The way in which financial advice is delivered has to change. The industry is facing challenges from regulation and technology that will make old models of advice obsolete in the very near future.
Henry van Deventer, chief officer for advice model design at Liberty Group, points out that the Retail Distribution Review (RDR) will fundamentally change the way financial advisors are remunerated. If they continue to rely on commissions from selling products, their businesses will not be sustainable.
At the same time, internet-based robo advice is accessible, convenient and capable of providing accurate investment recommendations. There is no value in a human financial advisor charging more to do the same thing.
This reality, together with demand from clients for more meaningful financial advice, is defining the future of the profession.
Where’s the value?
“The reality is that today, more than ever before, sitting on a winning recipe does not guarantee success into the future, simply because what our clients want and what we can do, and should do, is evolving at such a rapid pace,” Van Deventer says. “It has become so important for us to appreciate that what has brought us this far is not necessarily guaranteed to take us forward.”
This means advisors have to engage in a large dose of self-reflection.
“What clients value and are prepared to pay for is, to my mind, without doubt the single most important question that we will face in the coming years,” Van Deventer says.
This is particularly relevant given how technology is able to offer many solutions that are more efficient and more accurate than human advisors. As venture capitalist Michael Jordaan noted at a Satrix event this week:
“I think the role of the advisor is becoming more and more that of a life coach. Robo advisors can already do many things, but unfortunately investors are all prone to well-established behavioural biases. Advisors can manage that better than machines ever will.”
What have you done for me?
After RDR, the ongoing fees that advisors charge will have to increase. That is the only way they will make up for the loss of commissions. If this is the case, advisors have to be clear on how they justify this to their clients.
“When remuneration changes in line with RDR and your clients ask themselves whether you are worth it, they won’t answer that question based on what you have promised to do from that point going forward,” argues Van Deventer. “They will answer it based on what you did for them over the last two or three years. And we are already in that period.”
And what clients value most is the ‘advice experience’.
This includes the service they receive and the returns they earn, but most importantly it is the ‘tailoring and teaching’ their advisor offers.
“As opposed to clients feeling like they are getting a product off the shelf – like they are going through a production line – does what the advisor is offering speak to what is important to the client and help them solve the problems that matter to them?” asks Van Deventer.
“When it comes to having meaningful conversations with our clients, it’s not about planning for the money – it’s about planning for the person and the things the person values and wants to achieve.”
Becoming good at having those conversations is the skill set he believes advisors should be focusing on.
The right questions
“We need to shift the focus away from talking about markets to equipping clients to answer the questions that keep them awake at two o’clock in the morning,” Van Deventer says. “I am yet to meet the client who lies awake at two in the morning wondering about whether their bond exposure is too aggressive now that we’ve seen an uptick in the economic growth cycle.
“Clients don’t worry about that,” he says. “They worry about what is going to happen if they have another kid. Can they afford that? What can they do with their time when they retire? Can they still afford to travel? The better we can help them to answer these questions, the more meaningful our advice becomes.”
He says research indicates that advisors who are good at this see two-and-a-half times more referrals from existing clients, and their funds under advice are one-and-a-half times more per client.
“So not only does this help clients to have conversations the internet won’t allow them to, it makes financial sense for the advisor,” Van Deventer says.
“The truth we have to realise, as financial advisors, is that the traditional way of thinking about investment advice doesn’t make as much sense as it used to.”