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Is Trail the right Financial Model for you?

Trail commission. Is it the silver bullet that justifiably allows Financial Brokers to build value in their businesses and eventually sell the business at a healthy multiple? Or is it a somewhat opaque way for advisers to be paid, sometimes with very tenuous links between the value provided by the adviser and the payment received?

Is it the right model for your business?

 

Trail commission is not perfect

Okay, let’s get the negatives out of the way first… Trail is far from perfect; in fact one could argue that it has some potential conflicts of interest for Financial Brokers. The word potential is highlighted for a reason – trail commission doesn’t in itself cause the conflicts, but the use of trail by individual Financial Brokers could. Let’s look at a few areas of possible conflict for advisers,

1. A client gets a windfall, let’s say an inheritance. If the adviser’s income is based on the amount of assets under management, income increases if the money is invested. If the client pays off their mortgage, it doesn’t.

2. What does the client with €3 million invested through the adviser get that’s different from the client with €500,000 invested? Are bigger clients simply subsidising smaller clients?

3. Similar to the above, a wealthy client gives you €500,000 to invest. You then find out that they have €2 million invested elsewhere themselves. What additional services will they get when giving you the money to manage, that will justify your huge increase in fee? Of course if you are providing comprehensive financial planning, with future cashflow planning sitting at the heart of it, there’s part of your answer – you need visibility of all assets to provide the complete picture.

And then there are the negatives simply in terms of trail commission as a business model. You secure a senior executive in a large company as a client. But after your factfind and analysis you find that the client’s wealth is tied up in a company sponsored pension scheme, also with an AVC scheme on great terms. Unless the client has other investment assets, there’s not much earnings potential for you on a trail basis.

And what happens when markets fall sharply or indeed the client decides that its now time to de-cumulate assets? Your earnings take a drop, even though your work may not.

 

But there’s a lot to be said for it!

First of all it’s relatively easily explained. Clients understand that a small percentage of their money will be taken as charges. Trail is simply an addition here and clients “get” that.

Then of course trail is very easily collected – this is such an enormously important point! Advisers say all of the time that it’s hard to get a client to write another cheque, especially year after year. Trail makes this problem go away and the adviser / client relationship continues each year without this hurdle.

And clients see a level of alignment of interests too – if the portfolio sees strong growth, both the client and the adviser win, if the portfolio falls in value, they both lose. Is this fair for the adviser? That’s a question for another day!

 

It’s all about your proposition

To me, this is the nub of it. If an adviser is simply adding trail onto policies as a means of securing ongoing payment without giving too much thought about what they are delivering, I believe this is a very flawed model and a very risky strategy. If an adviser cannot demonstrate and communicate their value, and as a result link the trail back to what they do, they are on very unstable ground.

On the other hand, if your advice proposition is crystal clear, clients understand it and are happy to pay for it, well then trail commission is a very appropriate method of collection of your fee. And were trail commission ever to disappear as a means of collection of fees, clients would be clear about the value you are adding and the fees that still need to be paid.

 

What would I do myself?

I’m not an adviser so you could argue that it’s easy for me to be a bit sanctimonious on this issue! However I could also argue that trail is not a feature of my business model (which is based entirely on fees) – so I only get paid when I can demonstrate value. When you have to demonstrate value to get paid, trust me you work very hard on your proposition!

At the end of the day if I was an adviser, I think I would use trail commission as a method of payment. But I would link it clearly back to the value that I’m adding, and ensure the client sees the trail commission as simply a method of payment for the advice given. The quantum of trail would be decided by the services provided. I’d give clients choice; fees, retainers, trail etc. Their choice, but they need to be clear that they are paying you for the value of your advice, rather than the setting up of a product. Because it is in the provision of advice where Financial Brokers add value and change clients’ lives for the better.

Letting your communications drift

So you finally decided to start sending out a regular email newsletter or regularly updating the blog on your website. Well done to you! The first issue of your newsletter is full of promises about your new newsletter keeping clients and other contacts informed and educated. And then the newsletter delivers this in spades! Roll on to a month or two later and the next edition is due to go out. You’re busy, it’s the middle of pensions season and the markets are in turmoil. You just about manage to cobble the newsletter together, everyone moaning about not having enough time. And then that’s it, the next edition never see the light of day…

Unfortunately this happens a little too frequently among financial advice firms. So apart from a bit of a gnawing sense of failure within your own firm, what messages does letting your communications drift say to your audience?

You don’t have an opinion

Your clients and prospective clients want to hear your opinions about current events. Whether they are about how they should (or shouldn’t!) react in the current market turmoil, your views of any changing legislation that will impact the personal finance world or indeed developments within the life and pensions market. Your opinions may reassure investors, allow you to demonstrate your expertise and show that you have your finger on the pulse.

Of course if you’re not sending out these opinions, exactly the opposite applies. And then your clients don’t know where you stand on these topics. And of course then there is the very real risk that they will find their way on to the email database of another Financial Broker who provides them with this expert opinion all of the time. Who will they want to deal with – the person with their finger on the pulse or the person without?

You’ve run out of ideas

Of course email newsletters also offer you the opportunity to educate your clients and prospects. You can remind them of the value of getting advice from a Financial Broker, set out the benefits of having a risk appropriate investment portfolio, remind them of the importance of having the right income protection plan in place and how to ensure that their legacy on death is not a worrying tax burden for their loved ones.

But then when you stop, have you demonstrated all that you know, that you’ve shown the breadth of your knowledge? So what about the topics that are worrying your clients that you haven’t covered? You don’t want them thinking that maybe you just don’t have knowledge in that particular area…

At the end of the day, your clients can be a rich source of content ideas. Ask them for topics that they would like covered and then write about them!

You just don’t care

Of course this is the real worry… that your clients will think that you simply have lost interest and don’t really care about your marketing and your business. That you have simply slowed down a bit and are coasting…Of course this will set off alarm bells in their heads about your approach to your wider business, your clients and their personal financial affairs. Are you just punching in time there too?

At best, your clients might just see all of this as a bit unprofessional – starting a marketing initiative that you’re unable to continue. Is this how you want them to view your business?

StepChange provides content to Financial Brokers who don’t have time to write it themselves and a newsletter service to manage the whole process of sending out regular fully personalised and branded communications to your clients. And we’ll deliver these on time, every time!

The World of Financial Brokers today

Last month I agreed to put my head on the chopping block and give my general observations of Financial Brokers in Ireland today, my views formed by the work I’ve been fortunate to carry out with a great number of you over the last four years. So here goes…

A very resilient bunch of people

This is my overall sense of Financial Brokers and is the factor that has impressed me the most since 2011. At that stage many Financial Brokers were on their knees, as the market for personal financial advice and solutions had dried up almost completely. However most of you simply dug in, scaled back your businesses to a more sustainable size, re-examined your propositions and got out there meeting your existing and prospective clients. Thankfully in 2014 and again in 2015, many of you are now reaping the rewards of the effort put in during these tough years.

Financial Brokers do invest in their businesses

When I started out in 2011, if I had got a euro from every person who said to me that “brokers won’t pay for anything”, I’d be a richer man! The bottom line is that Financial Brokers are willing to invest in their businesses, where they see value in doing so. The days of only engaging with suppliers when a provider will foot the bill are long over.  Yes, you are very discerning about when and with whom you engage, making sure that you can see a clear return for your investment. But you’re 100% right! This ensures suppliers (like me) are focused on the value we can bring to you, rather than simply pushing products and services at you. Is this any different to the work you do with your clients?

Many Financial Brokers are not great at communicating the value you add

You know somewhere in the back of your mind the value of what you do and know that you are delivering value to your clients. The problem for many of you is that your clients are just not seeing it. From my experience of working with many Financial Brokers, this stems from not taking the time to actually articulate what you do and the value that that you add, and as a result not actually documenting your proposition. As a result, there are lots of “chats” happening with prospective clients, instead of structured conversations with relevant marketing supports that set out your proposition in a compelling and engaging way.

Some Financial Brokers are still trying to be “all things to all men”

Having a clear target market makes your life so easy. You can then focus your client value proposition, your sales activities, your marketing messages and indeed your whole support infrastructure around meeting the needs of specific groups. But some only see the risks involved in this – narrow groups of people to target, missing broader opportunities etc. As a result, many Financial Brokers continue to try to appeal to everyone. And as a result, they don’t really connect with anyone. Yes, your target market must be big enough to sustain you. But if you then focus your efforts on them, you gain the opportunity of creating a real standout positioning for yourself.

Pricing is a major challenge

As more and more Financial Brokers move from transaction based pricing to advice based pricing models, the big question that you are confronted with is how much to charge. This first of all comes back to your actual proposition(s), then how good you are at actually communicating these to your clients. Even then, there is a certain amount of trial and error. Certainly I know from working with many Financial Brokers in this area (and from my own work), you need to initially work out sensible pricing levels and then keep them under review going forwards. For those Financial Brokers with well thought out propositions, experience suggests that they tend to initially set their pricing levels too low and end up reviewing them upwards as they gain more confidence in their pricing. And yes, in many or most cases, the fees are collected through the commission system.

These are some of the main observations that I have of Financial Brokers today. In the main, you are an enjoyable group of people to work with, challenging too because of your ambition to see your businesses thrive. And that’s what keeps it interesting for me.

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?

How are you going to exit your business?

This is a question that continuously exercises all business owners. How are they going to leverage their business to support their desired lifestyle when they want to stop working? This article explores some of the main areas you might consider to increase your chances of achieving your end goal in relation to your business.

What are your goals?

First of all, think about what is important to you in terms of exiting your business. Do you have a particular timeframe in mind? Are you looking to “get out early” and maybe have a long, but relatively modest retirement? Or are you looking to work hard well into your 60’s (or later) and then sell your business to fund a more prosperous retirement? If so, it’s important to be working towards a definite end date. Or are you looking to build a business that will continue after you’re gone, possibly headed up by one of your children, a business that may also support you in retirement?

These are really important decisions to think about now, as they will influence what’s important in achieving your goals. Will it be all about maximising the value of the business on a certain date in the future or are you trying to build extremely deep relationships between your clients and your business that will endure after you’ve exited?

Know what your business is

Now you’ve got to be really honest with yourself. What do you have to sell? Is it actually a business or simply a consultancy service? For some Financial Brokers, they’ve built up a thriving business in which they are the conductor of the orchestra, where the value is not based purely on their own presence in the business. These businesses are obviously very attractive to potential buyers. Then there are other businesses in which the value all revolves around the business owner. Take the owner out of the equation and what is there? While these businesses may offer a nice lifestyle to the owner, they are a far more challenging proposition when it comes to trying to sell.

If you own a business that is based on you as the key asset and you have ambitions to sell it one day, you need to start thinking about how you will develop some saleable value within your business.

Where is the value in your business?

So let’s assume that there is potential value in your business, outside of your own input and that your aim is to actually sell your business. Now it’s time to try and maximise the value of all of your assets. These might include;

  • Financial Assets: An obvious one to start. The main asset that a prospective purchaser will pay for is the future income stream of your business.
  • Persistency: The next thing a buyer will look for is the persistency of your business as this will be a key influencer of the potential future income stream. This will give them a sense of the quality of the “book” of clients that they are buying.
  • Brand: if your brand is well known and seen as a trustworthy brand, there is definite value in this for a buyer.
  • Staff: If you have a team of highly qualified, revenue generating people that will remain in the business, they are a very valuable asset to the business.
  • Market Positioning: If you have a recognised presence in some attractive market segments and niche areas, these may open up new opportunities to a potential buyer.
  • Operational Excellence: If your service proposition, compliance and data management (among other) areas are very strong, these offer great opportunities for a buyer to leverage off the capabilities of your business.

Who will facilitate your exit?

This is another factor that you need to start thinking about well in advance. Who is likely to enable your exit from the business? Once you’ve identified the profile of your potential buyer, you can then work on making your business proposition as attractive as possible to them.

If your aim is that your business will continue with a new leader / owner of the business, you need to start identifying who your potential successors will be. Do you have fellow directors who will buy you out? Or do you have younger, ambitious individuals within the business who might want to take over after you’ve gone? If so, you need to identify these people and start putting in place structures and interim incentives to retain them, and to make it attractive for both you and them for a buyout to happen in the future.

If an external buyer is your preferred route, you need to start identifying particular candidates. Would your business be attractive to current competitors, either in your market segments or geographical area? How would your clients react to this? Are there firms trying to build presence in a niche where you already enjoy a strong presence?

And then, how do you alert potential buyers? Is it a quiet word or a public tender (which will alert your existing clients)? Or can you use the broker networks to gather interest?

How will they pay

Of course one of your main areas of interest will be how much you will get for your business and how the consideration will be paid! Will it be a straight cash deal or will there be some tie-ins into the future in the form of earn outs etc. And how will your firm be valued – are buyers likely to look at recurring income, profits or future cash flows? And which of these works best for you?

Lots of questions to consider! Now is the time to start thinking about them. The more thinking and preparation you do well ahead of your exit date, the more fit for purpose your sale proposition will be. And all of that is likely to result in a higher price for you.

What are the critical areas that you believe need to be considered when selling a financial advisory firm?