You can go the distance; we’ll find out in the long run

I was listening to some old tracks by The Eagles and thinking how much their sound has changed over the years. This got me thinking about how some of my other favourite bands have evolved over time, to the point where their early work is almost unrecognizable from their current material. I then started to think about how important it is to change the way we work with clients, since their needs change over time.

Do clients need and want something different today from what they needed 10 years ago? What types of advisers are available to clients today and how should you structure your business? I categorised today’s advisers into three main categories — and even gave them their own Eagles theme song:

1. Investment managers: Life in the fast lane
Perhaps now an anachronistic model for financial advice, those who see themselves as investment managers and whose primary value to their clients is picking and choosing investments for them.

These adviser types pride themselves on performance and delivering above average returns from the portfolios that they build. Of course, the disposition effect convinces us all to believe we’re better at what we do than perhaps we are; picking funds that do well we attribute to skill, whilst those we pick that don’t do so well we attribute to bad luck or other factors outside of our control.

The main problem with this advice model is that success is predicated on factors that you have no control over. Fund manager makes a bad call timing the market? Markets go into freefall? Volatility weeks before a client meeting savages short term return figures? There’s nothing you can do to influence these outcomes. And whilst it’s fair to say that markets also go up, fund managers make good calls and market volatility is largely a short term phenomenon, clients levels of interest in their investments tend to be a lot lower when they’re going up in value and borderline forensic when they’re going down!

And really that’s the Achilles heel of this model’s long term sustainability: once the trust in your ability to continually pick winners and discern the losers, your clients are already gone.

2. Accumulators: Wasted time
The meteoric growth of consolidators over the past few years has seen the popularity of this particular business model increase immensely with everybody from entrepreneurial advisers to product providers. Growth of the business is driven by further acquisitions – a ripe market given how many advisers are openly looking to capitalise their businesses ahead of retirement.

Many have made this particular model work for them with healthy profits and growing client banks. However, the issues that can present themselves can derail a growing business at a prodigious rate. There are of course difficulties in retaining clients from acquired businesses; client loyalty tends to be to an individual adviser rather than to a brand or firm and if their existing adviser leaves with no structured handover then they likely feel no reason to continue paying the acquiring adviser.

The requirement to hire new staff for such a growing business can also prove a distraction as principals find themselves spending less time advising and more time managing individuals and ensuring that disgruntled employees don’t attempt to take clients with them if they leave the practice (again, loyalty to individuals trumps loyalty to the firm with most clients).

Finally, if the level of personal service that clients have become used to wavers or changes, once satisfied and engaged clients can become disengaged and ‘at risk.’ This increases the pressure on the principal to maintain and/or grow profits with more acquisitions rather than recommendations and introductions from existing clients, which can magnify the problem rather than solve it.

As The Eagles themselves sang “been down the road to Damascus, the road to Mandalay, met the ghost of Caesar on the Appian way. He said, “it’s hard to stop this bingeing, once you get a taste, but the road to empire is a bloody stupid waste.”

3. Wealth managers: Peaceful easy feeling
The final type of adviser is the wealth manager. In my estimation this approach provides the most repeatable and predictable business and is the model the majority of advisers should adopt.

In any service business, if you meet client expectations, you will do well. Your business will grow each year and you will retain clients. Think of the person who is the most trusted financial adviser to high-net-worth clients — more often than we like to admit, it is the accountant.

Think of your own accountant. He or she knows the tax code well and is aware of recent changes, will complete your tax return by the end of January and will send you a bill that is in the ball park of what you discussed. Job jobbed, as they say. It’s all very black and white. Advisers, on the other hand, could have a difficult time meeting expectations. It all depends on that variable they don’t control that I mentioned earlier: the market.

So how do we move from the grey to the black and white? Become a wealth manager. Wealth managers arrange all manner of insurance for families – income protection, critical illness cover, life insurance – which protect them should the worst happen. Wealth managers ensure that their clients have an up-to-date will in place to ensure their final wishes are carried out. Wealth managers also provide tax strategies to utilise various allowances and minimise as many liabilities as possible – something I would argue can provide larger and more dependable financial benefits for their clients than investments themselves. They also create financial plans for their clients to give them valuable insight into how much they need to save to realise their lifestyle goals in retirement.

With the exception of the financial plan, all the other items are binary: you either helped your client complete them or you didn’t. You met expectations or you didn’t. From personal experience working with hundreds of advisers, I can tell you that advisers get a lot more leeway in difficult markets, when they’ve helped their clients get organised and protected. They don’t get beaten up (physically) on performance (unless it is really bad) because investment advice is one small part of the holistic service that they have delivered over the years.

Behold the bitten apple – the power of the tools. But all the knowledge in the world is of no use to fools. And it’s a long road out of Eden.