Taking an advice-first approach

Advisors have had brutal experiences in the marketplace, especially over the last six months. Some clients are more proactive than others when it comes to asking for advice about their portfolios. I often hear questions like, In light of the losses that I’ve taken do you think that I will still be able to retire at age 60? Or, How much more will I need to save to still reach my objectives?

Both questions are an open invitation for you to say, I would be delighted to do an analysis for you so I can recommend a course of action to give you the highest probability of achieving your objectives.

Even if your clients don’t ask great questions like this, many may be delighted to get your advice before you recommend any more product transactions. I’m suggesting you take an advice-first approach to business.

“Advice first” means what the term implies — you give advice prior to the sale of any products. It could be as simple as advising the clients how much they need to save to reach their objectives.

During good times clients will settle for a transactional approach, but in tough times some clients are looking for something more. Over the years, I’ve noticed five major reasons why advisors switch to an advice-first approach.

1. You’ll earn more.

You’ll make more money because typically you’ll get all the clients assets versus a piece of the pie. You’re able to address all the client’s problems (financial planning, tax, mortgages, insurance and investments), resulting in other “transactions” that generate revenue. Cerulli Associates, a U.S. research firm, followed a number of new financial advisors for five years. The firm found that advisors who were doing financial planning (advice first) generated 400% more revenue than their transaction-based counterparts.

2. It’s better for the client.

If you’re doing comprehensive planning, you typically don’t overlook issues that need to be addressed. For example, a comprehensive risk management approach will ferret out needs for various and sundry living benefits insurance. If your small business owner client has his portfolio perfectly balanced but has inadequate insurance coverage, his portfolio will likely not remain in tact if he has a serious illness or injury.

3. Consumers are demanding more value.

Financial advisors used to be the first source of difficult-to-source information. That is certainly not the case any longer. But while it’s easy for a client to gather information, it’s another thing entirely to understand the information in the context of their own situation and to know what actions to take. Making sense out of the information can be valuable to a client yet it can go unnoticed unless presented in the right context. When you generate a plan that includes a step-by-step action approach to help a client get where they want to go financially, your services will be considered far more valuable even if you end up recommending a proprietary product. You’ve done something to clearly illustrate why they need to “buy” what you are “selling.”

4. Compliance becomes much easier.

The advice-first approach squarely addresses the suitability of any of your recommendations. It also establishes that you have a process for making recommendations. A lawyer I know specializes in suing financial advisors. He says he first tries to establish that the accused advisor has no process for making recommendations.

5. Competition demands advice first.

It is becoming increasingly important to distinguish yourself from your competitors. Canada will eventually follow suit with other countries in making the consumer aware exactly what they are paying for “advice.” Right now, a larger amount of some advisors’ compensation (for advice) is derived via trailers and commissions.

When your client with $1 million in assets sees on his year-end statement that you were paid $10,000 for the “advice” he received over the past year, he can’t help but wonder what he has actually received for his $10,000.

Many clients will want to see some robust evidence of the value they are getting for the advice they are paying for. This specifically equates to a well-thought-out financial plan.

Make no mistake, true financial planning is valued. Here is an excerpt from an e-mail a new client sent to one of my colleagues after she presented the new client with her financial plan (referred to as a Personal Financial Strategy report).

“Analysis contained in the Personal Financial Strategy report confirms my belief,” the client wrote. “No longer can I afford to squander my savings. I must also become an astute investor fast. The rate of return on my investment portfolio must improve.

“Just one look at my mutual fund portfolio is the ultimate proof that past performance is no guarantee of future performance. In retrospect, I’m glad to have hung onto some GICs. Not only is the principal preserved, I also possess the means to wait for the market to come back. An added bonus is that some good investments can be found at bargain prices in this market. May I express my heartfelt gratitude for all the efforts that you’ve put into the report. The Personal Financial Strategy report is most helpful. The proposed asset allocation seems like a good start to get my financials on track, and I’m most interested in your implementation strategy.”

The advice-first approach taken by my colleague resulted in $1 million being transferred from an advisor who was stuck in the transactional world.

Advice-first advisors have certainly had a lot more fun over the last six months than their transactional counterparts. If you consider such an approach, you will be no different. In future columns, I will bring you ideas that will assist you in making a transition.

John A. Page, R.F.P., CFP, is a senior advisor at Page & Associates and the president of Wealth Enhancement Academy.

(03/02/09)