Small dealers, adapt or die

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Wealth management business is undergoing significant structural changes thanks to protracted slowdown, skittish clients, and concerns over low returns and high volatility.

In the new business and regulatory environment, the survival of small dealers and advisors will depend on their ability to change and adapt, said Earl Bederman, founder and president, Investor Economics, at the second annual Small Dealer Symposium Strategies for Success in the New Financial World, held Wednesday in Toronto.

“Equities and transactions-based accounts have been experiencing a longer-term underperformance relative to the total market place and that will continue into the future [where] full-service brokerages are going to account for a lesser share of that total,” said Bederman.

Discount brokerages are growing dramatically and will continue to do so well into the future, he added.

That is not to say it’s the end of transactions-based ownership of equities, but there is a “movement towards self reliance and the growth of online discount brokerages and equity ownership through that channel.”

There is no denying that the industry is witnessing a structural shift towards fee-based managed assets. “Fee-based terms rates are higher, more stable and more predictable and it’s not surprising that that’s where the action is going and will go in the future,” said Bederman. “Figuring out and understanding the dynamics of fee-based [services], why it’s been happening and why it’s going to grow, are going to be critical to the success of all firms in the market place, especially in the brokerage industry because it has been and will continue to be at the forefront of that shift.”

Brokerage channel is the conduit for a majority of the households to access or manage their financial wealth or engage in the dispossession of it. Bederman says that will only expand in the future.

Full service brokerage started to lag behind discount brokerage in the middle part of the last decade. But the 2008 financial crisis really amplified it. “[The trend] gained tremendous momentum in the [2008] downturn and in the aftermath of the downturn, and that’s something that we believe is important to pay attention to because it does show there might be some kind of behavioural shift in terms of attitudes toward advice versus self reliance.”

The issue of compensation is a nagging issue in the industry that ebbs and flows with market performance. “When markets [bounce] back and equities are up, everybody’s happy and [the compensation issue] goes into the background.”

The current economic climate has not only brought it back but is keeping it front and centre. “This is a permanent and continuing issue in the industry that is going to need change because we are in an environment of reduced profitability and margins and lower rates of return,” said Bederman.

As more advisors accept different kinds of fee-based compensation, Bederman says it will become a stepping stone to the future of transactions. “Advisors as discretionary money managers are increasing [and] although the percentage of advisors that are doing that is relatively small, it’s ramping up,” he said. “When we talk about the discretionary business of brokerages what we see is more advisors are becoming their own private investment counselling firm and that’s an important trend in the industry.”

In aggregate, fee-based brokerage is still a big part of the market place. Bederman said the fee-based brokerage becomes very important in terms of facilitating the mechanism for advisors to lower the cost of the investment products to the customers. The fee-based brokerage, therefore, becomes potentially a gateway to more discretionary business, he added.

One of the ways firms can counter this heightened attention to fees and costs is by offering a differentiating value proposition and communicating it compellingly to the target market.

However, value proposition is something leaders of many firms don’t get right or fail to express it effectively, says George Hartman, CEO, Market Logics Inc. a firm that provides consulting services to the financial services industry.

“Value proposition [is done] from two perspectives; the first one is what we offer out to our clients. [It is] what we say to them to convince they ought to do business with us,” said Hartman.

The second, he said, is what is offered to the firm’s advisors who represent their products and services to the market place. “I can assure you in most cases advisors are not representing [their firms’] value proposition effectively,” said Hartman. “In order for a value proposition to be conveyed effectively to clients, advisors have to understand it.”

Value proposition, he said, must be written from a perspective of the client. But it is clear from their mission statements that many firms tailor their value proposition from a perspective of the firm’s owner rather than client.

“The value proposition is really to describe to people what’s in it for them and why you versus the competition,” said Hartman. “People have a lot of choices with whom they do business today and all different methods of accessing market information and transactions; we need to find a way to convince them that we’ve got the goods and, in fact, can deliver them.”

Leadership is the key issue in the survival of particularly small- and medium-sized dealer firms. “Walking the walk and talking the talk by senior executives and by the founders of the firm is absolutely essential,” said Hartman

It’s not just talking about it, but demonstrating it by putting the resources in place to allow advisors to deliver on the value proposition, he added.

Last but not least, value proposition should be consistent and should be widely shared, known and believed within the firm. “It’s not something you do once, put on the wall and then file way,” said Hartman. “It needs to become part of the culture, part of the daily dialogue within the organization and needs to be believed.”

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