We are moving from a dysfunctional, low tech, high cost past, to a more sophisticated, accountable, well structured future with better differentiation of service and pricing options. The clamour over the “advice gap” is self interested, myopic and deliberately misinforming.
There has been much hand wringing in some quarters by those opposed to the introduction of best interest standards and the doing away of commissions. Perhaps the most revered of all arguments is the advice gap. For some reason doing away with commissions is doing away with the ability of small investors to get financial advice.
A recent UK Independent article (hat tip Ken Kivenko) discusses this issue. Unfortunately the advice gap has always existed. It has never been possible to make “real” money providing personalised one on one advice for smaller investors unless you focus less on advice and more on the transaction. All that the acts of introducing best interests standards and removing commissions have done is lifted the veil.
Anyone who has provided personal financial and investment advice will have long since come to the conclusion that it is extremely difficult making money providing labour intensive, personalised, disciplined, accountable advice to the vast majority of investors. The money is in the volume of the management of assets, or if you can flog unlimited numbers of products, then the selling of unlimited amounts of products.
But, in truth, even high net worth investors do not need a complex detailed financial planning exercise every year. Most financial planning advice, providing you have the systems, can be rerun in seconds once you have updated client information – in a good service process ongoing advice slides off the service structure like water off a duck’s back.
The very wealthy, with complex financial needs and complex tax and expensive estate planning strategies are the perhaps the only segment of the market that requires intensive, hand holding and can justify remunerative annual financial and investment planning advice. This is not to say that the job of managing assets and financial needs is not complex, but it is a function that can be mostly automated on an ongoing basis.
Importantly, much of the time cost of personalised services is accounted for by hand holding, and while hand holding does indeed have value, it should be a service component for which the client agrees to pay and can indeed be separated out of the service pricing decision – dependent of course on regulation.
But let us look at the components of the process to better understand the issues and the problems:
Some time is spent selling the service and the process: in order to be able to sell an advice based service process, you need an advice based service process that is capable of processing and managing the clients needs/assets. I would suspect that much of any loss in the numbers of advisors providing service is due to the simple fact that they do not possess such a service, or the firm itself does not wish to invest in developing such a service.
We are not just talking about swapping commissions for fees, but sales based service for advice based service processes; this all requires systems, organisational structures, advisor education etc and will take some time to fully develop and implement. So when we are talking about companies not offering service to those investors below a certain level, we are really talking about institutions/firms/individuals that do not want to incur the time and cost of delivering advice based services.
The transaction and the “advice based service mentality and structure” are totally different and it would be perverse to believe that there would be no transitional turmoil.
Some time is spent processing the investor, assessing risk and performance preferences, and depending on the service structure/systems/resources/expertise, some time will be spent structuring and advising on asset allocation, security selection, investment, insurance, estate and other financial planning. Some of this can can be systemised and much of this requires centralised organisational support, but a great deal of this is a one off cost. The overall cost of the service depends on the sophistication of the process, the complexity of the financial position, and the knowledge base of the investor. Smaller clients will demand simpler cheaper solutions and education (not disclosure) needs to be a bigger part of structured service offerings. Again, transaction led services are not big on education because education is an upfront cost and reflective of more disciplined, accountable service processes.
Yes, there may be clients who do not wish to pay, yes the initial cost of advice based services exceeds the initial costs of transaction based services, but I doubt very much whether the total costs of advice based services, over the longer term, are higher than transaction based services.
Part of the solution with regard to cost and profit margin can be dealt with by better service differentiation: you should pay for hand holding, you should have education over service process, risk and return, portfolio options that can be accessed independently by investors, and ultimately you should have more sophisticated systems that will allow investors to interact much more efficiently with the core expertise and service offerings of the organisation.
But the rest of the time is spent managing all the component strands. The core of the service is the asset and liability modelling and management (how assets and liabilities, including insurance and estate planning are managed and integrated), the valuation allocation and management frameworks (the investment framework) and the investment planning (the systems that allow advisors and eventually investors to plan and manage assets and liabilities together), all of which are capable of being centralised and software-ised. What will end up happening is that the individual components of the service process will become more efficiently priced, packaged and delivered.
Ultimately what we are looking at is a sea change in the way financial services are priced, delivered and managed and one that threatens the status quo. Having salesmen deliver transactions within decentralised frameworks of limited sophistication and accountability while framing the service as advice will never be as efficient or effective as centralised sophisticated service processes.
We are moving from a dysfunctional, low tech, high cost past, to a more sophisticated, accountable, well structured future with better differentiation of service and pricing options. The clamour over the advice gap is self interested, myopic and deliberately misinformed.