Your price is only an issue when your value is in question

I was asked by your editors to write to you this morning on the ostensible subject of how advisors may compellingly communicate the value of their advice to clients and prospects. And I’ll be delighted to do so in just a short while – as soon as we deal with the inconvenient truth that this is the wrong question.

The threshold question is, of course, what is the value of your advice? Once you have a very clear idea of what your value proposition is, then crafting a way of advocating for it becomes quite simple, even obvious. The sticking point for most advisors is the converse: that they find it very difficult to present their value proposition cogently and convincingly because they do not really know what it is.

First, then, let’s define the term. An advisor’s value proposition is that service or basket of services which a reasonable prospect will clearly see is worth much more to him than what the advisor is charging him for it. When a prospect perceives that the value of your advice far exceeds its cost, he becomes a client. When he persists in this perception, he becomes a client for life.

If and when he concludes (even unconsciously) that your value proposition has gone negative – that you cost more than you’re worth – you lose him. Or, at the very least, he stops listening to your advice.

What are some common advisory value propositions that are guaranteed to go negative sooner than later, because you can never consistently deliver on them? Well, I can immediately think of the two big ones: prediction and performance.

If the last three years taught us nothing else, at least let them have convinced us that neither we nor any other sentient being can consistently anticipate the economy or the markets. If we have room for a corollary lesson, let it be that the more dramatic the next series of market or economic events is going to be, the less we can anticipate them, let alone time them.

The other great empty promise many advisors offer – to their enduring sorrow – is the claim to be able to handicap future relative performance, based either on past performance, the examination of chicken entrails, or whatever. There is no statistical evidence for the persistence of performance. And, at huge market turning points, relative performance – in addition to being unpredictable and uncontrollable – simply doesn’t matter.

What, then, can an investment advisor offer that is manifestly worth multiples of what he charges, again and again over a client’s investing lifetime? Why, of course: it’s behavior modification.

The dominant determinant of long-term, real-life financial outcomes isn’t investment performance. It’s investor behavior. And the most high-value service we can offer is preventing the client from behaviorally blowing himself up. Warren Buffett’s teacher, the immortal Benjamin Graham, always said, “The investor’s chief problem – and even his worst enemy – is likely to be himself.” I believe we advisors were sent into the world for the express purpose of interposing ourselves between the client and his own worst instincts, thereby to earn treasure on earth and in heaven. Let me give you a pertinent (however grotesque) example.

On May 6 of this year, in the so-called “flash crash,” American common stocks appeared to have fallen nine percent in one day. In fact, they had not: most of the putative decline took place in sixteen minutes, and was made up in the following twenty minutes.

But after two previous years of almost unbearable equity volatility, the “flash crash” set off a fresh wave of investor revulsion, exhaustion, panic and capitulation. People simply gave up; they couldn’t take any more. This was only human.

The advisor who had rigorously trained her client to regard her not as a market prognosticator but as a behavior modifier was ready when the client called, insisting that he wished to sell. Let’s assume she prevailed, and the client, however reluctantly, held on.

As I write, the broad equity market in my country is about 12% higher than it was at the nadir of the “flash crash.” (Since the elapsed time is six months, the return to the behavior modifier’s client is an annualized 24%.) I’ll assume the advisor is charging her client, for an entire year of such life-forwarding behavioral guidance, something on the order of one percent.

That’s the pure essence of the behavioral value proposition. It doesn’t always work that quickly or that dramatically. But, human nature being what it is, it always works.

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© 2010 Nick Murray. All rights reserved. This essay is licensed exclusively to Advisor.ca. Nick’s book for clients and prospects, advocating for the behavioral advisor, is Simple Wealth, Inevitable Wealth, available only on www.nickmurray.com, click on “Books.”

(11/25/10)