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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Leverage the financial services evolution to maximize your firm's value The Essential Advisor presents an insightful handbook for advisors looking to navigate the changing face of financial services. The industry is evolving, consumers are evolving, and many advisors are being left behind as old methods become less and less relevant. This book shows you how to turn this shift into a positive, by positioning your firm to maximize these new opportunities, and deliver the results and experience increasingly expected of financial advisors. You'll learn how to provide the transparency, hands-on interaction, and around-the-clock access today's clients demand, and how to consistently deliver service that robo-advisors cannot duplicate. Emerging technologies do not have to be a threat to your practice--they are tools that represent opportunities to provide greater service to your clients, and smart technology integration will be a hallmark of firms that survive the shift. This guide provides a clear vision of the future of financial services, and an indispensable management framework for maximizing your firm's future value. Advisors are increasingly confused about what clients are seeking, and clients are equally confused about what advisory firms offer that alternatives cannot. This book helps clear the air on both sides by examining the client's perspective of financial services, and helping advisors better communicate their strengths. * Articulate the value of your services * Leverage new technology to complement your practice * Capitalize on opportunities and maximize your firm's value * Position your firm to benefit from the changing consumer population Financial advisors can only grow their businesses if clients know what they do, know how to hire them, and can access them affordably. The Essential Advisor shows you to bring your firm into the future successfully.
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Seitenzahl: 348
Veröffentlichungsjahr: 2016
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Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Asia, and Australia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding.
The Essential Advisor
Building Value in the Investor-Advisor Relationship
Bill Crager Jay Hummel
Cover image: Wiley Cover design: © Siede Preis/Getty Images
Copyright © 2016 by Envestnet Asset Management, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.
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ISBN 978-1-119-26061-5 (cloth)
ISBN 978-1-119-26062-2 (ePDF)
ISBN 978-1-119-26064-6 (ePub)
To our families, colleagues, clients, andfriends who make us better every day
CONTENTS
Foreword
Preface
Acknowledgments
Chapter 1: The Evolution of Financial Advice
The Roots of Modern Investing
Regulatory and Tax Changes Spur Evolution
A Small Shift to Advice
A New Advice Model
Key Takeaways
Notes
Chapter 2: The Evolution of Complexity
Talking about My Generation
The Not-So-Simple Life
The Challenges of the Family Advisor
Needs and Wants
The Search for Simplicity
Exercise 1: You All Sound the Same
Exercise 2: Presentation Is Everything
Key Takeaways
Notes
Chapter 3: The Digital Divide :
Napster or Amazon?
A Tale of Two Companies
The Fate of Robo Advisors
From Channel to Solution
The Lasting Impact of Robos
Key Takeaways
Notes
Chapter 4: The Pillars of Value
Defining Value—A Large Broader View
A Summary of Value Creation
Pillar 1: Financial Planning—50+ Basis Points
Pillar 2: Asset Class Selection and Allocation—28 Basis Points
Pillar 3: Investment Selection—80+ Basis Points
Pillar 4: Systematic Rebalancing—44 Basis Points
Pillar 5: Tax Management—100 Basis Points
Key Takeaways
Chapter 5: Communicating the
Essential
The Industry Value Cycle
Define Your Value Proposition
Assessing Your Current Value Statement
Your Value Proposition: How to Get Started
How to Articulate Your Value Proposition
The Value Proposition Goes Social
Conclusion
Key Takeaways
Notes
Chapter 6: Building the Essential Relationship :
Who Are You Going to Call?
The Power of Relationships
Transitions Clients and Advisors Encounter Together
Building around the Transitions
Transitions Expose Digital-Only Platforms
Key Takeaways
Note
Chapter 7: Success in the Digital Revolution
Data, Insights, and Advice
The Future of Planning
Change the Meeting
Understand the Cost of Implementation
Overcoming the Lack of Long-Term Technology Adoption
Key Takeaways
Chapter 8: Maximizing Value
Is the Cost of Advice Prohibitive?
A Firm That Raised Fees
Adapting to Changes in Fee Disclosure
Delivering on Your Value Proposition Never Ends
Key Takeaways
Notes
Chapter 9: Finding the Essential Advisor
A Growing Number of Choices
The Essential Advisor
Avoiding the Bait and Switch
It’s Okay to Say No
The Advisor of the Future
A Final Story
The Last Word
Unlocking the Value of the Independent Advisor
Crossing the Digital Divide
Here We Go Again: It's More Than Man versus Machine
About the Interviewees
Joseph J. Duran, CEO, United Capital, CFA
®
Ric Edelman, Chairman and CEO, Edelman Financial Services
Patricia Farrar-Rivas, CEO, Veris Wealth Partners
Zachary Karabell, Head of Global Strategy, Envestnet
Michael E. Kitces, Partner and Director of Financial Planning, Pinnacle Advisory Group
Valerie Newell, Chairman, RiverPoint Capital Management
Shirl Penney, Chief Executive Officer, Dynasty Financial Partners
Jim Pratt-Heaney, Chief Investment Officer, LLBH Private Wealth Management
Chip Roame, Managing Partner, Tiburon Strategic Advisors
Knut A. Rostad, President, Institute for the Fiduciary Standard
Bill Schiffman, President and COFOUNDER of Schiffman, Grow & Co. and SG Financial Services, LLC
Mark Tibergien, Chief Executive Officer, Pershing Advisor Solutions
Elliot S. Weissbluth, Chief Executive Officer, HighTower
About the Authors
Bill Crager, President, Envestnet
Jay Hummel, Managing Director, Envestnet
About the Contributors
Jud Bergman, Chairman and CEO, Envestnet
Jean Chatzky, Financial Editor, NBC’s
TODAY
Show
Pam Krueger, Executive Producer,
MoneyTrack
Index
EULA
List of Illustrations
Chapter 1
Figure 1.1 The Trust Gap
Chapter 2
Figure 2.1 The Consumer’s Complexity
Figure 2.2 The Advisors’ Complexity
Chapter 3
Figure 3.1 The Wrong View of Digital
Figure 3.2 The Future of Digital
Chapter 4
Figure 4.1 The Five Pillars of Advisor-Created Value
Figure 4.2 Quantifying Value
Chapter 5
Figure 5.1 The Cycle of Value
Figure 5.2 The Foundation of a Value Proposition
Figure 5.3 Customer segmentation and service delivery
Chapter 6
Figure 6.1 The Intersection
Chapter 7
Figure 7.1 The Advice Pyramid
Chapter 8
Figure 8.1 A Calculation of Net Value
Guide
Cover
Table of Contents
Preface
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Foreword
On January 6, 2016, the day Bill Crager and Jay Hummel asked me to write the foreword for this book, the Dow marked its worst four-day start to a year on record. Crude oil sank to a seven-year low. And that was just the bumpy beginning of a tumultuous month—a month marked by headlines with words like: Plunge. Bear. Wild. Even Ouch (kudos, CNN.com). It was a month when I found myself on the air repeating the same mantra over and over: I know it's hard, but try to be calm. As long as you're in it for the long term, do your best to stick to your plan.
Still, you couldn't blame even seasoned investors for their frazzled nerves. The stakes Americans have in securing their own comfortable financial futures have never been higher. We are responsible for our own finances to a degree that earlier generations never imagined. The pensions that were there for our grandparents (and a few of our parents) are largely gone, replaced by 401(k)s and other defined contribution accounts that we have to fund and manage ourselves. Employer-sponsored health care is fading quickly. In 2007, nearly three-quarters of employers were certain they'd still be offering an employer plan a decade down the road, according to Towers Watson. By 2014, just one-quarter felt the same way. As for Social Security, pundits may believe it's here for the long term; individuals not so much. According to AARP, 57 percent of people are not confident in the future of the program (unfortunate, since 80 percent say they'll rely on it for income).
The extra financial responsibility we're being asked to shoulder wouldn't be as much of a problem if it came with an instruction manual. It doesn't. In 2016, only 20 states require high school students to take a course in economics, according to the Council for Economic Education—that's two fewer than had the requirement in 2014. Just 17 states mandate personal finance. It would be nice to think that parents could simply pass their financial smarts onto their own children. That's not happening in a world where 40 percent of Americans consistently give themselves a grade of C, D, or F when it comes to their personal finances, according to the annual Consumer Financial Literacy Survey. Is it any wonder that the leading cause of stress among American adults is—you guessed it—money?
I like to tell people I've had a ringside seat at the personal finance revolution. For the past two and a half decades—from my perches at Forbes, SmartMoney, Money, and the Today show—I've chronicled how Americans make their money, save it, spend it, invest it, and protect it. I've examined not just the technical side of personal finance, but the behavioral and emotional components, repeatedly asking: Why do we do things with our money we know are not in our own best interest? More importantly, how do we stop?
Advice—good advice, holistic advice—is a big part of the answer.
To understand why, think about three facts of modern life. One: We are starved for time. Working Americans (particularly those who are either working parents or—like many of your clients—have demanding jobs, or both) will tell you they don't have time to do the things they want. And when they choose how to allocate their limited time off, there are a whole bunch of line items that rank a lot higher than rebalancing their portfolios. Two: The immediate gratification itch that lords over everything from how we shop (ahem, Amazon Prime) to how we watch our favorite shows (cough, Roku) plays a role in our finances, too. We don't come for financial advice just because. We seek it because we have an issue—we're getting married, having a baby, turning 50, getting divorced—and then we don't just need help, we need it now. And three: The financial landscape is getting more complicated every year. It's not just that there are thousands of investments (8,000-plus mutual funds, 1,600-plus ETFs) to choose from. It's that the problems we are being asked to solve have multiplied. For years, personal finance publications preached one main thing: Grow your nest egg. Now we have to turn the puzzle on its head and make the money last.
Unfortunately, all of those things stand squarely in the way of doing a good job with your money. Surveys that show Americans are spending more time planning a vacation than retirement, or that we'd rather go to the dentist than spend an equal amount of time learning about money may have been fielded to garner splashy headlines. But they make a point. On the whole, many of us don't put the time we should into our finances. And when we do turn to our money, it's often in the wrong frame of mind—because we've had an emergency or because the markets are down big. When we're emotional, we're not rational, particularly where large sums of money are concerned. That makes it especially difficult to wrap your brain around issues where there are no right answers to complex questions: How long are you going to live? How long will you be able to work? How much money will you actually need year in and year out?
Enter The Essential Advisor. As you read the book Bill and Jay have thoughtfully put together, you'll understand why I believe financial advisors have never been more important—and why I believe advice is worth paying for. There's no question that there are plenty of tools available for DIY investors; many of them are excellent. What is in doubt is how many people will actually use those tools. Your portfolio is no different from your lawn in that regard. If you're not going to mow it yourself, it still has to be done. Paying someone to do it for you is much saner than letting the grass become an eyesore. In the case of your portfolio, it also happens to be profitable. ROA—or Return On Advice—is something you can quantify.
Envestnet's study of ROA (tested on thousands of advisors) shows advisors have the potential to add 3 percent in value to their clients annually. Some of the added value comes from investment selection and asset allocation, some from systematic rebalancing and targeted tax management. But I believe the biggest benefit comes from simply having a plan designed to help you get from where you are today to where you want to go tomorrow—and a trusted advisor on your team to help you stay on course.
Which brings me back to January 2016. As I blogged and tweeted and reported on the ongoing rollercoaster in the markets, I took the time to check in with my own financial advisor. Many people are surprised to hear that I have one. But I have for years, for the same reasons I believe others should, and it's a relationship I value tremendously. I shot off a quick e-mail with the subject line: Yikes. “I guess after a six-year bull market this is what we get. Anything special you're doing over there?” The return came back in momentarily. “Meeting/talking with lots of clients, and never fun, but fundamentally staying the course, as usual.” He signed off with a promise that I'd receive a call shortly.
Then I did.
Jean Chatzky
February 2016
Preface
Naming a book is more challenging than one would think. Our goal in picking the title was to make our point of view perfectly clear: we believe the advisor is essential now and into the future in helping more consumers reach their goals and achieve their dreams. Consumers need more advice, not less. This book will most likely be read by advisors who want to continue making themselves essential to delivering better outcomes for their current and prospective clients. However, we believe consumers will benefit from reading it because we also focus on understanding what advisors do, how they deliver better results for consumers, and how consumers should think about the industry and selecting an advisor.
We have day jobs, and understanding what we do in them is important to understanding the approach for this book and our perspectives. Bill is the cofounder and president of Envestnet and Jay is the managing director of Strategic Initiatives and Thought Leadership at Envestnet, where he focuses on advisor training, innovation, and consulting. Envestnet was founded to provide end-to-end technology and consulting solutions to independent financial advisors. At Envestnet, we are solely focused on helping advisors and financial institutions bring better outcomes and financial wellness to their clients. At a time when some are questioning whether financial advisors will be relevant 10 years from now, we believe they will not only be relevant, but more relevant than they are today. Advisors change lives. Investable assets aren’t numbers on a page. Investable assets are deferred spending accounts. Investing is an action of trust and hope—trusting the assets will someday be used for something good. When an investor spends their savings to attain a goal, that’s where joy happens. This goal may be retirement, a vacation, taking care of a loved one, or sending a child to their dream college. Better financial advice means better lives.
When we talked to our friend Rob Densen, founder of the advocacy marketing company Tiller, about the book, he cautioned us to make sure we don’t look like “homers” … a sports reference for a fan that roots for their home team so passionately that the team can do no wrong. The fans are blinded from reality by their passion. He cautioned us not to do the same for our industry, our company, and advisors in general. His point was a good one. Others cautioned us not to do it at all, not to have strong opinions about the industry. We serve more than 42,000 advisors today and there’s some potential risk in us writing this book because, in some ways, we are critical of some aspects of the industry and how it’s been built. As an industry, we aren’t perfect. As a company, we aren’t perfect. The advisory community isn’t perfect. Nobody expects anyone to be so. We hope this book provides a view forward to an evolving industry and serves as a driving force for all of us to continue to push ourselves to become better for our clients.
As a backup to ensure the reader also knows our opinions are independent, we are lucky to have Pam Krueger partnering with us on this effort. We know advisors. We know how they operate and how they should for the future. However, until recently, as a company and as people, we’ve spent little time thinking about the end investor. As a Gracie Award–winning host of the Emmy Award–winning PBS show MoneyTrack, which focused on helping end consumers make better financial decisions, Pam has listened to thousands of consumers. She kept us honest in this effort by helping us to view our industry through the lens of those we are trying to attract to it, as clients and future generations of financial services leaders. You will see a consumer perspective section at the end of each chapter. We believe this effort will not only provide an important voice, but also help achieve a goal of the book: to bring the consumers and advisors closer together.
Although we sit on the same side of the table as the financial advisors and enterprises we serve, as a company we pride ourselves on being independent. We understand there are a lot of different models out there to deliver advice. Some models are arguably better than others, but as long as the consumer is getting nonconflicted advice, then we believe our industry has achieved its purpose.
When we set out on the journey to write this book, we had three objectives: have fun, write something that adds to the industry conversation in a constructive way, and bring the consumer and advisor closer together without being too academic or preachy. We certainly had fun in this effort. Whether we achieved our other two goals is for the readers to decide. We hope we meet your needs. Enjoy the book.
Bill Crager and Jay Hummel
Acknowledgments
We are both avid sports fans. Writing a book is a lot like being an athlete on a team. The athletes on the field tend to get most or all of the credit even though there are dozens of people supporting the victories. Our names are on the cover and we will get a lot of credit for what we hope the readers consider was a victory. However, this was a huge team effort. First and foremost, thanks to three key collaborators in this effort: Jean Chatzky, Les Abromovitz, and Pam Krueger. Jean wrote an outstanding Foreword and is the type of financial advocate the investing population needs in this world. Les drafted and edited much of this book, making the ideas that always sounded good in our heads sound much better on paper. Pam brought her consumer insights to the book, helping us meet our goal of bridging the advisor and consumer gap. We believe her consumer perspectives throughout this effort will prove to be invaluable to the reader. We are indebted to the three of you for your efforts. A special thanks also to those who subjected themselves to our probing questions through their interviews. Please see the biographies of the outstanding individuals who agreed to do interviews and be included in this effort in the back of the book. We are honored you came along for the ride.
We want to thank our families who support our crazy schedules and all that we do. Our wives, Kathy and Valerie, are outstanding partners. Our kids help us stay focused on what really matters in life.
We are lucky to have outstanding colleagues at Envestnet. We have over 2,000 employees who work tirelessly each and every day to help our clients achieve their goals and remain focused on the audacious goal of not only being the best company in the financial services industry, but the best for the industry. We hope our colleagues believe our efforts here are as excellent as their teamwork. Some colleagues went above and beyond to support this effort. We owe a big thank you to Karen Lanzetta, Cindy Siegel, and Jaime Hernandez. Thanks to our CEO and friend, Jud Bergman, for writing an outstanding strategic piece you will find at the end of the book in a section entitled “The Last Word.” His strategic vision herein and at our company is contagious. Thanks to Rob Densen and “Team Tiller” for coming up with the title of the book.
Lastly, thanks to our amazing clients who give us the opportunity to serve them and gain insights about their businesses, which served as the foundation of this book. Without you, this book would not exist. We look forward to building many success stories and memories with you in the times ahead.
Chapter 1The Evolution of Financial Advice
You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future.
—Steve Jobs
Advice is essential for people to reach their financial goals and dreams. Technology has made it so much easier for consumers to access information, and it is important for advisors to recognize how this impacts their role—for better and for worse. As consumers think about their changing demands, and as advisors position themselves for the future, both groups must understand how drastically the financial system has evolved. It’s easy to forget that not long ago the financial landscape was very different. For example, we take for granted the number of transactions we can handle on our phones. Even 10 years ago the thought of moving money with the swipe of a finger or depositing a check by taking a picture seemed crazy.
In the broad history of our industry, the 1950s wasn’t that long ago. During that time, when consumers had a few dollars to put away, they opened a savings account. At some savings and loans (S&Ls), the teller wrote down the amount of the deposit in the saver’s bankbook along with any interest that had accrued. In time, computers took over many of these tasks, and the economy started to become more global. In the 1980s and 1990s, banks focused on geographic expansion, entering new markets and building more—and larger—branches. Less than a decade later, the amount of traffic into most retail branches declined sharply. Today, few people visit a brick-and-mortar branch to do their banking. Many banks, especially those with a regional focus, are trying to shutter as many locations as possible, a trend driven largely by the rise of ATM transactions.
The first ATM in the United States appeared sometime in the late 1960s. By 1980, the number of monthly ATM transactions was nearly 100 million. Within 10 years that number grew to almost 500 million transactions per month.1 This accelerated a strategic change for banking executives. In 20 years, banks went from adding real estate to decreasing real estate—an amazing transformation in a sector that remains the heart of the financial services industry. In the remaining branches, there is also a tighter focus on generating revenue through the sale of specialized products and services that often have higher margins. There are also far fewer tellers than in the past, and it is not uncommon for them to encourage customers to bank online and through mobile channels.
This short trip down memory lane was intentional. Banking is the largest portion of the financial services industry and these rapid changes impacted its employees and clients. In the wake of such significant change to the industry’s biggest sector, it’s reasonable to believe that the wealth management and advisory businesses will face similar disruption in the very near future. Those opportunities and challenges exist today and will accelerate for advisors.
The Roots of Modern Investing
The majority of this book is about the future. Our goal is to present a roadmap for increased success in a period of immense change. In order to do so, we believe it is crucial to examine the past. After all, these events have set up where we are today and represent the building blocks of the future. In the 1950s, most people in the United States shunned investing. Many of them had lived through the Great Depression and wanted no part of the stock market. A number of Americans subscribed to the notion that the stock market was for rich people, and this perception had become a reality. Buying and selling securities was costly, in large part because most brokerage firms charged fixed commissions, which were quite high and typically nonnegotiable. These rates could be 10 percent or more of the transaction amount. In 1952, only 6.5 million Americans, which was about 4.2 percent of the U.S. population, owned stock.2
In the 1970s and 1980s, consumers typically looked to brokers for what they deemed to be financial “advice.” Madison Avenue helped broker-dealers convey that message to consumers through advertising. One of the most famous commercials of all time was for the brokerage firm, E. F. Hutton. In one commercial, wealthy people were filmed as they lounged around a swimming pool at what appears to be a country club or a fancy hotel. A man turns to a woman and asks about her broker’s advice. She answers casually, “Well my broker is E. F. Hutton, and E. F. Hutton says …” Everyone around the pool stops talking, purportedly because they want to hear E. F. Hutton’s financial advice.
Advertising campaigns like E. F. Hutton’s were built on the premise that a brokerage firm could give investors tips on what securities products to buy. Since that campaign, the firm has disappeared through a series of acquisitions involving Smith Barney, Morgan Stanley, and Citigroup. (E. F. Hutton’s grandson has launched a new, unrelated company under the old name.) But many people remember the slogan that made E. F. Hutton famous, “When E. F. Hutton talks, people listen.” Money magazine describes, on its website, how effective the campaign was during the bull market that began in 1982:
This was a powerful image during the bull market that started in 1982. After the lost decade of the 1970s, investors were getting excited about stocks again. The Hutton ad suggested that only through a broker could you gain an investing edge.
In some ways, the suggestion was ironic—coming just ahead of the massive insider trading scandals of the late 1980s, when dozens of Wall Street players, including Ivan Boesky and Michael Milken, were found to have skirted the rules for their own advantage. So much for the broker edge, which in those cases anyway was about illegal stock tips sometimes in exchange for suitcases full of cash.3
During that same era, Smith Barney launched an equally memorable ad campaign. Distinguished actor John Houseman voiced the immortal slogan: “Smith Barney. They make money the old-fashioned way: They earn it.” It’s worth revisiting these advertisements because they capture what the world of financial advice was like in the 1970s and 1980s. And they also reflect how consumers perceived it. These campaigns strongly tied financial advisors to the wealthy classes, and perpetuated the mystique of investment firms. That approach was quite different from what you see today in television commercials for established firms, and in taxi-cab ads for new players like Wealthfront and Betterment.
Firms also operate much differently now. Up until the late 1980s, if you were a broker, you attended a daily research call where stock ideas were discussed. These research calls gave brokers ideas for how to help their clients buy and sell securities. Brokers were allowed to promote only those stocks on which there was research coverage. There’s a debate as to why this happened. Some would argue it was to manage risk, as recommended securities should be tracked, but others with a more jaded view argue it was to push the securities with higher commissions or with companies with financial ties to the brokerage firm. The investment business was largely product focused. It was an era when brokers pushed stocks touted by research analysts.
Regulatory and Tax Changes Spur Evolution
In 1975, the Securities and Exchange Commission (SEC) made an important decision that laid the path for the financial world as we know it today. Fixed commissions were abolished. Up until what is known as “May Day,” brokerage firms charged commissions based on a schedule published by the New York Stock Exchange. The commission was calculated off a grid based on the number of shares traded. Brokerage firms, therefore, could not compete with each other on price. The new regulations created a situation where commissions could now be negotiated. This decision opened the way for discount brokers, and eventually led to the online trading craze of the 1990s. Fueled by enhanced technology, online trading allowed people to cheaply buy their favorite stocks on their own, without a broker, for the first time.
The next change came in 1978, three years after fixed commissions were abolished. A major change to the tax code opened the door to an entirely new financial services sector. Congress added Section 401, under which Item K allowed companies to offer their employees an additional benefit, now known as the 401(k) retirement savings plan. 401(k)s and similar defined contribution plans helped turn employees from spenders into savers—and investors.
401(k) retirement savings plans took off in the 1980s around the same time that companies began to sunset traditional pensions. The vast majority of defined contribution plans were offered by larger companies as one of the benefits to retain employees and also encourage saving. A key inducement was the employer match, a 401(k) contribution made by the employer at no cost to the employee.
Despite the potential benefits of 401(k) plans, they also presented employers with new challenges. Most companies had no idea how to determine which investments should go into these plans, so they turned to 401(k) record-keeping firms to administer their plans. Most of these firms were units of large mutual fund companies so, not surprisingly, the investment menu consisted of a good range of mutual funds. (The default option was the money market fund, much like today’s default option would be a target date fund.) This represented a key building block for the future because the 401(k) business supported the enormous growth of the mutual fund industry.
Meanwhile, wirehouse firms began to more clearly separate business development from managing money. During the 1980s, firms encouraged their account executives to gather new business and increase clients’ investments, while professional money managers tended to client portfolios. This shift emerged from the belief that individuals would benefit from the investment professionals’ expertise, and that client-facing advisors could better serve customers by focusing more time on their existing clients. Without the burden of managing every client portfolio, advisors could also work on business development.
So marked the beginning of fee-based management and managed accounts. On the heels of the existence of managed accounts came professional gatekeepers who decided which asset managers qualified to be on a securities firm’s platform. The good gatekeepers protected clients because the decision to put an asset manager on or off the platform was based on performance. One could argue there were also bad gatekeepers who selected asset managers onto the platform based more on revenue share agreements than what was good for the clients. The debate on good versus bad gatekeepers remains to this day and the managed accounts business has blossomed into a $4 trillion industry.
A Small Shift to Advice
As we will discuss in depth later in the book, we believe financial planning and coaching will be a key building block of advisor value in the future. When we speak at conferences and industry events, it seems like some people think this is a fundamental change that happened overnight. It’s not. The industry has actually been shifting this way for decades. For comparison, consider a musician who has been writing songs and playing in clubs for years. When she finally gets a hit song, she is viewed as an overnight sensation. In reality, however, the musician is being noticed for the first time after years of playing the same kind of music.
Financial planning as a value proposition is nothing new for thousands of advisors. Although in its infancy the idea of planning was very different than it is today, it did exist. Back then, the financial planning process focused mostly on asset allocation advice and was often driven by Morningstar-style boxes. The idea of planning gained some attention when the College for Financial Planning opened in 1972. The College has graduated more than 64,000 individuals into the financial planning industry. Can you imagine what it must have been like to graduate in some of those earlier classes? The economic and political factors a planner dealt with in the mid to late 1970s represented uncharted territory. Planners were required to deal with double-digit inflation and a sustained bear market. It was actually a bad time to be in the “advice” business, because the bear market had soured consumers and there were few who wanted to invest. For many consumers, paying close to 18 percent interest on their home mortgages left them with little disposable income. This situation left advisors with fewer potential clients because people were not investing in the market. Consumers with assets were likely keeping their money in certificates of deposit (CDs) or treasuries with longer-term yields above 12 percent.
The 1980s brought a major shift. Faced with making investment selections for their own 401(k) retirement plans, which provided no guidance, people’s investment lives started to become more complex. On top of that, the stock market began to recover in 1982 and the tax code was changed in 1986, two changes that made people more interested in the investment potential of the markets. However, the advice business as we think of it today still didn’t exist. More money entered the market, but stocks and bonds continued to dominate.
The concepts of holistic advice and account aggregation were not in the lexicon of the day. It was not until the late 1980s that the advice business began to change, and these changes started setting up many of the advice models that exist today. Fee-only firms, as they are known today, started popping up around the country. Fee-only firms were built on the idea that the way advisors were paid in the past created conflicts because advisors were paid differently based on the investment products they recommended. Fee-only firms don’t collect commissions and don’t collect fees from the fund companies for putting their clients in certain securities. The client fees for advice are the only source of revenue for these firms. The argument is since the client is the only one paying the advisory firm, potential conflicts of interest are removed from the relationship. We will drill deeper into this argument later in the book when we discuss how advisors are paid and how consumers should think about fees. Ric Edelman started his firm in 1991, right around the time fee-only advising was going mainstream. When we asked Ric why he decided to start his firm, his answer was simple:
We went looking for a place where people could get good financial advice and we couldn’t find a place like that anywhere. We believed consumers needed people that were focused more on the outcomes they needed in their lives, than the products they needed in their portfolios. The only advice people got was from people focused more on selling them something in their portfolios than bringing better outcomes to their lives.
In the early 1990s, technology use in the industry was exploding and so was the stock market. A trading frenzy enabled by online trading came onto the scene. Charles Schwab was the major disrupter during this time. For the first time, trades were far less expensive than at the major brokerage firms, but the major brokerage firms countered by starting their own online divisions. This intersected with the rise of technology companies nobody had ever heard of—commonly referred to as dot-coms. These companies had no real business models, but they became the most talked-about companies in America—and people wanted to feel like they were part of the game. Investing presented them with a way to become directly involved in the action. Regardless of age or wealth tier, people had online accounts to play the market, and they were winning because technology stocks seemed to go in one direction, up! Research analysts covering these tech upstarts were measuring them in part by the amount of traffic their websites were getting, which often took precedence over the companies’ financials. Later, this time period was famously referred to by Federal Reserve Chairman Alan Greenspan as the period of “irrational exuberance.” The dot-com bubble started to burst in 2000, and the stock market slide continued for three years. What is interesting about the market collapse of 2000, and even back to 1987 and 1989, is that consumers seemed to accept that market cycles existed, so unstable periods didn’t increase the number of consumers seeking financial advice. We believe this changed with the market turmoil of 2008 and 2009, which we will discuss later in the chapter.
After the technology bubble burst in 2000, many consumers headed for the sidelines, but around 2005 a number of online trading tools emerged, offering people a do-it-yourself approach and luring some people back to the markets. During the peak of this trend, you couldn’t go to a party without someone talking about their brother, sister, cousin, or unemployed friend who was day trading. Few were day trading full time, but many who were quickly realized they should have kept their day jobs. It’s not easy to win against the professionals who dominate market trading. Even more discouraging was the devastating market correction that occurred during the 2008 economic meltdown. Anyone involved in the financial services industry back in 2008—advisor, trader, investor—can’t help but be scarred from what occurred during the Great Recession.
