Deciphering the Financial Advisory Industry: Part III
So I want to expand on a question that I asked in last week's podcast. For those of you that haven't listened to it, I'm dubbing this series of podcasts the Forbidden Questions series, and it's designed to enable you to ask the right questions of your future or current financial advice team. And one of the questions that I asked last week was, what is the succession plan of the advisor that you're about to partner with? And the context was I asked it in the context of low fees. And so I want to expand on why low fees should trigger your question on their succession plan? It may not be evident to you how those questions are connected, but I promise you they are inextricably linked.
Volume or Margin?
Financial advice is a business and just like every other business, there are margins and profits that allow you to invest back in the business and which incentivize certain activities. If you ask how many clients the advisor has, you can then back into the gross revenue number of the firm based off your fee. Remember that payroll, rent, compliance, marketing etc all have to be paid for. If that number doesn’t seem attractive to you, this is probably not a good sign for the longevity of the firm, it’s ability to attract and retain talent to serve your needs or its ability to grow with you as your wealth increases. If their fees are low, it is a rational conclusion that they need to work on volume of clients. This may seem pretty basic. You can work on volume or margin…but in the financial advice business it can be the difference between receiving intimate, differentiated advice for generations or the minimum amount of attention and service necessary to keep your business.
The next facet of this relationship volume based business is portfolio management. This is a risk to you as the client because now that I’ve armed you with this knowledge you will be left wondering how your portfolios are being managed and monitored. If they are not regularly reaching out to you asking what is going on in your life, how are they going to know how and when different risk mitigations should be put in place on your behalf? This is similar to my question about your tax returns that I’m sure everyone is tired of hearing me ask about but it bears repeating. How can someone put together a “customized portfolio” without reading your tax return? It’s impossible. When you have too many clients, you don’t seek more opportunities to be accountable. You don’t seek more opportunities to give. In a volume based business you are hardwired to seek more opportunities to receive because that’s the lifeblood of your business. If you are in a volume industry, I’m not knocking your business model…but this industry isn’t a volume based business. The advisor who charges fees to 250-500 clients, has limited staff and is still actively looking to grow, is not much different than the old school advisor selling individual stocks on commissions. It’s just a transactional arrangement and then you move on to the next account.
Continuity Strategy?
Zeroing out a little bit more, the other reason that I believe advisors run a volume based business is that they are looking for an exit. IE they are looking to sell their client practice to someone else who will pay them a 2x or 3x multiple. These buyers can be everyone from other advisory firms to private equity firms. Granted, if you are partnering with an advisor over the age of 50, you should point blank ask them when they plan on retiring. Who is or what firm is their succession plan? And finally, Would they ever consider selling the practice? If you are reading this and you don’t have a good answer to these questions, you should start today. JD power last concluded that the average age of Advisors is 57 and if you look at the age breakdown of Certified Financial Planning Professionals, 45% are over the age of 50. So back to my original point, with the vast majority of advisors with their eye on the “finish line”, more selling begets more selling which drives up multiple expansion. If you are in a volume relationship, this puts you at a disadvantage from the beginning because the best suitors on the street are looking for…you guessed it, practices that are built on profitable margins, not volume. So you are paying twice for your decision to partner with someone based on low fees. First in having to compete with other clients for differentiated planning services and after that when being bid on the street. Of course you can always shop around, but who wants to do that in their 60’s, 70’s or 80’s? This is kind of like getting on an airplane with a pilot that decides to get you to the first leg of your destination, and then he bails out in mid-air and says “I briefed the new guy. Don’t worry, I’m sure you’ll like him!”? So I'm being a little bit facetious here, but I think you can see the wisdom in ensuring that you actually understand what the firm's succession plan is and how the different factors of volume vs margin directly affect the advice that you're going to get. Why not do your homework upfront and lay a foundation that you can build on for multiple generations?
领英推荐
Cost or Investment?
This leads me to your last point. Instead of viewing your fees as cost. Why not view your fees as an investment. An investment in advice, consulting and curated service that allows you to sift through all the data and information out there and make a plan which gives you efficient and predictable cashflow which in turn allows you to invest from a position of strength and confidence rather than doubt and insecurity. I want you to ensure that the decisions you are making are solving a need you within three generations of your family at a minimum. Partnering with an Advisor team is about so much more than Not simply just figuring out the shortest path to retirement. Because the truth is there is so much more to financial independence than doing nothing. that ensures you and your family are equipped to make the most intellectually rational decision possible. View your fee arrangement as an investment.
That brings us to a close for today. Thank you again for joining us. If you have questions or further thoughts, please reach out! Remember that I am wishing you continued Truth, Beauty and Goodness on the road ahead.
This Newsletter is for general information purposes only and is not intended to provide specific advice or recommendations for any individual. To determine what may be appropriate for you, consult with your attorney, accountant, financial or tax advisor. Investing involves risk, including possible loss of principle. No strategy assures success or protects against loss. A diversified portfolio does not ensure a profit or protect against loss in a declining market.?Unless otherwise noted, guests of the Wisdom and Wealth Podcast are not affiliated with CWM LLC.