October 1, 2014
Time’s Up – Advisors should hit the ground running now !
Karthik Jhaveri
Director
Time’s Up!
The time is over for experimentation. The time is over for trying out various business models and pricing formulae in financial advisory profession. The time is over to check and learn what someone else is doing. The time has arrived for considering yourself as an industry more than ever before. If you still think you are and you can work independently then I suggest that you start a countdown to possible closure of business.
For the new entrants to this industry you have no choice but to hit the ground running; unfortunately there is no cooling off period for you. Get smart, recognise the trend and move with it. If you continue to be complacent and conservative or you want to reinvent the wheel yourself then ensure you have very deep pockets to survive in addition to enormous patience.
The financial advisory business whether you call it Financial Planning or Wealth Management or anything else tends to get a booster when the stock market is making good, positive news and action each day i.e. the market is in a rally. This is the state of affairs at the moment and it seems this will continue for some time. The business cycle seems to be turning favourably and we have a stable government which is essential in a democracy.
As a result there will be an enormous increase in business enquiries and business for everyone and the number of people giving good answers today is far larger than it was 10 years ago. Moreover the younger generation assumes that fees need to be paid for services hired whilst the older generation still continues to thinks that financial advice is free. A lot of things are changing and rapidly.
In all this progress and positivity around us the requirement to have a strong industry body still remains a far cry. Hoping to have someone who can represent the common interests of the industry seems like gazing into a black hole. As of now there is no option but to jive with a few common points of interest described ahead.
Price or Perish
There is a dire urgency today for each person who is in the business of financial advisory to start charging a fee. This urgency is far more today than it was ever before. Imagine this: A potential client goes shopping to a number of advisors and all of them specify a fee for their service. Internationally this would be in the range of 1-2% per annum. In India most advisors do this for free. Complacency galore! The abolishment of entry loads from mutual fund investments in 2009 pushed a lot of people out of the business. The possible abolishment of all commissions from all financial products would push a lot more people out of the business.
The fact is one cannot be reactive. Once a client is used to pay nothing for services he will not start paying if the rules of operation change for the advisor. It is not impossible but very difficult so why not adapt soon? The urgency is because of the ongoing rally in the stock market because new business will happen and once this opportunity is lost it will be lost for another 5 to 8 years hence. Needless to say the business processes and documentation need to be correspondingly reworked and realigned.
In addition to charging a fee a certain amount of uniformity in pricing is also a good idea. If you think you can run a business by charging a small fee or a fixed fee of a certain amount and expect that the client will pay that forever wait till you see short circuits happening in your own balance sheet.
Advisor or Robot
Who will rule? Advisors or robots?
Robots in the financial advisory industry refer to automated websites dispensing financial and portfolio advice. Robots emerge from the concept of DIY (Do it yourself) services. Worldwide the trend seems to be that robots will take over human advice and a lot of people are betting a lot of money on this ideology. It seems that the new generation can only absorb information which is delivered in 140 characters or similar. It seems that social network is the way of business forward. It seems that there will be apps for everything and platforms and websites will take over.
As of today I do not agree with the global trend, however these robots are going to cause a lot of problems for advisors. Clients often do not know what to expect of an advisor vis-à-vis what to expect of an accountant or doctor or lawyer. Hence if a robot claims that the client does not need a human advisor and that the robot can do pretty much everything that the advisor is doing and perhaps better with alerts and other facilities etc., the client is quite likely to be swayed by this in the medium term.
Robot will definitely have a pricing advantage too. So I think people will go to robots; then learn that they need humans; then get frustrated and finally exit from the robot. But all this will take time and will cause opportunity loss for the advisory industry.
In our lifetime I do not see replacement of people who need to use their brains to provide advice to their clients. However one must definitely be technologically endowed. In simpler words get basic technology in place as soon as you can. Not only will this reduce effort and cost but will also make you at par with competition in the market place. This is essential. So the faster we adapt the better it is; the faster we become uniform in our services the better it is. Slow pace will be like slow poison.
New fund managers
That is another thing which may start happening pretty soon. There are many reasons for this; regulations getting trickier, fund management costs rising, financial education lacking, need to provide value addition, need to retain clients with lower and better cost structures etc. More advisors might choose to take the pure advisory route and start charging asset based % fees on all assets they simply provide advice on. Execution would be client’s responsibility using robots and platforms. This I already see happening. Competition will push robots to charge lower and lower fees. Product manufactures face an even bigger threat from robots. Only the very large product manufacturers may survive on millimetre margins!
Open new doors
The consumer behaviour today is impatience and more demanding than ever before. Thanks to technology and connectivity. Single service providers are sure to become extinct soon. Advisors will find it hard to sustain by providing single service of insurance or mutual funds etc. This will happen to most businesses and needless to mention that few exceptions will remain. However the day all commissions from all products are eliminated those exceptions will also evaporate. Mix it up. Get more services onboard; get services that are directly related like tax, distantly related like legal, ancillary like data, research, recordkeeping etc., unrelated services are also welcome. We advice diversification to our clients and with multiple services we do our diversification. That way we complete the circle.
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