Over the past 30 years, I’ve spent time with financial advisors at every level. I thought I’d seen and heard it all, but recently I encountered something I haven’t run into before.
Some top-producing advisors are telling me that for the first time in their careers, they find themselves struggling to maintain revenue because older clients who pass away aren’t being replaced. As one advisor put it: “I’m working as hard as ever and doing the things that have worked in the past, but I’m just not seeing the same results.”
In other cases, successful advisors are exiting the business, selling their books of business well before they had planned.
As one advisor said: “I’m in the fortunate position that I don’t have to work if I don’t want to. And I never thought I’d say this, but I no longer want to. I still enjoy helping clients; but competition and the overall business environment have become so tough, it’s just not fun any more.”
My conclusion: not only will the things that made you successful in the past not lead to success in the future, but continuing to do the things that you’ve done to this point is a prescription for certain failure.
In essence, to be successful, you will need a set of new rules to guide your business.
– The shifting landscape
To understand why some advisors are struggling, looking broadly at today’s business environment is helpful. When I speak at conferences, I sometimes begin by asking advisors in the audience to identify one-time dominant companies that are struggling or have vanished entirely. Typically, a flurry of names follows, including familiar names such as Eastman Kodak Co., Polaroid Corp. and Pan American World Airways.
The U.S. automobile industry has bounced back from its near-death in 2009, although individual companies’ market share today is a shadow of what it was. General Motors Co.’s share of the U.S. auto market has declined to less than 20% today from 60% in 1980.
Then, there’s the long list of storied names in retail, including Blockbuster LLC, RadioShack Corp., Toys “R” Us Inc. and Sears Roebuck & Co.
Why are we seeing this kind of disruptive transformation? The answer comes down to two words: accelerated change.
Throughout history, change has been a constant, but the pace of change has not. There have been long periods of slow, almost imperceptible change. For example, in 1800, Napoleon’s troops travelled using the same technology and at roughly the same speed as was the norm in 50 BC. Just 50 years after Napoleon’s exploits, the arrival of railways forever transformed the way armies travelled.
That’s what’s happening today in the investment business. We’re going through a period of intensive, compressed change when all the rules shift. In this environment, clinging to the status quo and looking for incremental change is a prescription for disaster. And, in a period of accelerated change, complacency is the most dangerous management sin.
Banks are a good example of the way companies respond to compressed change. Not that long ago, banks operated in a predictable pattern: they expanded and hired staff in good times as the economy grew; when we hit a downturn, banks would cut back and lay off staff. Over the past few years, though, something has changed. Banks have had very healthy performance on both the top and bottom lines; yet, almost every major bank has reduced staff in its branch network and traditional business lines significantly.
The reason lies in the threat from a new breed of disruptors known as “fintechs.” In 2015, New York-based consulting firm McKinsey & Co. issued a report predicting that as much as 40% of banks’ retail profits could be in jeopardy from fintechs. In response, bank CEOs around the world reconfigured their organizations to get ready for these new, high-tech competitors.
– “What, me worry?”
Contrast the response from bank CEOs with conversations I’ve had with some successful advisors recently. Often, what I hear reminds me of the “What, me worry?” sentiment of Mad magazine’s Alfred E. Neuman character.
Here’s what one advisor I spoke with recently had to say: “I’m really glad I entered the business when I did; I would hate to be coming into the business today. But because I came into the industry 25 years ago, I’ve been able to build up a loyal client base with whom I have deep relationships. As long as I do a good job of communicating with my clients and maintain strong relationships, I can’t see most of them going anywhere.”
As I listened to this advisor, I couldn’t help thinking back to a conversation I had in 1985 with a friend whose family had run a small chain of upscale toy stores in Toronto since the 1950s.
Here’s what my friend said: “I get that Toys ‘R’ Us and Wal-Mart [Stores Inc.] will be entering our market at some point. But given the reputation for quality and service we’ve built, I think we’ll be able to withstand new entrants that come in competing just on price. In fact, today, we see customers bringing in their kids, and those customers were brought to our stores when they were children by their parents.”
You can predict what happened. Despite a loyal customer base built over decades, five years after Toys “R” Us and Wal-Mart entered the market, this family business shut its doors. In most categories, offer enough of a price savings and even happy and loyal customers will move.
That’s an example of the new rules that apply. Something is “business as usual” until, suddenly, it’s not.
– New dynamics at work
When I compare the way business is conducted today with the ways of the late 1980s, in most categories, it looks entirely different.
There are only a few instances in which things haven’t changed dramatically. One is how health care is delivered. A second is how students are taught. And a third is how many advisors deliver advice.
Here are just two examples of areas in which the rules have changed for advisors:
– The clients you focus on. Under the old rules, advisors were generalists. You’d meet with a retiree in the morning, a business owner over lunch and a couple planning for retirement in the afternoon.
Under the new rules, you’ll need to be a specialist to excel. In profession after profession, we see generalists struggling – think: doctors, lawyers and accountants – and advisors will be no different. As one example, an advisor in Toronto first narrowed his focus to retirees, then narrowed it further to snowbirds who spend the winter in Florida. He has developed expertise in estate and tax planning issues for Canadians who own U.S. property. He talks to his clients about hedging against a drop in the Canadian dollar, hosts seminars on hot buttons for snowbirds and makes three trips to Florida each winter to meet with clients.
This advisor delivers value to his target clients that generalist advisors can’t match. Other successful advisors I’ve met include a woman in Los Angeles who focuses on women who’ve left long marriages and an advisor in New England whose target is business owners in their 60s and 70s.
– How you communicate with clients. The old rules regarding client communications were all about face-to-face meetings with occasional telephone updates.
Under the new rules, face-to-face meetings still will be important; but a new, hybrid model using Skype and other digital means of communication will play a growing role.
There has been much discussion about U.S.-based robo-advisors potentially displacing human advisors. Robo-advisor market leaders Betterment LLC of New York and Wealthfront Inc. of Redwood City, Calif., have about US$15 billion in assets under administration (AUA) between them.
Compare that with Malvern, Penn.-based Vanguard Group Inc. In the spring of 2015, Vanguard launched personal telephone advice to its clients at a cost of 30 basis points. By last March, Vanguard’s advice offering had AUA of $65 billion and was attracting $5 billion in new AUA a month.
In the period ahead, we can expect every aspect of how advisors run their businesses to look fundamentally different. In my next few columns, I’ll be outlining the new rules on how successful advisors will need to operate.
Dan Richards is CEO of Clientinsights (www.clientinsights.ca) in Toronto. For more of Dan’s columns and informative videos, visit www.investmentexecutive.com.
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