Evolving client interactions

I was listening to some old U2 tracks and thinking how much their sound has changed over the years. This got me thinking about how some of my other favourite bands have evolved over time, to the point where their early work is almost unrecognizable from their current material.

I then started to think about how important it is to change the way we work with clients, since their needs change over time. (My mind started wandering during With or Without You).

Do clients need and want something different today from what they needed 10 years ago? What types of advisors are available to clients today and how should you structure your business? I categorized today’s advisors into three main categories — and even gave them their own U2 theme song:

1. Investment managers: Hold Me, Thrill Me, Kiss Me, Kill Me

Advisors who see themselves as investment managers pride themselves on their ability to achieve above average returns for their client. Many advisors try to compete in this category. However, the truly successful investment managers are a rare breed. Most advisors can tell you who they are. These are advisors who, for some reason, have a special insight into the market. They can stomach the volatility and make rational decisions backed with market insight and intelligence even in the most challenging or euphoric markets. Truly successful investment managers represent approximately 5% of the advisor population by my estimate (no research here, just my observations). Yet, the majority of advisors still try to compete in this space.

For those who are not in the top 5%, the outcomes are predictable. Clients will like you in good or reasonable markets. But they will turn more suspicious in bad markets, start asking about fees and take longer to agree to your recommendations or disregard them all together. In the worst cases, these advisors become order takers with a business of “at-risk” clients.

2. Accumulators: I Still Haven’t Found What I’m Looking For

The accumulator or entrepreneur has risen in popularity over the last decade. These are the advisors who buy other advisors’ practices. This approach, if done reasonably well, can be very profitable.

More often than not, accumulators try to keep all the clients and find they have to add more staff as a result. Their business often becomes very reactionary and the advisors become staff managers rather than client managers.

These businesses can still be good for the advisor but not as good for the client. Without client satisfaction, the business expands only through further acquisitions or market growth. These types of advisors sometimes feel they are constantly running to keep up; they no longer feel they are truly adding value to the client relationship, but they are making a good living and don’t have the time to fix the problem — before it is too late.

3. Wealth managers: Sweetest Thing

The final type of advisor is the wealth manager. In my estimation this approach provides the most repeatable and predictable business and is the model the majority of advisors should adopt.

In any service business, if you meet client expectations, you will do well. Your business will grow each year and you will retain clients. Think of the person who is the most trusted financial advisor to high-net-worth clients — more often than we like to admit, it is the accountant.

Think of your own accountant. He/she knows the tax code well and is aware of recent changes, will complete your taxes by a certain date and will send you a bill that is in the ball park of what you discussed. Done, done and done. It’s all very black and white. Advisors, on the other hand, could have a difficult time meeting expectations. It all depends on a variable they don’t control: the market.

So how do we move from the grey to the black and white? Easy: become a wealth manager. Wealth managers provide insurance for families or business owners who are at risk if something should happen to them, their family or their business. Wealth managers also provide tax advice such as income splitting that may not benefit their clients today but will be hugely beneficial in retirement. They complete and update client wills to ensure wishes are followed through with. They also create financial plans to give clients insight into how much they need to save to realize their income goals in retirement.

With the exception of the financial plan, all the other items are binary: you either helped your client complete them or you didn’t. You met expectations or you didn’t. From personal experience, I can tell you that I give my advisor a lot more leeway in difficult markets, because he got me organized. I don’t beat him up (physically) on performance (unless it is really bad) because I know he has done so much more for me.

In fact, Bono might have put it best: Even though my wealth manager is not an accountant, he’s even better than the real thing.

Keith Pangretitsch is the director of private client services at Russell Investments Canada.

(07/21/09)