There are a few inconvenient truths surrounding the wealth management spoils of 2007.
- We seem to have forgotten the person who is paying for our party. Our clients.
- There is a fixation on rock star money pickers or market timers, who have usually taken no personal risk but are rewarded with share options from floats (think BT) to retain them. Isn’t it ironic that in spite of the argument regarding the war for talent, most active Australian fund managers have consistently failed to deliver notable out-performance for their clients? Talk about false gods.
- The big foundations of 2007’s success were good global markets and new superannuation legislation. Just like Stephen Bradbury’s 2002 Olympic goal medal, most financial advisers were in the right place at the right time in 2007. Well done.
So what do we do about these inconvenient truths in 2008?
Firstly, let’s remember the clients. Let’s recognise that they are paying for everything in our industry. If the pricing for our services is calculated on the products we sell, rather than the services we provide, our business destiny will be controlled by our relationship with the product manufacturers, not by our relationship with our clients. It has been in the product manufacturers’ interests for us as an industry not to develop our craft as price-makers and price-sellers to our clients.
Clients pay us for the financial leadership we provide to keep them accountable and on the most efficient track to their financial goals. They also pay us to provide them with the relevant financial expertise, capabilities, and choice that they themselves lack. Most importantly they pay us because they have confidence that we’ll help them make the smartest possible objective decisions, as the financial challenges in their lives unfold.
There’s an insidious argument that clients can’t afford the costs of insurance, investment products, or advice charges to implement them. The argument says that because these products and processes are so expensive, clients prefer to pay over an instalment plan that the commission system provides. Arguments continue that if advisers charged in dollar amounts, consumers would not proceed, and would thus be left without adequate protection to cover their risks or investments to provide for their retirements.
The fact is that we have a generation of advisers who have built client bases in an era where the price of their services is determined by the quantity of product the client buys, rather than by the quality of the service provided by the adviser. This era of advisers is generally good at building client bases with authentic leadership and good financial expertise, growing trusting and long lasting relationships.
Advisers of this era are naturally fearful of any fundamental change to how they charge for their services, particularly because they’re usually approaching their own retirement from the industry that’s been everything to them.
However, their crippling disadvantage is the familiarity they have with how things have been done in the past, rather than how things will be done in the future. We’ve been privileged this year to work with advisers who have used the best of times to test new client service models, new approaches to pricing, and new techniques to position themselves as experts for low, medium, and high complexity clients. They’ve built new muscles, new processes, new thinking, and new boards of advice, to get them ready for a new era.
Like climate change, there’s a client change on the horizon.
It will be driven by:
- Younger advisers becoming principals who realise they can’t and don’t want to emulate the careers of their old bosses or industry stalwarts.
- Inevitable legislative changes as the success (and excess) of the burgeoning $1.33T funds management industry becomes more visible in everyone’s life. (Consumers will soon understand what a basis point is and how much of a difference it makes to their enforced superannuation savings).
- The same uncontrollable factors that delivered a perfect 2007 marketplace for advisers (e.g. recessions and similar economic cycles).
I have no empathy for the internal remuneration restructuring (e.g. BT Floats) the funds hardware industry is undertaking as the investment bull run continues to inflate the value of key investment staff. The long term value-add for most of them has had more to do with circumstances beyond their control.
Let’s not conceal any truths in 2008. Clients are paying and have been paying for everything. The only rock-stars are our clients. The value added has to be ours, not uncontrollable factors in the market.
Long live the relationship-skilled, price-making, adviser. In 2008, they shall start to inherit the advice world, transcending the professions of law, accounting, and financial services.
There’s never been a better time to be building an advice business.