Adoption is the New Innovation
Every day, there are hundreds of news items extolling the virtues of new fintech. There is a dizzying array of tools flooding the advisor market. I am envious of those who can choose wisely among them.
And yet this software doesn’t quite capture the feel and efficiency of the advisor-client experience. Is that a problem with the software? Or with the users?
I don’t want to discourage innovation—bring it on! But I wonder if we have truly learned how to use the amazing apps and software we already have, or if we keep jumping on emerging fintech as if it were the new iPhone version X.X before we’ve figured out half the functionality of the old models.
The center of any technology should be the advisor-client relationship. That’s the utopian vision, anyway, one that should prompt simple and easy solutions. Software providers should be enabling your digital relationships, and thus improving your volume of activity, as well as the consistency of your results. When you can string your software together into a customer experience, you see the potential contribution from tech adoption—and wasteful gaps when the tech is not deployed.
When you’re starting to deploy your technology, start with a daily plan and see how it affects your overall results. Your CRM software should have all your client’s information loaded and your activities log should show that every day you have “calls to action.” The average book for every advisor is 125 families. Your CRM should include three to four nuclear family members but also aging parents and adult children for a total potential “household” of 30 to 40 accounts with several custodians. Without good software, that’s a lot of Post-it notes.
It's time to think of your expectations for the customer experience. How many of those households receive a solid annual review? A midyear review? How many times do you follow up on the actions you’ve taken? If the industry standard is two meetings a year, can you be sure all 125 families got theirs? That’s 250 appointments with just two meetings for three generations and 30 to 50 accounts. What if more meetings were needed? If the accounts are for retired people, would that not mean more complexity?
I remember visiting with one of the country’s top wirehouse advisors a few years after managed accounts became mainstream. One of the pillars of this advisor’s offering was a quarterly performance and holdings report and a quarterly review with the clients. People loved the transparency and accountability—and consistency.
Walking into the advisor’s office, I noticed a flurry of activity in the office next to his. “They’re stacking our quarterly reports,” he explained. “We had to get another office to hold them.”
The advisor’s practice became buried in meetings with clients. He made changes to balance the load—like setting annual reviews by the client’s birthday instead of trying to squeeze everyone into the calendar at the quarter’s end. He also merged some account reviews by inviting multiple family members. Both steps opened additional opportunities, but the initial motive was just to save time.
The discipline required for the regular client meetings was an eye-opener to him. “We had no idea of how little we were talking to clients—and how narrow the conversations were,” he observed.
This is Practice Management 101: Our client communication is lacking, and that means there’s opportunity if we improve it. The average wealth management client is about 67 and has accounts with four to five firms, but no one firm usually has more than half those assets. Until that reality is altered, advice providers are battling each other in a zero-sum game with really significant implications. “Share of wallet” is the new battleground.
As aging clients consolidate their assets, there will be winners and losers among financial services professionals. Morgan Stanley has said for five years that it’s actively seeking the nearly $3 trillion it doesn’t have from the clients already on its books. In pursuit of that goal, the firm booked $438 billion in net new assets in 2021.
This is a big game with a lot on the table. If you think you’ll achieve organic growth that miraculously springs from this aging investor population, forget it.
Keep in mind the reality. Most advisors don’t regularly reach out to clients with tailored information. They just don’t have the time. This applies to RIAs, wirehouse advisors, regional brokerage advisors, independents and direct providers. Ironically, it’s the AI-powered robos that have upped the game for proactive outreach, not the humans. Robots are pretty organized and work 24/7.
Tech tools can indeed help you, however—help you manage opportunity and remember all kinds of important business issues: the clients you haven’t seen for a while and the meetings you meant to set and birthdays and retirement dates and RMDs and bond maturities and graduations and all the stuff clients told you in meetings that they hoped you’d remember.
Tech helps you manage opportunity by managing volume. Most advisors have all the clients they need—especially when you consider each client’s extended family, friends and business associates—but they are not organized well enough to get there.
Remember Warren Buffett’s line: “Investing is simple but not easy.” The same goes for advisors in the business of details—the excruciating details they must remember, like accurate beneficiaries and powers of attorney and cost bases and the names of the children (and pets!) Everybody knows this, you might say. But the industrywide data tell the story—they don’t do it. Otherwise why would the average client have four to five different firms? Are they really meeting a couple times a year with each?
His colleagues were soon consolidating assets, and their work set the stage for the evolution of the business into Merrill Lynch Private Wealth, a new step in client service.
As it was starting up, data again revealed reality. A very simple exercise we did with the top advisors globally showed that there was potential to serve even the best clients even more.
The advisors reviewed their top 20 households against a list of the seven most common financial products (such as managed accounts, for instance) and eight of the most common financial strategies (asset allocation, estate planning, etc.). The gaps found among just the top 20 households were alarming (or exciting, if you like opportunity). Each of those gaps opened a door of access for a competitor—and that became the basis of the wealth management game plan of driving consolidation and referrals (by closing that door to competitors).
Simple, right? It should be. All the best strategies are simple, and understandable to clients. But they require organization and attention to detail, and you cannot achieve that level of efficiency with Excel spreadsheets and Post-it notes. And that is where a lot of the advisory world remains, trapping frustrated clients with them.
Consider that in 1997, the time when Merrill Lynch took that step, there were just a few client households to reach, and the client population was not nearly so close to retirement. The oldest baby boomer was only 51.
Now there are some 10,000 people turning 65 every day. The Great Retirement and Great Resignation together suggest the number leaving the workforce exceeds 12,000.
The good news is that if your marketing and relationship skills haven’t atrophied after 156 months of bull markets, you’ve got a historic chance to win new clients and assets from less ambitious advisors—potentially doubling your business, or more. The flip side of course, is that you are surrounded by competitors who might do the same to you.
Let me know how it’s going—call me on my Razr flip phone or email my BlackBerry.
Let Them Eat Calamari!
When my son was about 2, we lived in a New York City apartment near an awesome Italian family restaurant. He loved calamari over linguine. One day another much older patron asked him how he liked his “squid.” “It’s calamari,” replied the confident tot. “Yeah, calamari is squid,” pressed the other diner. “Well,” my son explained (dismissively), “I like it anyway.”
A historic generation of 76 million people with a median age of 66 are rolling out of the workforce at 12,000 per day (a number that’s climbing). They need to replace paychecks from work and secure their healthcare. And survive their longevity. Sounds like a job for an annuity with a cost-of-living adjustment and a long-term care rider.
You mean a squid?
When I first earned my Series 7 license, I was a stock analyst. But at that ancient time, the Dow was 800 (just two zeroes) and investors were gun-shy, preferring to invest in 9% munis and 15% T-bills (when inflation was 13%). And why not? As you know, their preferences changed, but not overnight. Both bonds and stocks began an epic climb together, and an entire generation feasted on the returns from funds and managed accounts—initially opposed by a legion of stockbrokers who scoffed at the transparency and “risk-adjusted returns.”
Not so fast-forward to today, when commissions are free and managed assets are $40 trillion.
Those same clients are now facing the expenses of retirement. So when the Dow fell 10% and the Nasdaq tumbled 22%, retirees who remember losing half their account values from 2007 to 2009 (not to mention the first tech wreck 20 years ago) became justifiably concerned.
In a recent Financial Advisor flash poll of advisors, Evan Simonoff asked what advisors would do if clients said they wanted less risk. Eighty-five percent opted to “change asset allocation” instead of turning to income strategies and annuities. Another way to look at it is that they are defending capital market theory as an intellectual response to an emotional condition. But it’s getting well-intended advisors in trouble with clients who think they are being ignored—or dismissed.
“Retirement planning is like building a family dinner with multiple, complementary ingredients,” says a well-respected head of annuity and insurance solutions for a national advisory firm. Having just one dish—even with underlying components like a managed portfolio—should not be expected to satisfy everyone. The menu makes sense of it all.
That’s a terrific perspective for both advisors and clients. There is complexity—inherent complexity—in building solutions to fund a 30-year retirement. The portfolio can be the entrée, but what about the side dishes, the salad, the appetizers, the dessert, the wine? To some people, the wine is the highlight. But too much might ruin the meal (and the next day). And anyone with a big family can tell you that it is important to recognize that every member has different preferences.
Watching advisors and their clients wrestle with the myriad needs of retirement, we see their frustration at the lack of certainty. And we see their anxiety. Most of the success factors, like longevity, are unknown. But we cannot and should not allow the unknown to stoke unease. There are other things important to clients: such as peace of mind, comfort and confidence. And these are things they are willing to pay for.
As several smart behavioral experts have said, human brains do not naturally process abstract, long-term planning. But we all love short-term comfort, and advisors need to offer some of it. Sometimes it is OK to add some mac and cheese or dessert to the healthy table. It doesn’t mean you’re promoting chocolate cake instead of a stuffed turkey.
There’s been enough research showing the value of certain annuity products in retirement. But this article is not about solving that problem in a left-brained way. I’m talking about connecting with clients in a very human way.
Annuities face criticism, but some of that is based on folklore from long ago. Anyone lamenting the products’ “high cost” should apply the same test to most alternative investments. Or to “no load” mutual funds, with their 4% back-end cost or their forebears, whose cost was 8.5% up front. Demand drives innovation that results in better solutions. That innovation has been taking place in the income product world for years—and there’s more room to run. Check it out.
It is simply ridiculous to turn a blind eye to an entire category of potential investment solutions that can give value—peace of mind—to a generation of investors who have earned our respect by supporting us for decades. Especially if there are solutions that can leverage limited assets—something that’s true for most clients. Such strategies will appeal to both their brains and their emotions and finally acknowledge that their peace of mind is a valued objective. If we insist instead on promoting what we think is “good for you” over what people say they want, without regard for alternatives, we will drive away our core clientele when a disruptor offers what they want—and it works. Consider the impact of target-date funds as the retirement plan default in lieu of guaranteed interest accounts.
We are watching a new role emerge in the retirement advice marketplace. Let’s call them “Next Chapter advisors” instead, people who specialize in helping individuals and their families fund that next stage of life. They are often in the same phases of life with their retiring clients, so they can use their own expertise with accumulation and investing. But now they can focus—on now. That’s a different mindset that requires an empathy clients will embrace. These advisors will use planning and products for multiple objectives and help families prepare for those inevitable things that happen in life.
So get everyone to the family retirement table and pass the calamari. Who cares if it’s really squid?
Steve Gresham is on a mission to improve “retirement.” He is CEO of the consulting firm the Execution Project LLC and leads Next Chapter, an active think tank of 50-plus leading financial companies. He is also the senior educational advisor to the Alliance for Lifetime Income. Steve was previously head of Fidelity’s Private Client Group and retail strategy.
Chasing the Other 80%
In the Blogosphere, April 11, 2022
Every day it seems like dozens of news items extol the virtues of new fintech – product announcements, funding efforts, PE acquisitions. A dizzying array of tools floods the advisor market. I am envious of those who can choose wisely among them. The @Kitces chart of company logos – brilliant. I wonder how many of these companies will survive. Does the world really need 26 portfolio management systems?
I don’t want to discourage innovation—bring it on! But do we truly learn how to use the amazing apps and software we already have, or do we jump on emerging fintech as if it were the new iPhone version X.X before we’ve figured out half the functionality of the old models? Do we have a product innovation challenge – or an adoption challenge? My guess is that adoption is the new innovation.
Chasing the Other 80%
Simple questions of even the best advisors reveal opportunities. Ask advisors if they deliver a list of ten wealth management services to their clients and the answer is invariably “yes”. But then ask how many of the (average) 100 households have actually received all ten services from their practice and the response is different. Serious truncation takes place after households #10-20 to prove Pareto alive and well.
The practical reality is that today’s advisors can do very well with that 20% of engaged clients. A robust bull market tide since March 2009 has lifted most all the advisory boats while reducing incentives for “completeness”. The industry is not so much focused on making sure everyone is cared for – the focus is more on satisfying the financial objectives of the industry. This delivery gap is a wide open door for serious competition – a door being accessed now by ambitious scale players eyeing the prize.
Invention vs. Innovation
My view of “innovation” has been formed by years of watching the energy of brilliant minds pursue a new capability without first testing for effectiveness – or impact. Seemingly small steps applied at large scale can easily outweigh unique inventions. Consider the time savings and customer satisfaction of improved money movement – remote check deposit, the ability to send wires – vs. the more limited but more exciting investment product builds.
Simplicity, ease and control are powerful design elements the advice industry has room to exploit. As long as CRM use remains below 50% of active advisors and fax machines support any part of FinServ, we have work to do.
Path Forward: Divide and Conquer
The advice industry is maturing into a more organized product and delivery phase. We know that many consumers need help with retirement advice, they want information about healthcare solutions, protected income and liquidity. We know that too few advisors provide that array of essential services – and that the industry does not strive to get those services to all of the clients.
Some firms are stepping into the “80%” gap by providing advisors with ideas for “next best actions”. Others are beginning to mimic the direct marketing behemoths Fidelity, Vanguard by making offers to clients and encouraging them to then engage an advisor for follow up. Still other efforts will allow clients to take action without need of an advisor. This segmentation is the future.
Our economy long ago eclipsed the need to depend on humans for delivery and effectiveness of most services and products. Even personal health care today has filled in huge gaps with transparent reporting, electronic records and partnerships with local for-profit chains like CVS. Amazon removed the need to depend on the local store. Gaps in delivery will be filled by innovators not focused on inventing some super silver bullet but instead focused on how to get us what we think we want when someone else cannot.
Disruption Is Invited
Several brilliant innovators have declared their best works were not even imagined by the consumers that love them. True enough. But some of the greatest commercial successes have been created by providing access – simpler and easier – to capabilities or products consumers asked for and could not get. And while it is fashionable to have a new invention, it is more powerful to be effective.
Focus on Effectiveness and Client Success
The much hyped “customer experience” needs an upgrade to “customer success”. Firms and advisors already on this bandwagon are the leaders. The myriad challenges of retirement planning require real answers, not best efforts. This standard of success is growing fast and will soon reward providers who can meet expectations.
A second and equally important aspect to “success” is the shifting of roles among providers. An advisor focused on investments that tries to add healthcare and longevity planning is taking on a significant effort. Creating successful retirements will mean transitioning to a new definition of success – a retirement manager or “next chapter” facilitator. Just like the industry move made years ago in favor of professionally managed accounts, the true consultants emerged and flourished. The true “stockbrokers” withered from the competition.
There is new opportunity for advisors and service providers to each take on components of “client success” and work together in complementary service models. Delivery needs to focus more on completeness and less on satisfying the requirements of a select few clients. Digital capabilities leverage the effectiveness of humans, and can also help reach people who need help. As we learned with COVID 19, there is both a need for effective treatments but also the access to those treatments. Innovation looms large in both perspectives.
Steve Gresham is on a mission to improve “retirement.” He is CEO of consulting firm the Execution Project LLC and leads Next Chapter, an active think tank of 50-plus leading financial companies. He is also the senior educational advisor to the Alliance for Lifetime Income. Join Steve at Next Chapter 2022: Rockin’ Retirement on May 24-25!