A variety of forces — technological, competitive and regulatory — are changing the business landscape for financial advisors. A quick look at the headlines, in any financial industry publication, supports the idea that the pace of change in the advisory business has accelerated in recent years. But does this mean that advisors must resign themselves to having their practices shaped by forces beyond their control?

At Capital Group, we believe you should view revolutionary forces affecting the industry not as a threat, but as an opportunity to strengthen your practice by “reframing” the value that you provide to clients. We have developed a methodology, both philosophical and practical, that enables clients to clearly see, and appreciate, the value that you provide them. Taken together, the various elements of our approach form an “advice revolution.”

Forces reshaping the industry

Change has been a constant in the wealth management industry — but even so, we have now entered a truly transformational age. Financial advisors are facing powerful pressures on multiple fronts to adapt their practices:

 

• Regulatory: The U.S. Department of Labor’s fiduciary standards — and the uncertainty about how and when these rules will be enforced — have created numerous challenges for financial advisors. To prove that they are meeting the “best interests” standard, advisors will need to adopt the right systems, create audit trails and implement a host of other new practices. 
• Technological: Financial advisors have had to cope with the rise of internet-based “do-it-yourself” services for quite some time, but the rise of robo-advisors has taken financial planning technology to a new level. While it remains to be seen whether robo-advisors will turn out to be a “friend” or “foe” to advisors, there is no denying that these algorithms and apps are radically shaping clients’ expectations for how investment services can be delivered.
• Demographic: Baby boomers will transfer an estimated $30 trillion in assets to younger generations over the next several decades. As a result, advisors must increasingly focus on forming relationships with their clients’ spouses, children and grandchildren. The fact that up to 70% of women fire their financial professional within months or a year of their husband’s death, according to Vanguard, drives home the importance of forming these relationships.
• Economic: “Fee compression” has become a growing concern for financial advisors. Among the forces that are threatening advisors’ margins are the shift toward passive investing and low-cost mutual funds and ETFs, and the fact that younger investors who are “digital natives” are highly familiar with shopping online and will not hesitate to question the cost of investment advice from human advisors.

The combination of these forces means that “business as usual” is no longer an option for advisors. To thrive in the new environment, you will need to adapt, and one of the most important areas of adjustment is how you position your value to your clients.

Closing the “perceived value” gap

There is a major disconnect between the services that advisors think are the most valuable and the ones that clients prioritize. This disconnect can lead to client dissatisfaction and bad outcomes for both parties.

If you are like many advisors, you learned that your value was based largely on your ability to outperform benchmarks and create portfolios that are allocated efficiently across asset classes. While these measures are undoubtedly important, they don’t align with how clients think about the value that you are providing them.

In fact, a recent study published by Vanguard asked clients to quantify how much value their advisors add through various services. Surprisingly, the study found that clients basically ascribe zero value to asset allocation. Conversely, the clients in the study placed the greatest value on services related to “behavioral coaching.” Put differently, clients placed a high value on the advisor saving them from making bad decisions with their money and helping them achieve their goals.

The financial crisis provides a clear example of why behavioral coaching is so important to clients. By early 2009, many investors, shaken by the precipitous declines of the previous two years, dramatically reduced their equity holdings. As a result, these investors didn’t fully participate in the ensuing recovery. In times like these, advisors are able to keep clients focused on their long-term goals and avoid the temptation to deviate from investment strategies at exactly the wrong times.

So, how can you maximize your efforts to increase your value in your clients’ eyes? We have found that advisors can achieve excellent results by identifying their core services — such as retirement income planning, wealth management, estate/legacy planning, tax planning, risk management and education funding — and reprioritizing the energy they dedicate to delivering services in a way that aligns with clients’ perceived value. Rethinking how you deliver — and talk about — these services closes the gap between what you know your core competencies to be and how your clients understand and value those competencies.

Goals-based planning is key to reframing efforts

Reframing your value requires reorienting your practice around helping clients achieve their goals. In recent years, it has become trendy for advisors to talk about adopting “goals-based planning” (GBP), but we have found that many advisors are just paying lip service to the approach and aren’t making substantive changes to how they work with clients. At Capital Group, we have developed an approach to GBP that is based on research into behavioral finance and how investors think about risk and their goals. Our approach has meaningful implications for how advisors construct and manage portfolios and how they communicate with clients about their progress toward their goal.

A central part of our approach is helping clients understand the true cost of each goal. This involves guiding clients through the process of articulating specific aspects of each goal. For example, if a couple says they want to spend two months a year “someplace warm,” you need to probe deeper. Do they want to go to Arizona or Florida? Or somewhere more exotic, such as the island of St. Kitts? Do they want to stay in a first-class hotel or rent a small bungalow?

Another critical element of our approach is guiding clients through the process of prioritizing their goals. This requires clients to place their goals in three categories:

1. Essentials: absolute necessities, such as retirement living expenses and health care
2. Enhancers: things that clients would like to achieve, but could do without, such as a vacation home
3. Endowments: aspirational “legacy” goals, such as leaving money to a charitable group or an inheritance to children

Each of these categories has a distinct value to clients, and each requires a different degree of “confidence.” For essentials, we assign a 90% required level of confidence, which suggests using a more conservative investment strategy. For enhancers, we assign a 75% level of confidence, which calls for a moderate investment strategy. For endowment goals, a 50% level of confidence is best served with an aggressive investment strategy.

This system of goals-based planning not only helps you shape your clients’ investment strategies precisely to meet their goals, but it can also positively affect the way clients look at their investment results. For example, under a less nuanced system of goals-based investing, clients might feel disappointed if it appears that they will fall somewhat short of reaching their goal of two months each winter in St. Kitts. In fact, they might feel they have “failed,” and — fairly or not — blame you. However, if they understand that enhancers are things that are “nice to have, but not essential,” they may be satisfied with a lesser outcome, such as six weeks each winter, rather than the full two months.

Our approach to implementing GBP goes beyond merely changing your approach to goal setting and portfolio construction. You must also rethink how you communicate with clients. Whether during in-person meetings or through quarterly portfolio updates, all of your communications with clients should focus on their progress toward their goals. This means you won’t want to lead with typical metrics, such as standard deviation and a portfolio’s performance relative to benchmarks. By keeping the discussion in the realm of advancement toward highly specific goals, you can also avoid the “performance trap” —­­­ the danger of being judged solely on the relative performance of clients’ portfolios.

Reframe your value — and reshape your future

Change is a constant in the wealth management industry, and the rate of this change has undoubtedly accelerated over the past decade. While navigating this “advice revolution” may be daunting, it isn’t optional. The success of your practice depends on your ability to adapt. As you respond to the regulatory, economic, demographic and technological forces facing your firm, you should focus on reframing how you talk about and deliver the services that are most valuable to your clients.

We invite you to download our “Reframe Your Value” worksheet. This document walks you through the three-step process of identifying, demonstrating and reinforcing your value in the marketplace.