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Will Financial Brokers be replaced by Robots?

Does it sound like a mad idea to you? Well it shouldn’t, there’s even a name for them now – Robo-advisers. The question is not if they’ll eventually have a role in the Irish market, it’s when will they have a role and to what extent will they disrupt the traditional advice models.

So for starters, what is robo-advice? It is using technology to carry out the advice process within an overall investment management proposition. It’s related to the advice part, not the management online of an investment portfolio, as that capability has of course been around for years. It’s suggested that there is a swathe of the population that may be disenchanted with the traditional advice model and want to be more in control of the process themselves, via the use of technology. It’s already making strides in other markets – for example a robo-adviser firm in the US called Wealthfront now has more than $1bn in assets after only two and a half years in operation. They’ve doubled their assets in the last 9 months.

The robo-adviser model works by the investor completing a series of questions on a website, similar to those that you ask at a meeting with a client – their investment objectives, age, time frames, assets, risk profile. The website then instantly runs a programme that produces an appropriately diversified portfolio for the investor, made up of passive funds and ETF’s. Once the portfolio is implemented, the other activities carried out by an adviser (rebalancing, annual reports etc.) are also carried out by the robo-adviser.

So are robo-advisers a real threat for financial planners and financial brokers or can they be ignored? Well the jury’s definitely out, so here are a few thoughts to help you make up your own mind.

Why you can’t ignore them

  • Cost: Websites can typically work for a lower price than humans. So robo-advice will be attractive to investors whose main aim is to reduce costs.
  • Convenience: Investors can get advice without leaving their desks, at a time completely of their own choosing.
  • Dissatisfaction with existing broker: Some investors are dissatisfied with advice they’ve got in the past. They see this as a preferred way forward.
  • Technology: The technology is (or at least appears to be) there now to enable people to get the advice they are looking for.
  • Attractive to younger investors: These models are potentially more attractive to younger investors who are happy carrying out many others aspects of their lives online. Will they view investment advice any differently?
  • Attractive to smaller investors: As financial brokers struggle to deliver their proposition profitably to investors with smaller funds, this may not pose the same problem for robo-advisers.
  • The missing link: The advice piece was the one area missing in terms of portfolio management. Robo advisers will enable investors to fully manage their portfolios online.
  • Scale: One of the biggest challenges for financial brokers is to deliver a top-class advice proposition to large numbers of clients. This is not a challenge for robo-advisers.

So is it game over for traditional financial brokers. To my mind, absolutely not! While there might be fewer arguments “for the defence” below, these are very powerful reasons.

Why financial brokers will always win

  • It’s all about the discussion: We only have to look at the risk profiling process. I think many financial brokers agree that none of the systems available are perfect, that the discussion between adviser and client is equally important to bottom-out the client’s real risk profile.
  • Tasks can be templated, but people cannot: We’re just not that straightforward as a species! Research tells us time and time again that the full personalisation of advice is a key requirement of investors.
  • When markets tumble: Who do you call for reassurance and advice when markets tumble? I call my financial broker, unless he’s got to me first! No such luxury with robo-advisers.
  • A major change in your life: Who will help you make sense of the impacts on your portfolio of major changes in your life – a death, a sudden and serious illness, loss of job etc. All of these need a friendly face to keep you on track. Robo-advisers don’t offer that.
  • It’s not all about portfolio growth: Financial brokers give so much valuable advice around the edges of a portfolio – they will consider the impact of taxes, inheritance planning and protection needs. All very valuable and not on offer from robo-advisers.
  • You can’t ignore emotions: Investing can make you feel exhilarated, angry, reassured, doubting! Financial brokers play a very important counselling role, one that robo-advisers will never play.

I for one can’t imagine being willing to pass on the value that I get from my financial broker. Yes the fees may be slightly higher than those available online, however I think they’re worth every cent in terms of the reassurance that I get, the opportunity to “run things by” him and the sense of having someone in my corner. I won’t be moving!

Do you view robo-advisers as a real threat or are they on your radar at all?

Adding lots of value to your clients? Tell them about it!

A lot of advisers today are really starting to effectively demonstrate their value to new clients in their initial meeting. Using powerful presentations or other marketing material, they are setting out their advice processes and how these processes are really valuable to the clients.

However many advisers still struggle with reminding their clients of the ongoing value that they are adding, year after year. They’re providing great ongoing advice, adding value to the clients throughout the year but the clients just don’t seem to see it – they don’t realise the value added… So how can you keep reminding your clients of the tremendous value that you continue to add?

Here are two ways that I think are really important.

Have brilliant review meetings

This is a very obvious one, but there are some financial brokers who consider it a “win” if the client says they don’t need a review meeting! The review meeting going ahead is certainly not a win. Yes it might give you an extra few free hours, but the opportunity cost of reinforcing your value is significant.

Of course there is the “hard yards” in review meetings of reviewing a client’s portfolio, getting up to date values and potentially even writing a short review report. But this is balanced with the business opportunity of potential top-ups, a review of protection benefits and policies and new financial products needed. However the real opportunity to demonstrate your value on an ongoing basis to clients rests outside of the traditional review meeting agenda. Why not take a little extra time and set out for your clients some financial benefits that you’ve delivered to them such as;

  • The growth in actual euros of their investment portfolio
  • The tax saved as a result of their pension plan and any other tax efficient policies
  • The actual money saved in euros and cents as a result of a protection review you carried out previously.

 Now your ongoing fee / trail commission starts to look very small! However there’s still a lot more you can do at these review meetings to demonstrate further value to you clients.

  • Help your clients with their household budgeting. Trust me (as a consumer), this can add huge value to your clients!
  • Talk to them about their broader financial needs where you don’t provide the solutions. You can add value by tapping them into your network of solicitors (for their will or enduring power of attorney), tax advisers (tax advice) or accountants. Now you’re the person pulling all of the strings!
  • Obviously if you carry out future cashflow planning with your clients, this is an exceptionally valuable exercise every year.

Client Calendars

There are lots of activities that you carry out on behalf of your clients during the year. The challenge is getting them to notice the work that you’re doing on their behalf and then reminding them about it in an engaging and memorable way. One of the ways that you can do this is by providing your client with their own calendar of your services every year. Obviously you would create a nicely presented version of this, but the main content for your key clients might look something like this, if presented at the end of each year;

  • January: Client newsletter,
  • February: Investment rebalancing
  • March: Annual Review Meeting, client newsletter
  • April: Investment seminar, update on major market movements
  • May: Investment rebalancing, client newsletter
  • June: Golf outing
  • July: Client newsletter
  • August: Investment rebalancing, meeting with your accountant
  • September: Half Year check-in, client newsletter
  • October: Budget update, tax deadline review
  • November: Investment rebalancing, client newsletter
  • December: Christmas lunch

Now the client sees you working for them throughout the year, not just at a single point in time at the review meeting

If you’re delivering both of these supports in a structured and engaging way, how likely is your client to start arguing over your trail commission?

Be the Hub of your Client’s Financial Affairs

I was recently helping a very progressive financial advice firm in Cork with their marketing planning. As part of the conversation, we discussed value added services that advisers can offer today and indeed I got talking about my relationship with my own financial adviser.

I see my financial adviser as the hub of my financial affairs. My accountant does a very solid job in terms of the production of accounts and ensuring I pay my taxes on time and basically don’t break the law! But I really see him in a transactional / compliance capacity.

On the other hand, my financial adviser provides a broader range of value to me. Yes, he has of course developed my financial plan and ensured I have the right investments, retirement planning and protections in place – I’d expect no less! But he also guides me in relation to much broader financial-related issues and I’ve found this a bit unexpected and extremely valuable. He’s now the go-to guy for me in relation to my broader financial affairs – he’s the hub of my financial world.

Having been the beneficiary of such value-added services, I’ve identified below a few areas in which you can add value to your clients beyond the preparation of traditional financial plans and beyond the products that you recommend to your clients. Why bother with these? To build your client’s appreciation of the value that you can bring and to make you the first port of call when changes in their circumstances arise.

Budgeting

I’m starting with an easy one that is often overlooked by financial advisers as not needed by clients because “everyone does it”. I disagree! People tend to do personal budgeting in a very unstructured fashion, usually in their heads. The opportunity is here for financial advisers to bring templates to their clients and help them structure their budgeting and examine all of their day-to-day spending.

Apart from the value that the exercise brings, for married clients it is a great way of engaging the spouse too in the overall process, as their spending is equally important in the overall picture.

Future Cashflow Planning

I refer to this a lot, but only because I see it as such as a valuable service offered by some financial advisers. It certainly isn’t appropriate for every client, but is hugely valuable to those who are suitable. The reason for this is simple. Traditional financial planning focuses on the starting point (as identified within the factfind – where you stand financially today) and the end event (death, investment maturity date, retirement date).

Future cashflow planning focuses on every year between now and your death, highlighting times of particular financial challenge to you in the future. Knowing the challenges that you will face, gives you an opportunity to plan to overcome them.

Tax Advice for Individuals

Business owners and professionals will usually have an accountant. Most PAYE workers probably don’t. That doesn’t mean that they can’t benefit from tax advice; some want help in completing their tax returns, some want general tax advice. There’s a growing trend internationally of financial advisers moving into this space, in fact some financial advice firms are now employing accountants or tax advisers to provide this service and other tax advice to clients.

Now this approach is not going to be for everyone. At a minimum though, you should have a relationship with a good tax expert that you can plug your client into. The benefit for you is that it’s another demonstration of your value, as you are the catalyst for your client receiving the broader solutions needed.

Financial advisers also play a very valuable role in helping clients prepare for later in life and indeed end of life through retirement planning and life assurance solutions. However there are a number of other ways that you can help your clients prepare for these latter years, again helping to position you as the hub of their financial affairs. Some of these areas can also potentially bring you into contact with your client’s adult children, an important target market for many advisers.

Advice about Bank Accounts

Neither my bank manager nor my accountant spoke to me about having multiple signatories on my bank accounts, both personal and business accounts. But my financial adviser did. This is very practical advice, ensuring that in the event of my death or loss of capacity, that my wife would be able to access my money without jumping through all types of legal hoops…

Enduring Power of Attorney

This is a legal document that can be set up by a person during their life when in good mental health. It allows another specially appointed person to take actions on their behalf should they become incapacitated through illness in the future. This prevents assets being frozen and going under the control of the courts and allows the person acting on your behalf to make a range of personal care decisions on your behalf.

Anyone who has been through this situation, needing to access the assets of a relative who has lost their mental capacity (e.g. to pay for their care) will know the value of having an enduring power of attorney in place. It can be incredibly frustrating being unable to carry out simple actions on the person’s behalf without it.

At the same time, many people also draw up a “Living Will” which captures their preferences in relation to areas such as end of life care, their preferences in terms of resuscitation etc. when close to death.

A financial adviser won’t set this up. However they can be the catalyst for it happening through setting out the benefits of it to their clients and guiding them to put it in place. The adviser may even be able to refer them to a solicitor who will carry out this work with the client.

A Will

Again this is an area where financial advisers can guide their clients to ensure that they have a will in place to ensure their assets are distributed as they intend on their death. A simple process usually carried out with a solicitor.

These are some areas that financial advisers can help or guide their clients through. They add real value to your relationships; way beyond the product solutions you advise clients about and put you firmly at the hub of your client’s financial affairs.

Are there any other areas beyond products in which you advise your clients?




image courtesy of Flickr / David Hunter

Will Clients Pay Annual Fees?

The whole area of fees sends a chill down the spine of lots of financial advisers. How much do you charge? Will clients pay? Will they pay every year? These are some of the questions I’m asked all the time.

Yes we’ve seen moves towards fees in other markets, with a lot of focus on the changes in the UK in particular. But that doesn’t mean that we’re moving to a fee only environment in Ireland. In any event, I think the question of commission v fee is the wrong question… To my mind, it’s all about what you’re being paid for, rather than how you are paid.

Maybe let’s start with some of the reasons that clients won’t pay annual fees, whether this is paid by an annual fee, a monthly retainer or as a trail commission.

 

They can’t afford them

There’s no doubt, there are many clients out there who just are not in the position to write you an additional cheque every year. Their income may be low, their outgoings may be high and these clients are seeking the minimum number of financial products to meet lender requirements and to provide basic levels of protection for their families. These clients are not going to pay fees.

 

They don’t see why they should

This is a more interesting group… These people can afford fees, have multiple financial advice and product needs but don’t see why they should pay for it each year. Whose fault is this? Well it’s theirs if they think that they can get your services for nothing. But maybe it’s your fault if they just don’t place enough value on what you do? You need to consider;

  • How much value are you providing beyond setting up products?
  • How robust and valuable is your planning and advice model?
  • How well do you communicate this to clients?
  • How well do you link this value proposition with your charging basis?

Get these right and you’ve a better chance of convincing this group to pay your fee each year.

 

They know another adviser who won’t charge a fee

There is always another adviser who will undercut you on price, indeed there are execution-only options out there for clients. However this is where the focus is solely on the product implementation. If you can demonstrate to the client that the fee is for the excellent and valuable advice that you give and that this will positively impact their outcomes, they are more likely to decide based on value gained rather than the price paid.

This group is a tricky one for advisers who hate to see a client go elsewhere. But if you’re not being paid a fair price for the value that you bring, it sometimes makes sense to walk away…

 

So what are the main activities that you need to undertake in order to give yourself the best chance of convincing your clients that the annual fee is worth paying?

 

Develop a compelling advice proposition that clients value

I know that there is a huge amount of talk at the moment about the need for a clear value proposition… But it really is a basic requirement if you hope to convince people to base their purchase decision on value rather than price.

Your value proposition needs to demonstrate to clients and potential clients, what you do, where you add value, why this is important to them and the positive impact that you will have on helping them achieve their financial objectives and better outcomes. Think this through from the client’s perspective – if they can’t connect with the value for them, you’re going to find it more difficult to justify your fee.

 

Make sure clients value your advice, not the product purchase

Move the conversation away from choosing the right product and then implementing it. At the end of the day, the clients don’t place much store on this. Advisers who are today receiving large portions of their income from fees focus more on helping the client really understand their life and financial objectives and then develop a plan for the clients to help them achieve these objectives. The products merely become vehicles to help them get there.

 

Deliver a great service and review process

If you’re going to look to charge your clients each year, you’re going to need an ongoing service that clients believe is second to none and worth the price paid. This will mean being available, adding value throughout the year and communicating regularly with clients.

Central to this is developing a really powerful review meeting. This is not just about communicating updated values (even though you do this too), but it is about really demonstrating to the client how they are progressing towards their financial objectives, and why continuing on this journey with you offers them the best opportunity of achieving their desired outcomes. So broaden this meeting out, bring in all of your undoubted experience and expertise and package it, so that your clients will seek out these value meetings with you, year after year! And it makes it easier for you to justify your fee.

 

What experiences have you of charging fees? What are the main hurdles that you encounter? Please feel free to leave your comments below

 

 

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