Four Qualities of Next Generation Financial Advisors

Much has been written about the current period of turbulent change in the investment industry.

Now, a new analysis of what's behind the current turmoil and how to come out the other end comes from a new report co-written by Joseph Michelli, author of the best-selling book, The Starbucks Experience. Titled The Consumer Revolution: Surviving and Thriving in a Time of Tectonic Shifts, the report is an initiative from California-based United Capital Financial Advisors.

The report is in five parts, concluding with the four qualities that will define success for the next generation of financial advisors.  You may agree with all of it, some of it or none of it ... but by challenging established assumptions, at a minimum the report contains provocative food for thought.

Part 1: Casualties on the Highway of Change

The report starts by looking at three industries whose traditional practices have been made obsolete by the internet - travel agents, music stores and video rental stores.

In every case, a category killer was at work. The authors summarize it this way:

"Expedia killed the travel agent. Apple demolished the music store. Netflix closed the video store.

We have been told that the internet is causing a change in business worldwide, but the internet is simply the tool that allows the shift to occur, it is not itself the cause of the change. The internet today is much like the machinery, interchangeable parts and mass production that allowed for the Industrial Revolution to occur.

Today the consumer revolution is as large and impactful to all businesses as the Industrial Revolution 200 years ago that shifted the way we produce and manufacture forever"

Part 2: How Category Killers Change the Rules of the Game

The authors go on to look at the qualities of category killers, firms like Apple, Amazon and EBay which have such a powerful competitive edge that they wipe out incumbents and make it almost impossible for anyone else to operate profitably.

They identify three factors driving the success of category killers:

1.       Customized solutions

Category killers are able to deliver unique and specific solutions profitably.  In short order we've gone from one size fits all to one size fits none.

2.       Democratization of knowledge

With the exponential growth of information sharing, every mediocre experience is magnified.  Category killers tap into the the rapid flow of information and the power of viral networks; by creating a significant shift in the consumer experience they are able to mobilize the power of word of mouth.

3.       Pushing competitors off a pricing cliff

Category killers don't promise incremental price savings, rather their strategy is one of abrupt and extreme discounting.  As a result, they put intense pressure on the revenue models of traditional competitors - think no further than the impact of discount brokers on traditional full service firms.

Part 3: Death of the Financial Industry Craftsman?

The authors go on to argue that because the typical retail clients knows and understands so little about investing, the industry has been able to control the pace of change.  As examples, they point to the fact that the shift from a transaction-based to fee-based business and from individual securities to mutual funds and managed money took decades to happen.

They maintain that going forward, shifts will be more abrupt, disruptive and transformational and as an example point to the advent of ETFs, whose razor thin margins are wiping out billions of dollars of revenue for financial institutions, advisors and custodians - and this at a time when ETFs are still in the early stages of growth.

The authors believe that this is what everyone in the financial industry will have to get used to. They also draw a parallel to the death of craftsmen arising from the industrial revolution. Once given a choice, most consumers were unwilling to pay a large premium for inefficiently produced, custom made products. In a similar fashion, they maintain that ETFs will make obsolete the financial industry craftsmen who've spent their lives custom building individual portfolios.

They summarize this section by saying that in order to survive "many of today's financial craftsmen will need to change the way they work and the services they offer."

Part 4: What  Informed Consumers Want

The next section of the report outlines what today's sophisticated and empowered consumers want:

1.       A unique self-designed experience

Today, consumers expect an unprecedented level of control. Just as the medical profession has had to adapt to patients who self-diagnose and expect to be part of the decision making process for their treatment, so the financial industry will have to evolve. The old days of telling clients what to do and expecting them to accept our recommendations without discussion are rapidly disappearing.

2.       Value for every dollar they spend

Historically, the financial industry has thrived by having fees disguised in various complex forms.  That's all changing, with higher standards of disclosure and readily available cost information and comparisons. The authors go on to say: "Today the consumer knows more, expects more and plans to pay less."

3.       The quest for judgement, simplicity and objectivity

Today consumers want all their advisors to be free from conflict and to offer transparent, simple answers to questions.  With that comes an expectation of much greater accountability for outcomes than ever before.

Part 5: The Four Qualities of Next Generation  Advisors

The authors conclude by pinpointing the four qualities of advisors who will prosper in the new world they describe. These advisors will run practices and offer solutions that are:

1.       Customized

Tomorrow's client will expect to participate in the creation of an experience and an outcome that is exactly right for them. The authors use the analogy of the difference between piloting an aircraft with your clients as passengers and clients sitting beside you acting as co-pilots.

New era advisors will expose more, explain more and bring knowledge and judgement to the client experience. They will educate and encourage participation to design a truly interactive and personal solution for their clients. They will be guides ... identifying impending turbulence and helping their clients navigate through adverse conditions.

2.       Original

Tomorrow's advisors will focus on creating an experience that is far more understandable, meaningful, measurable and tangible. The focus will be on simplification and innovation.

3.       Scalable

Tomorrow's advisors will use technology to scale their operations focused entirely on driving down costs and on better servicing clients. They will understand the true revenue and cost for clients and tier pricing and service to ensure profitability. They will manage their staff to allow each individual to focus on their core competency and on very explicit specialized roles, so as to deliver unique client experiences profitably.

4.       Network connected

Next generation advisors will create a strong client community, linked together with technology and customized client events. They will form unions with relevant affinity groups and have a sustainable sales strategy and customized outreach programs.

If you'd like to read the full report, you can find a link to it here

http://unitedcp.com/WhitePaper.pdf