Financial advisers who seek to define their value proposition solely in terms of investments may struggle to survive the current inflection point in our industry that is driving the separation of advice and strategy from product.
The challenge posed by this change has been highlighted again recently by a keenly watched industry scorecard which shows how few traditionally active funds manage to outperform their benchmarks over periods of between one and 10 years.
The S&P Dow Jones Indices Versus Active (SPIVA) survey began in the US in 2002 and now covers Australia, Canada, Europe, India, Japan, Latin America and South Africa. In all regions, the six-monthly survey’s findings rarely change. Most active funds underperform their benchmarks over periods of five, 10 and 15 years. But even over shorter periods, managers routinely fall short of even delivering the market return.
That was certainly the case in the past financial year in Australia, where SPIVA surveyed results from 854 Australian equity funds, 436 international equity funds and 116 Australian bond funds. It found large cap Aussie equity funds in 2018-19 posted average returns of 6.3%, well below the gain of 11.6% by the S&P/ASX 200 index. More than nine out of 10 large cap managers failed to do better than the market after fees. Similar underperformance was recorded in the other categories.
For financial advisers, these reports, which are available free online, are full of helpful information. Of course, there are always funds that outperform from year to year. The trick for advisers is identifying them in advance. And, as we all know, the risk in chasing past returns is you always feel like you are trying to catch a moving train.
The point here is not to stoke the tired active vs passive debate. There are some good active managers out there. The point is to challenge advisers about where they see their value-add. Is it in picking managers and making tactical asset allocation decisions? Is it in closing your eyes and choosing the hottest new manager and hoping for the best?
Investment No Longer the Focus
My view is that a below-the-line proposition built around “I reckon this” and “I reckon that” won’t stack up in the future. As clients become increasingly discerning and the marketplace matures, advisers’ roles will be redefined, as will their value propositions.
The fact is it is no longer just about the investment. Certainly, just helping your clients to achieve the return to which they are entitled is a great start. But where advisers really add value, at least in clients’ eyes, is in values discovery, mentoring, coaching, counselling, project management and as a catalyst for meaningful change.
In your client conversations, the goal should be to get your clients to connect the solutions you offer to the part of their brains that relates to what is most important to them – not necessarily money or wealth, but family and relationships and hope and meaning.
What people really want is to know is whether they will be OK and whether they are on track to achieve what’s important to them. They want their adviser to know them and their family, to simplify and declutter their lives, and to ease their anxiety. Strategy, coordination, implementation, and management are all part of the proposition of the future.
This is a significant change in thinking, to be sure. But we have seen this movie before. Think of the travel industry. Agents used to get paid for selling product. Then they were disrupted by the internet. Many of the simple things they used to help us all with could now be done ourselves online. So, they had to quit the business or change. Many of those who survived reinvented themselves, targeting niche markets or specialising in specific areas such as adventure holidays or immersive experiences.
Shift to ‘Life-First’ Advice
In the advice space, I see a similar transition underway into what I call a ‘Life-First’ approach. This recognises that clients’ needs evolve as they move from wealth accumulation to wealth conversion, wealth protection and ultimately wealth transfer. Instead of looking for ‘single need’ solutions such as investment management, they are gravitating towards an integrated solution that requires a more holistic and integrated approach from their advisers.
The Life-first Adviser helps clients understand those planning needs necessary to help them transition to the next phase of their lives. This involves a ‘life-based’ instead of a ‘money-based’ approach. Conversations start with the focus on life values, needs, concerns, opportunities and goals, before moving to strategy.
Under this redefinition of advice, the Life-first Adviser will also take on more of a partnership role in the life of the client, transforming more into a mentor, coach, educator, catalyst and project manager than being a mere investment adviser.
Where is the opportunity here? Let’s look at the numbers. Investment Trends tells us 2.1 million Australians intend to turn to an adviser in the next two years, up 31% on the previous survey. Based on those with unmet advice needs and the number of current registered advisers, this translates to about 450 clients per current adviser at full demand. Post-FASEA, that ratio will probably rise further. And keep in mind that depending on the proposition, most advisers can only manage about 80 to 120 client relationships.
So, in that context, demand is not the issue. An irresistible value proposition is.
It’s for these reasons, I passionately believe that the approach to advice I advocate can change lives. I call this new kind of advice Life-First because it is a holistic approach based on both the material and non-material needs of people and their families. We have all seen both the benefits of such an approach and the enormous costs of the still too common alternatives in poor advice, product-led advice, or no advice at all.
I firmly believe that not only will clients pay you for this sort of service, it will improve their lives, give you enormous pride in your contribution and help you build a sustainable and growing business of your own.
And based on the data from SPIVA, there is good reason for you to consider change.