need to meet with all your clients quarterly? Maybe, but I would suggest that your younger clients (Gen X, Gen Y and Trailing Edge Boomer) may be happier with a different service model. If you are doing more “online” servicing, you may need to think about adding in the extras like non-financial newsletters or small-scale social events to keep them engaged and thinking about you.

To remain successful, businesses need to evolve and meet the needs of the new consumer. Think about the changes in the movie industry. From silent to “talkies,” from black and white to color, and now 3D, their business has evolved. Has yours?

Image courtesy of FreeDigitalPhotos.net. 

*2012 SEI Analysis of Phoenix Marketing International Data - PMI Global Wealth Monitor Survey

Styling and Risk Profiling: Time for a New Approach

With the markets near all-time highs, it seems that risk and client behavior are   
being discussed more in the media and by advisors — and with good reason. While most portfolios have recovered to their 2007 peaks, the market meltdown and collapse of 2008 (ending in early 2009) are still very fresh in the minds of both clients and advisors.

I would bet many of you are having volatility discussions right now, as you are conducting your quarterly client service meetings. And hopefully you are also taking this opportunity to do some enhanced profiling of prospects and re-profiling of clients and their attitudes towards risk.

Be averse to the old-fashioned risk profile

Many of us learned risk profiling the old “institutional” way. We pull out a standard-issue firm or fund company form with 10-15 questions that ultimately leads us to decide if the client is a conservative, moderate or aggressive investor. We file that form in the client’s folder as a CYA, and rarely revisit those questions again. There are a few issues with this method:

• Percentages aren’t “real” to your clients

• You’re giving them homework, rather than having a conversation with them

• It doesn’t take into account that different goals have different risks

Let’s take a stab at addressing each of these issues.

Percentages vs. real account value

Many advisors tend to be “left brain” thinkers — you tend to be more logical, analytical and objective. Numbers and complex, critical thinking are your specialty. That is precisely why someone who is more “right brain” may come to you. You can understand the complexities in an estate plan or assist in retirement income planning; you also have a better handle on dealing with numbers.

So, I have an issue when I see the standard:

If the market decreases by 15% over the next three months, would you:

A. Panic and sell

B. Stay the same

C. Add more

I would guess that many of your clients and prospects would answer B, stay the same. They know that is the “right” answer. How do you think they would answer if they saw the question this way?

“With regards to your $1MM portfolio, if the value decreases by $150K over the next three months, would you….”

See the difference? By using their real account value and a real number instead of percentages, I think you can gauge their risk appetite much better. 15% is just a number, but $150K is real money!

Homework vs. conversation

When people have been in business for a while, they sometimes begin to take shortcuts in their processes. Many advisors will send out a “prospect” kit to any new prospects and/or referrals – which can go a long way, if you want the prospect to see your attention to detail and process-oriented business.

The challenge is that if you add a risk profile questionnaire and more investment-related materials, you are boxing yourself in and positioning yourself in a way that may not meet the client’s expectations. It may signal a sales approach instead of a consultative, collaborative-advice approach to your business.

When sending the questionnaire as “homework,” advisors are missing the best part — the ability to ask follow-up questions and have a real dialogue with the prospect. Don’t get me wrong, this shouldn’t be an interrogation, but a real live conversation about goals, hopes, dreams, wishes and what they want their retirement to look like, how their wealth can impact them and their children, etc. Time spent going over the questionnaire together can be immeasurable in building a long-term relationship.

Risk-focused vs. goals-focused

The typical institutional risk profile questionnaire makes one fundamental flaw as far as I’m concerned: It assumes that you can create a single risk tolerance score for a client. That assumes that clients place the same importance on each goal.

For example, my wife and I have two sons, ages six and eight. We have a goal to have enough money to pay for their college. We also have a goal of buying a second home. As most investors do, we have created two pools of assets to fund each of those specific goals. When we think of those goals, one is a “have to,” as in “We have to send the kids to college and not smother them (or us) in debt to do it.” The other is a “want to,” “We would love to have the money set aside to buy a place in the city” — but if it doesn’t happen, it won’t change our lives.

When it comes down to it, we assign risk very differently in each of those scenarios and invest differently for each. Wouldn’t it make sense that if you are discussing risk with a client, you would discuss risk at the goal level and not the overall portfolio level?

No time like the present

By now, you should have all the materials ready to do your Q1 quarterly meetings. Maybe you are meeting with a new prospect this week. How are you going to address risk? How are you going to use your questionnaire? Hopefully it will be in person, using numbers not percentages, and at the goal level.

Continuous Client Service – It’s Time to Differentiate Yourself

It’s happening again!  Today, we launched Part 2 in our End-to-End Excellence Series – Continuous Client Service – Lock in Loyalty and Build Your Business to those of you who registered to receive it. (Hopefully you all registered for Part 1 last month – Sales & Onboarding – Your Last Chance to Make a Good First Impression).  It’s not too late if you didn’t.

Client service is becoming a differentiating value proposition. Done right, it can help you build trust with your clients, strengthen relationships and create a long and mutually beneficial partnership.  In the video and our advisor article, we describe the Five Essentials to Continuous Client Service:

1. Assume nothing and segment your book

2. Conduct impactful client reviews

3. Engage in frequent and tailored client touches

4. Track progress against client goals

5. Explore alternative communication channels

Now I know your days are packed with client meetings, prospecting and firm management.  You may find it challenging to devote so much time to building a continuous client service experience.  But I argue that these activities demonstrate your competence, build trust with your clients and enable confident decision-making.

Almost everything you do touches on the service experience.  By implementing the five essential elements to continuous client service, you can go a long way toward meeting – what we believe are – reasonable client expectations.

Don’t miss out – you can still register online and receive the video and its accompanying article and client review checklist.

Just a quick final note - the page will automatically update when new comments are added.  Please do not refresh your browser.

Now let’s get started with the Q&A!

Are you happy with your current client service and review process? Would you change anything based on what you saw and read today?

Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company.

For Financial Intermediary Use Only. Not for Public Distribution.

Two Ways to Read an Advisor/Adviser Technology Study

The following is a guest blog post by Raef Lee, Managing Director for the SEI Advisor Network. In addition to writing tips for advisors on technology, Raef is responsible for exploring new services and markets for the SEI Advisor Network. Connect with him on LinkedIn now.

The new InvestmentNews Technology study is out. These technology studies are popular reading for advisors, which is why InvestmentNews and other magazines produce them. In my experience, advisors read these in two ways:

• As the Business Owner Advisor, who has to deal with technology

• As the Early Adopter Advisor, who loves technology

But first, why is this an Adviser technology study rather than an Advisor technology study? I’m English and although I’m barely assimilated to the U.S. (or that’s what my colleagues tell me), I use “advisor.” Jim Pavia of InvestmentNews told me they hold to the spelling of the original Investment Advisers Act of 1940. (Who knew? My assimilation is reversed a smidge.)

For the Business Owner

This well-constructed study focused on how a business could effectively use technology to grow.

Outsourcing. The study includes articles from both advisors using technology and well-known industry insiders interpreting the data. Davis Janowski’s analysis showed that the top-performing firms are outsourcing more than the rest of the pack. Top performers spend one-third more on technology-based consulting and outsourcing than other firms. What’s more, this amount has doubled since 2011.

Built into this analysis is the fact that by outsourcing, an advisor can push both the necessity of understanding technology, and the time spent dealing with it, to a partner company. This allows the advisor to get back to lead generation and client interaction, areas that directly improve their revenues.

Existing technology and training. Another area that struck a chord was the approach to existing technology. 58% of advisors surveyed believe that fully utilizing their current technology and operations will be most critical to achieving their growth goals. This is like the old adage about word processing software: People use about 5% of the functionality, yet new versions are released annually with more features. If people would just take half an hour to find out how to do existing functions (for me it was using styles, rather than constantly changing font, color and line spacing), then you really don’t need to upgrade. The same applies to advisor technology. By investing in training your staff in what you have today, you may not need to upgrade, whilst motivating your team at the same time.

For the Early Adopter

The report includes interesting statistics for early adopters of technology as well.

CRM. The survey showed that 85% of the firms surveyed used CRM software. CRM is the hub software around which many advisors are building the rest of their technical infrastructures. One big technical advancement has been the way in which workflow in CRMs has allowed front- office processes to be built in ways that allow a company to scale.

The InvestmentNews technology study is more a business assessment of technology, compared to the Financial Planning yearly review, which gives a lot more stats by vendor and technology component. The Financial Planning yearly review stated in 2012 that 35% of advisors have Microsoft Outlook as their “CRM” and a further 14% have nothing, which means that effectively 50% of advisors still don’t have a CRM. This number will surely drop significantly over the next couple of years as advisors see how cheaply CRM technology can be obtained and built into their front-office processes.

Mobile. It is truly remarkable how quickly this technology is being used by consumers in general. This explosion doesn’t just give people new gadgets; it is fundamentally changing the way that people use technology. The increase in mobile devices is moving people away from PCs. IDC reported that the shipments of PCs in the first quarter of 2013 are down 14% from the same time last year. This is fast change.

The study put this trend into context by focusing on how advisors are using mobile. In general, advisors dealing with their client bases are using mobile the most, but their support staffs are not far behind. Currently, 81% of top-performing advisors use CRM; 42% use portfolio management apps on their mobile devices.

No time to panic

Reading technology surveys can be frustrating for Type A advisors. It can lead to a sense of concern that the practice is not doing enough. However, this survey does a good job of pulling the advisor back to why he or she needs technology to run a profitable business.

How are you using technology to enhance your business?

Take a Continuous Approach to Client Service and Lock in Loyalty!

It seems that I’m spending more time in front of the camera these days – not my favorite place to be (although my kids get a kick out of it).

Hundreds of you downloaded the first of our two-part series: Sales & Onboarding – Your Last Chance to Make a Good First Impression.  In the video, we discussed how making that first impression can start a relationship off right. We also followed the “premiere” with a chat session right here on Practically Speaking.

With Part One “in the can,” make your plans today to watch Part Two: Continuous Client Service – Lock in Loyalty and Build Your Business, which will be available next Monday afternoon, April 29 at 4 p.m. EST. With product proliferation, client service is becoming a differentiating value proposition. Done right, excellent client service can help you build trust with your clients, strengthen relationships and create a long and mutually beneficial partnership.

Watch our trailer today  and register for Part Two. Also, remember to stick around for our live chat at 4:30 p.m. on Monday, April 29th right here on Practically Speaking.

Landing Clients Is Like Dating – and Seven Other New Rules for Adding Clients

The following is a guest blog post by Dan Richards, founder of ClientInsights, a leader in providing financial advisors with video-based content for their own use and for use with clients. Dan’s advisor newsletter is on my must-read list; start receiving his emails by visiting his site and signing up to get his insights delivered to your inbox now.

What’s the single sales skill that’s grown the most in importance compared to 10 years ago?

A recent survey asked senior sales executives at Fortune 500 companies exactly that question. The answer was a surprise – it had nothing to do with proficiency on social media, asking great questions or taking a consultative sales approach. According to senior decision-makers, the sales skill that is now the most important compared to the past is, quite simply, the ability to effectively cultivate and manage a pipeline of prospective purchasers. And just as managing a prospect pipeline is critically important for salespeople who work for large corporations, so it is for every financial advisor.

Of course the notion of a prospect pipeline is far from new; the idea that it takes patience and repeated contact to bring new customers on board has been around since the first merchants set up shop in Middle East bazaars in the third century BC. What’s new is the fundamental change over the past 10 years in what it takes to nurture prospective clients. Here are eight new rules on building your own pipeline of prospective clients.

Rule 1: Someone isn’t a prospect until they say “yes”

Let’s first define what we mean by a prospect. College classmates, former work colleagues, next door neighbours and people you know from your golf club or Rotary meetings are suspects, not prospects. People don’t become prospects until they do or say something that shows some level of awareness and interest in what you do, whether it is sitting down for a coffee to talk about their situation, attending a lunch you’re hosting or agreeing that you can add them to your newsletter list.

Rule 2: You can’t rely on gravity

For the past 100 years, sales trainers taught salespeople to think about sales like a funnel. Put enough potential purchasers in the top, even though some would leak out through holes in the side of the funnel, over time gravity would see a certain number emerge from the bottom.

Today, you need to think about the process of cultivating prospects differently –more like a pipeline, less like a funnel. Yes you need to put prospects into the entrance of that pipeline, but you can’t rely on gravity to convert them to clients. Today prospects will become clients only if you initiate contact and activity to move them through the pipeline and get them out the other end.

Rule 3: Find a communications catalyst

Which takes us to the next new rule for converting prospects to clients. In times past, persistence was the key to success – check in with prospects often enough and after a while they’d agree to meet. Even if you can reach prospects today (let’s suppose they pick up the phone by mistake), most people are way too busy to respond to a check-in call that effectively says “Just following up to see if you’re ready to buy yet.” Of course there will always be exceptions; maybe you’ll get very lucky and hit prospects just as their existing advisor has done something to annoy them. That’s not something you want to rely on, though. While persistence is still important, today it’s no longer enough. You need a communication catalyst, something that demonstrates at-a-glance value and positions you with prospects as delivering differentiated value to them.

Some advisors do this via quarterly webinars or lunches to update clients on market developments. I’ve seen advisors use large-scale annual client events, still other advisors send clients weekly or monthly emails with links to articles from Business Week or Fortune. To be effective, your communications catalyst needs to be clearly credible and stand out from the reams of information that overwhelms potential clients. That’s why sending an email with your chief strategist’s outlook is much more effective if he’s been interviewed in Barrons or The Wall Street Journal than if it appears with your firm’s logo at the top.

Rule 4: You don’t control the timing of decision-making

In times past, advisors drove the timing of conversations with prospects. While advisors still play a critical role in initiating contact, more and more clients have seized control of the timing and direction of decision-making on moving to new advisors. Recently, the website About.com unveiled research on how today’s consumers go about making purchases in a variety of categories and unveiled a concept called The Purchase Loop.

This research identified six interrelated stages that customers go through when making a purchase. And while salespeople are important at some steps, what’s striking is the reliance on online access to get information that salespeople would have supplied historically. As a result, advisors have to recognize that their ability to control timing of decision-making is reduced relative to previous periods.

Read the research on The Purchase Loop now.

Rule 5: You still have to ask for the order

Even if you do everything right, you won’t get the full benefit of this unless you ask for the order. I was reminded of this when I interviewed an advisor who’d used speaking engagements to build a robust pipeline of prospects. At the end of every talk, he’d draw for a book; each ballot gave members of the audience the opportunity to be added to the mailing list for this advisor’s newsletter. With this simple tactic, this advisor built up a pipeline of hundreds of prospects with whom he was communicating on a quarterly basis. And this worked, every time his newsletter went out, his phone would ring as some of the recipients called for an appointment.

Then this advisor did one more thing that dramatically increased the payoff from that pipeline of prospects he’d built. He hired a summer student to call everyone on that list with a simple sentence: “Dan asked me to contact you to see if you’d like to schedule a time to sit down and talk about your situation.” By doing this and this alone, he dramatically increased the payoff from the investment he’d made in building that pipeline. Even if you do everything else right, you still have to periodically pick up the phone and ask for the order.

Rule 6: Both quantity and quality of prospects are key

When I talk to successful advisors about their biggest business challenge, at least eighty percent of the time the answer relates to attracting new clients. Given that, my next question relates to how many qualified prospects they’re actively communicating with. The most common answer is between five and ten, with the occasional advisor talking to as many as 20. “But they’re 10 very high potential prospects” is the answer I recently got when I suggested that this number was unlikely to be sufficient for an advisor to meet his growth goals.

The number of prospects you talk to is highly subjective – but I can say with a high degree of confidence that most advisors aren’t talking to nearly enough prospects. Yes, quality is important, but even the best quality prospects won’t enable you to maintain a healthy business if there aren’t enough of them.

Rule 7: What dating can teach you about landing clients

Another key to successfully bringing new clients on board is striking the right tone in your conversations. Courting prospects is like dating in high school – if you see someone you’d like to go out with, you have to convey that you’re interested but not desperate. The same principle applies when talking to prospects in your pipeline – you want to communicate that you’d LIKE to work with them, but that you don’t NEED to work with them.

One of the most important qualities to build into your prospecting mindset is patience – few things will scare prospects off is appearing to be in a hurry to get their business. One problem with having too few prospects in your pipeline is the pressure it puts on you to make each one of those prospects count, it’s hard to be low-key and casual if the prospect you’re talking to represents 10% of your pipeline of potential clients Appropriate frequency Invitation to talk further – err on the side of less often

Rule 8: Build pipeline management into your weekly routine

The final key to effective pipeline management is scheduling enough time in your weekly routine for the three critical activities to make a pipeline work for you:

• Adding prospects to your pipeline:
  • Who are you going to approach to attend a client event or will you contact with an offer to add them to the invite list for your quarterly client lunches or your e-newsletter?
• Moving prospects through your pipeline:
  • What are you going to send prospects in your pipeline to stay top of mind and to reinforce the value that your provide to your clients?
• Getting prospects out of the pipeline:
  • Has it been 12 months since you’ve tried to check in with someone in your pipeline? If you haven’t at least tried to reach someone in your pipeline, the question can be asked as to whether they really qualify as a prospect.

All this takes much more effort than the historical approach of picking up the phone and asking someone if they’d like to do business – just add this to the list of things we used to take for granted that no longer apply. That’s why if one of your goals is to add new clients, consider whether you need to make improving prospect pipeline management a priority for the period ahead.

For more about the mechanics of prospect follow up, view How to Follow Up without Being a Pest or Turning Acquaintances into Clients.

The opinions and views expressed herein are those of the author and SEI bears no responsibility for their accuracy. Neither the author nor ClientInsights is affiliated with SEI or its subsidiaries.

Shorts: Trip or Vacation, Benchmarking, and Continuous Client Service

BLOG POST UPDATED: 11 a.m. Tuesday, April 17: Corrected the registration link to the Continuous Client Service Video

“Shorts” is a newer feature on Practically Speaking, featuring posts that I thought were important, but didn’t warrant a full article. 

My brother once said (who knows where he got it) there’s a difference between a vacation and a trip. A trip is when you take the kids with you and a vacation is when you leave them at home!

I have been on both a trip and a vacation over the last few weeks and have lots to share. (No, I don’t mean I will be attaching family photos of the kids on hikes and at Legoland©.) Here are a few “shorts” to get it started.

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When I am on the road, one of the more common topics of conversation with advisors is the financials of their businesses and the compensation of staff and other advisors. Because the typical advisor is a small-business owner and our industry is a bit fractured, it is really difficult to get a handle on trends and benchmarks. As a reference guide for those discussions, I have read (and re-read) the FAInsights Study of Advisory Firms: People and Pay. If you want to truly benchmark your business, I would urge you to complete their 2013 survey. The deadline has been extended for just a few more days (April 19th). All respondents get a free copy of the survey, a $250.00 value. Go here to learn more and to take the survey: http://fainsight.com/research.html

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Tax day has come and gone. I was disappointed to learn that my local post office decided not to extend their hours this year for all the last-minute filers. Not being one to break with tradition, I found another post office that was on my way home from SEI that didn’t close until 7 p.m. Sure enough, at 6:59 pm, I handed the extension forms to the nice postal worker standing with his bin in the parking lot. (You didn’t think I would hand him my completed forms, did you?) Since April 15th has passed, maybe we can have some humor around the tax code now. Here is a funny little story you can listen to from Planet Money on NPR.

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“All right, Mr. DeMille, I’m ready for my close-up.” We had a great response to our video webinar “Sales and Onboarding: Your Last Chance to Make a Good First Impression,” with hundreds of you downloading the video and a lot of great questions in the Q&A after. We just finished shooting the next installment on Continuous Client Service. Watch the trailer here and register for the debut on Monday April 29th.

Don’t Believe the Hype: Your Book of Business Doesn’t Lie

As you can probably guess, I read quite a bit. I spend most of my time on airplanes and other down times reading financial publications, research reports, and various newsletters. I tend to use a lot of what I read in conversations and presentations with advisors — and our regular “cup of links” series is very popular on this blog.

However, having spent almost 30 years in this business, I have become pretty skeptical of many of the articles that I read — like when the headline makes a bold statement that just doesn’t seem right. Or a single metric is highlighted at the exclusion of others.

I’ll give you an example. For three years, PriceMetrix has published “The State of Retail Wealth Management.” Without question, it is one of the most comprehensive reports available today to gauge the state of our business.

Some of the key metrics from their 3rd Annual Report:

• Average households served by an advisor: down to 159 in 2012; a decline of 4% from 2011

• Fee-based assets (% of total assets): 28%, up 8% from 2011

• Average advisor revenue $550k, up 2% from 2011

• Average advisor assets under management: $80.8MM, up 9%

A lot of media outlets picked up on the last statistic and heralded that the advisor
business is doing great and has rebounded from the recession. They trumpeted that advisory firms are worth more today than in the past, and praised advisors who stuck it out in difficult times. As I reviewed the articles, something didn’t seem right to me. Where are all those growing advisors?

Look at your book of business

When I look at most advisors’ books of business at the macro level, I tend to see lots of similarities. When you add the account allocations together, the rough split between stocks and bonds is about 60/40. (Go ahead, do it yourself — pull up your total AUM and see where you come out.)

The good news is that last year your 60/40 “firm” allocation had a great 2012. If I remember right, the S&P returned about 16% (including dividends), EAFE came in around 17%, and even the Barclays aggregate did a little better than 4%. Your balanced 60/40 client should have had about an 11.5% return. In fact, the 60/40 allocation across your entire book should have done about 11%, yet the average assets under management according to PriceMetrix grew by only 9%.

See where I’m going here? Instead of being proud that our industry shook off the challenges of the recession and the changing attitudes of clients, we should be concerned that not only did our books of business not grow, we didn’t even keep up with market appreciation! To me, it looks like the average advisor lost money last year, not gained.

Wake up and smell the AUM

Just for a minute, put yourself in the shoes of a buyer of financial services businesses. When you see a business with declining households served, anemic revenue growth and reduced AUM multiple years in a row, would you be attracted to that business? Probably not. In fact, would you think that business has any future or enterprise value?

The PriceMetrix study is a great wakeup call — and today is the day to act on it. Take a hard look at your practice:

• Is your overall allocation 60/40? How did you fare last year? Higher than 11.5% (and remember 11.5% means you just stood still)?

• What are your growth plans for 2013? The first quarter is over; how did you do vs. goals? How does your pipeline look for the rest of the year?

• How are you performing vs. your business plan? Do you have a plan? What benchmarks did you set up and how are you tracking?

Take an afternoon next week as focus time — and block it on your calendar. Look at your own business as if you were a buyer, not a seller. Does it look attractive to you as a buyer, or do you need to fix some things?

Picture courtesy of FreeDigitalPhotos.net.

Why Risk Tolerance Is Critical to Your Practice

The following is the first guest blog post in a two-part series by Tyler D. Nunnally, a specialist in behavioral finance and risk tolerance. He is a marketing consultant to FinaMetrica and Founder and CEO of Upside RISK, a behavioral finance consultancy.  For a free 30-day trial of FinaMetrica, visit www.riskprofiling.com/trial.

Do not let anyone try and tell you that soccer isn’t a contact sport. This past weekend I was injured while playing the game in our yard with my two young sons - Dylan, 12, and Max, 9. Max and I collided going for a loose ball. For a 9 year-old, Max is a pretty sturdy kid, let me tell you. As Max and I were lying on the ground in agony, Dylan gathered the ball, dribbled to the net and scored, which sealed his victory. In a moment of triumph Dylan proudly exclaimed “I won! I won!” Though it was obvious that Max and I were suffering from a great deal of pain, Dylan seemed rather oblivious to it all. He was just glad that he won. As it turned out, Max was fine, but I was not so lucky. I broke a rib. It is no fun getting old.

Before going to the doctor to get my ribs checked out, I waited a few days, hoping that the pain would subside. When I arrived in the doctor’s office he was curious why I did not come in right after the incident occurred. I told him that I was not trying to prove my toughness to anyone. I just was hoping that it was nothing serious and would heal. I have to admit I was very surprised when he came back with the X-ray and showed it to me. Sure enough, a clean break. Through numerous football injuries and serious ski accidents over the years, I have come to recognize that I have a higher pain threshold than most people. So the fact that I was able to wait a few days before getting it looked at is not all that surprising.

In addition to the physical pain, I suffered some psychological discomfort as well. With the rapidly changing healthcare regulatory landscape, I was not sure what the insurance company was going to pay for, and in turn, what out-of-pocket expenses I would be responsible for paying. This shifted the concern from purely physical pain into the realm of money, and the fear of losing it. While the situational context is quite different than financial advisory, there are important parallels to consider as it pertains to the importance of assessing risk tolerance.

Let’s start with the diagnosis. When I realized that I needed help with my injury I sought the expertise of a physician. The diagnosis was made with the assistance of an X-ray that provided quantifiable proof that my rib was broken. The proper assessment of risk tolerance works much the same way as an X-ray. The measure of risk tolerance must be quantifiable and it must be accurate to qualify as proof. Keep in mind that with the new FINRA “Suitability” rule, risk tolerance is an explicit factor that advisors have to assess before making investment recommendations to clients.

Now let’s look at the method. I made a statement above that my pain threshold was higher than most people. However, I have no way of proving it without a proper way to measure it. Pain threshold is a relative measure in the same way that financial risk tolerance is. There must to be a point of comparison in order to draw a conclusion. The point of comparison in both cases is other people. With a large enough sample size you can make that comparison through norms-based psychometric methodologies. This scientific method enables you to compare one person to “everyone else.” You can then segment people into groups that share similar characteristics and risk preferences.

FinaMetrica utilizes psychometric methodologies to assess risk tolerance. Once a client completes the assessment their results are scored on a scale from 0 to 100. Based on a client’s score, they are then placed in one of seven Risk Groups. The graph below is incorporated into a client’s risk profile to make it simple for an advisor to see and easy to understand. In this example, the client scored in a range from 55-64 which would place them in Risk Group 5.

Contrarily the vast majority of risk tolerance assessments within the industry fail to meet this standard. This explains why nearly 4000 leading-edge financial advisors worldwide use FinaMetrica for their risk profiling needs. Moreover, it is one of the primary reasons that SEI has established a strategic partnership with FinaMetrica and why you should consider using it in your practice as well. But there are other benefits that you might want to consider too and they relate to growing your practice.

Like a broken bone, risk tolerance has a lot to do with withstanding discomfort. If you are not properly assessing clients’ risk tolerances then you may be exposing them to unnecessary pain in times of market volatility, especially to the downside. While people with a higher risk tolerance are able to withstand that discomfort without much bother, those that are less risk-tolerant are deeply anguished by it. It is a well-known finding that people dislike loss twice as much as they like gains. Subsequently, assigning conservative clients to a portfolio with more risk than they are comfortable with is reflected in how your clients perceive you. From your clients’ point of view, you are the one that brought them to their unhappy place (i.e. dismal emotional state).

Likewise, putting clients with a higher risk tolerance in overly conservative portfolios creates similar problems. Naturally, there are other aspects to consider such as risk capacity and risk required that are equally important. But those aspects are more about financial constraints, whereas risk tolerance is a psychological factor. Thus, with risk tolerance you are trying to get into their heads as opposed to their financials, per se.

If you are not sensitive to your clients’ emotions, then they may well see you like I saw my son Dylan this past weekend. As I was lying on the ground moaning in agony, he was jumping up and down saying “I won! I won!” Though I certainly appreciate his competitive spirit, I saw his reaction as insensitive and indifferent to Max’s pain and mine. As someone who has served in an expert-witness capacity in multi-billion dollar litigation, I can assure you that attorneys take pain, suffering and emotional distress quite seriously and it manifests itself in punitive damages. Lowering your exposure to these kinds of legal liabilities is not only prudent risk management – it also makes good business sense.

While I cannot fire my son Dylan for being insensitive, the same cannot be said for the relationship that your clients have with you. This becomes a retention issue because if they are not satisfied with or confident in your advice, then they may walk and go elsewhere. Moreover, financial advisory is a referral business. You can be quite sure they will not be telling friends and family how wonderful you are. To the contrary, they may be telling them the opposite, which carries obvious reputational risks that could negatively impact your business.

And lastly, it is important to note that after I was diagnosed with a broken rib, the doctor wrote a prescription to help me cope with the pain. Making certain that your clients are assigned the proper asset allocation is a lot like that. You can help alleviate some of the emotional pain by aligning your client’s risk-tolerance with the optimal portfolios for their level of comfort in taking risk. FinaMetrica has developed innovative tools and a robust methodology to map a clients’ risk tolerance score to the right asset allocation. This is a topic that I will address in the next half of this 2-part series.

For a free 30-day trial of FinaMetrica visit www.riskprofiling.com/trial

For more information contact Tyler D. Nunnally: (404) 320-6047, tnunnally@upside-risk.com

ABOUT THE AUTHOR

Tyler D. Nunnally serves as a marketing consultant to FinaMetrica in the United States. A specialist in behavioral finance and risk tolerance, Nunnally is Founder and CEO of Upside RISK, a behavioral finance consultancy.Earlier in his career, he was with Oxford Risk Research and Analysis, Ltd., a spin-off consultancy of Oxford University, formed to bring behavioral finance and risk-behavior academic research to the corporate environment. Nunnally was responsible for the commercialization of the company’s intellectual property. He holds a Bachelor’s degree from the University of Georgia and a Master’s degree in International Business from the University of St. Andrews in Scotland.

ABOUT FINAMETRICA

FinaMetrica specializes in risk tolerance and risk-related matters. The FinaMetrica risk profiling system is based on a psychometric test of personal financial risk tolerance. Psychometrics, a blend of psychology and statistics, is the scientific discipline for testing attributes such as risk tolerance. Psychometrics provides international standards for the development of tests and for evaluating the qualities of developed test. Numerous academic studies have employed the FinaMetrica test and/or FinaMetrica data. The system enables advisers to make valid and reliable assessments of their clients’ risk tolerance, incorporate those assessments into the financial planning process, and explain risk meaningfully. More information: www.riskprofiling.com.

The opinions and views expressed herein are those of the author and SEI bears no responsibility for their accuracy. Neither the author nor Finametrica is affiliated with SEI or its subsidiaries.