A new approach to financial advice

Here’s one way in which advisors can reimagine what they have to offer.
Charging clients based on how big their pot of money is results in the profession fighting for that 5% while the rest of the market is neglected. Image: Shutterstock

Financial advice has to change. Shifting regulatory, technological and social dynamics mean that the traditional ways in which advisors have interacted with their clients are quickly becoming obsolete.

Quite simply, advisors have to come to terms with what they are selling, and what their value proposition is. If they are only in the business of selling products, they will be caught in a space where it is extremely difficult to differentiate themselves and margins will be tiny. If, however, they are able to market and sell their expertise, their options become substantially more attractive.

A different path

David O’Leary, founder and principal of Kind Wealth in Canada, explained to the Morningstar Investment Conference this week how his business has turned the pressures that many advisors are feeling into an advantage.

Kind Wealth only offers advice and coaching. Despite O’Leary’s background being in investment management, the firm does not manage any assets for clients.

“We don’t accept any commissions or sell any financial products of any sort,” O’Leary explained.

“Our clients know that when they pay us, the only thing we are going to give them is our advice, and so we have no conflict,” he added. “They like that independence and objectivity.”

To many advisors this may sound extreme, even untenable, but O’Leary argued that it can be extremely rewarding. This is not least because the public finds the value proposition compelling. In a survey of its clients, Kind Wealth found that the biggest factor attracting people to the firm was its advice-only model.

Source: Kind Wealth

A new market

Kind Wealth’s target market is people between the ages of 30 and 45 who are in the early stages of their financial journey, and are often starting families. This is a segment that, in his previous firm, he realised was underserved.

“I was concerned that most of the clients coming to me were my own age demographic, and we couldn’t really help them on a percentage of assets under management pricing model because, while they have disposable income, their financial assets are not the greatest they are going to be,” he explained. “So they are not a profitable client at this stage.”

O’Leary felt that charging clients based on how big their pot of money is basically ensured that advice would only be available to the wealthy part of the population with enough assets to make it worthwhile for advisors to serve them.

“That didn’t sit well with me – that, as a profession, we just collectively stand around saying we are all going to fight for that 5% and the rest of the country can’t really get financial planning,” said O’Leary. “So I wanted to serve that market.”

Turning challenge into opportunity

The decision to only offer advice also addresses two of the biggest challenges advisors are currently facing.

“This is not strictly a good thing, but when you stop managing assets for clients, and only offer advice, there is zero regulation of that,” O’Leary said.

“I don’t have to file a single piece of paperwork with any regulator,” he added. “I don’t have to pay any licensing fees or dues to anybody. That is a problem – there should be some basic minimums – but from a business perspective, as of now, that is a benefit.”

Focusing on planning and the psychology of investing also limits the threat of technology.

“Given the number of variables that go into a financial plan, it’s not possible yet for artificial intelligence to replace that,” O’Leary argued. “There is also the human element. The last thing that is going to be replaced in our business is your ability to connect with a human and understand their fears and anxieties.”

While some advisors may question how clients would feel about moving to this fixed fee model, for O’Leary this has proved not to be a problem at all.

“The target market we are looking at is 30 to 45-year-olds, and 90% of the people who come to us have never worked with a financial advisor before,” he said.

“In that demographic, this is how they pay for everything. They actually don’t even know that most people pay a percentage of investment, so it’s actually been very easy.”

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Hi Patrick
This article is too limited… I’m not sure what they practically do… i.e. where does advice start and end. What do clients walk away with (that no regulatory oversight is needed)?
Would appreciate a bit more info

Hey eMatt, there is something called Google, it not in 1965… not everything can be put in an article.

Good point… in my defense it was early

lazy reply – leave the sarcasm out of it

This article is a sequel to one by stealthyweatth and a lively discussion at the bottom of this article (worth reading) about how financial advisors should be fairly remunerated for their expertise.

Old models (mutual funds, platforms and % fees for financial advisors) are rapidly being replaced by newer more efficient and cost-effective models (ETFs, budget stock-brokerages like Easy-equities and models of remunerating experts, described above).

The barriers to entry to becoming a financial advisor in South Africa are very, very, very low. There are thousands of sole proprietors and IFA bucket-shops with FSP licences who are licensed (but not necessarily “qualified”) to give advice. The level of knowledge, experience and professionalism of some of these individuals is very poor. My point? Become your own financial advisor. There is a ton of very good material on the interweb, and you should be able to get to the point where you understand the difference between balanced funds, high equity funds, etc. Make your own investment decisions. You don’t even need to get an FSP licence because you’re your only client! And you certainly don’t need to pay the ridiculous initial and ongoing commissions to “advisors” who are little more than product salesmen.

Fortunately everybody is not as gifted and pessimistic about financial advisers, nor are the capable of doing all the research you are able to do…for many different reasons, for them advisers would be the way to go……the problem is the middle income class and lower income class who cannot afford these fees, will be excluded from advise.
Unfortunately barriers is no guarantee for anything. Being in the industry for the last 38 years, I have seen all the theory in trying to create an so called professional industry, without any success, as I have anticipated.
Would very much like to know your profession, just for interest sake.

Is it possible in this day and age you can dispense financial advice without any sort of regulation simply because you do not earn a fee from a product? Not sure about virtual meetings and what about the monthly
subscriptions? Paying for advice even when you are not asking for it?

End of comments.





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