Last month, I wrote about how doctors prescribe medicine, instead of selling it. In short, I was suggesting that if the advice industry is to become a true profession, there needs to be a clear separation of advice and strategy from product. After all, doctors don’t refer to their profession as an industry. The article seemed to resonate with many but struck a raw nerve with a few.
There are exceptions to all rules. As an example, one reader referred to the veterinarian profession doing both the “prescription and the pharmaceutical”. A reasonable point, but perhaps an exception as vets still charge for their time and advice, and then recover costs on the pharmaceutical side. They don’t subsidise the advice, hoping to make a margin on the pharmaceuticals. I ask any doubters to put yourself in your clients’ or prospective clients’ shoes for just a moment. Can you understand, from their perspective, that there is an actual, or at best a perceived, conflict between the advice many advisers provide and the assets under management (AUM) they hope to gain?
In the US recently, the brokerage industry has increasingly trained its brokers and agents in more holistic advice. The industry has pursued advice-oriented education (for example, Certified Financial Planner marks), and adjusted its marketing strategy, from its national advertising to its business cards, to convey that its primary role is no longer just product sales but actual advice. It was inevitable that regulators would eventually respond by applying a fiduciary duty to all those adviser brokers. This is in line with the US Department of Labor’s (DoL) fiduciary rule for registered investment advisers (RIAs).
It’s unfathomable that despite its ongoing transition into the business of holistic advice, the US financial product distribution industry and its representative associations have now prevailed in their appeal against the DoL’s fiduciary rule by successfully arguing that, regardless of their advertising and the titles on their business cards, their brokers and agents are not advisers at all, but mere salespeople who do not have a relationship of trust and confidence with their clients. Furthermore, the industry successfully argued, brokers’ and agents’ commission-based compensation is not in any way payment for the delivery of advice but merely for effecting a product sale. This occurred even as the industry and its associations continued to argue to the public and the media that the DoL’s fiduciary rule would restrict their ability to give advice to consumers (the very advice relationship they explicitly denied having with clients in their own court briefs).
Historically, advisers have been paid to sell and implement financial products. But over the last 10 to 15 years, there has been an evolution brewing – and some may argue now a revolution pending. Perhaps with a royal commission in Australia, we are at a tipping point. More client-centric advisers are moving from a sales model to an advice model. They are sitting on the client’s side of the table and getting paid by the client, as a non-conflicted fiduciary
A perceived conflict
There are good and bad advisers, extremely ethical advisers and less ethical ones. We all know that. The trouble is the public can be suspicious of our industry due to its historical product sales nature and its current opaqueness and remuneration model. Whilst it remains an industry and not a trusted profession, people will not seek advice as they should and need.
An example that I constantly see is advisers providing excellent initial strategic advice for a fee of, say, $500 to $3000. Then, once they win the business, they charge 1 per cent per annum, which in some cases can be $10,000-to $20,000 a year or more, for managing the portfolio. I’m not suggesting advisers should not charge for managing portfolios. In some cases, there is solid value being added, which includes keeping a client in their seat through difficult times and other behavioural finance lessons that can be taught along the journey. I am simply suggesting the fee needs to match the value, that if the strategic advice is excellent and valuable, advisers should be charging for that, not subsidising it, hoping for a product sale and assets under management. The trouble is the not so good and less ethical advisers can still get paid a lot of money, and add minimal value, by focusing on product distribution sales and AUM.
If we were to spend our time focusing on and improving our above-the-line value propositions and charging fees for them, our current and prospective clients would be better off – and in many cases so would our businesses.
Separating advice from product will quickly move the value and remuneration ‘above the line’, where they should predominantly be. Currently, in many cases, the value is ‘above the line’ but payday is ‘below the line’, and product/AUM related. We are all better not to have the conflict.
One of my favourite sayings is that “cost is only an issue in the absence of value”. Could this be the reason many subsidise their upfront advice and strategy fees?
Change your value proposition to above the line and charge for that. Build a proposition that is irresistible, as a mentor of mine used to say, “like a cold beer in the desert”. What people really want is to know they are OK and on track. They want their adviser to know them and their family, to help them, simplify them, declutter them, and remove their anxiety. Build a proposition around that and deliver it. The investments/products are the easier part. Think for just a moment how much value you are adding around this. Can you measure it and justify it, or are you open to disruption in the future? More on this next month. It’s worth considering that your top-10 clients may well be on someone else’s top-10 prospect list.
Think about the travel industry. People there used to get paid for selling product. Then they were disrupted by the internet. Many of the simple things they used to help us all with, we could do ourselves, online. They all had to change – some went out of business, some reinvented themselves. Those that reinvented themselves, especially with a clear ideal client, or niche market, and value proposition, have survived, and in many cases thrived.
There is no doubt in my mind we are at that inflection point. I believe there must be a clear separation of advice from product, if the industry is to become a true profession. And I believe the overdue separation is coming.
Those who reinvent themselves, focusing on an ideal client or niche market with a clearly defined and articulated value proposition, will thrive. Many won’t.
More people will trust our profession and, as a result, seek advice. All stakeholders will be better off.