I believe that it all started with the book, The Supernova Advisor: Crossing the Invisible Bridge to Exceptional Client Service and Consistent Growth by Robert D. Knapp. Printed by John Wiley & Sons, Inc. in 1995.
The Supernova Advisor looked at the way an Advisor functioned everyday and what were the roadblocks that held back advisors from greater productivity. It was a ground breaking book I believe because it focused on the way advisors functioned. It did not focus on investments which in of itself was revolutionary. Robert Knapp was a former advisor, manager and regional manager for Merrill Lynch. Coaching was Robert's forte.
I cite this book for several reasons. First, Robert Knapp worked for Merrill Lynch and this is an important point because the retail financial industry has been dominated by ex-Merrill Lynch executives for the past 15 years. At one point every major retail sales force was led by someone from Merrill Lynch. Even today UBS, Merrill Lynch and Morgan Stanley are led by Merrill people. This is no surprise as the "Merrill way" in the 1980s, 1990s and through to the new millennium was the envy of Wall Street. This was/is a very influential book among Wall Street executives. Second, as mentioned before this was one of the few books that focused on the way Advisors functioned on a daily basis and third the book was written in 1995. The second and third points are connected as 1995 was the beginning of the great technological revolution which is still in full force today. We are in an age where the rate of technology change is parabolic, straight up, and will remain that way for the foreseeable future.
The Supernova Advisor can be broken down into the thesis that an advisor because of all the paperwork could no longer manage/service a great number of accounts. If you cannot manage a great number of accounts then the accounts you want to cultivate are large accounts and the accounts you want to cull are the small accounts. Totally logical. In 1995.
Next around the year 2000 McKinsey worked with all the financial firms both institutionally and retail to execute the first profitability studies of their clientele. Typically any group of clients breakdown as 70% unprofitable, 20% break-even and 10% as driving all the profit. Which was almost exactly the percentages of the studies conclusions for the financial industry. These studies led the firms to create or beef up their private banking/PWM offerings so they could reach the most profitable segment more effectively. I will discuss this strategy in another blog but will only point out here that the firms did a client segmentation study and then segmented their Advisors.
So these two unrelated events have driven the strategy of the full service firms for close to 15 years. The Supernova Advisor introduced the concept of "swimming upstream" and the profitability studies "confirmed" that the firms do not want small accounts (unprofitable). Now the full service have bracketed their clientele on the top end and on the bottom end based on the size of the account. Services are divided up according to the size of an account and where the account is located in the firm not necessarily on the actually needs of the client. Accounts not in the Private Banking/PWM broker segments are not allowed access to certain products and services. UBS(to it's credit) is the exception. UBS bases it's services on the needs of the client no matter where the account sits in the firm. Merrill Lynch has strict requirements on where an account can be actually sit in the firm. If you are a $10 million account you must be in the Private Bank.
The Supernova Advisor circa 1995 was correct in it's assessment on how to deal with a major issue everyone dealt with in 1995, an overload of paperwork. It was overwhelming for every aspect of the industry, advisors, CSAs, branch office operations and operations on a national level. No one was immune to the paperwork problem. But that has changed as technology has changed every aspect of retail firms from opening accounts, performance reporting and how we manage the assets. The changes have allowed advisors to manage a lot more assets with a lot less effort.
So, are all assets good assets or not? If we are going to judge assets as good or bad is the best methodology based on the amount of assets? What about the mix of the assets? Or what is the potential of the assets? Unfortunately because of the limitations the industry's technology the method used is the amount of assets. But it makes sense given the current business model. The amount of assets multiplied by the average fee that the firm earns minus the average cost of the firm for the account maintenance. Profitable or not? In or out? But this methodology re-enforces the current business model which is firmly entrenched in the "we only do investments" business model.
In my career I started as a Customer Man, then an Account Executive for years, then to a Financial Advisor before moving on the a Wealth Advisor or Wealth Manager. The name changes parallel the hopes and dreams of the industry's senior management teams to cross-sell their existing clientele more financial products. But as much as we try the industry remains mostly, above 95% of revenues from Advisors, in the investment world. There have been definitive inroads into lending in the last 6 years as the banks have pulled out of mortgages above the Fannie/Freddie limits and the wirehouses have responded to the demands of their clientele.
So the decision to look at an account size as a correlation for revenues is correct, in the investment business model. But in reality revenues are in fact are driven by life events. I am buying a house, we are having a baby, do I have enough to retire, I own my own business are life events. Mortgages, life insurance, long term care, loans and disability insurance all are revenue opportunities driven by the needs of a client not by the amount of their assets at the firm. It is the inability of the Financial Advisors to capture life events and deliver a solution that make small accounts seemingly not profitable to a firm. That is a training issue not a business model issue per se. This does not mean that firms can/should change their business model to support a change in culture to move a wealth management model to increase cross-selling.
The advisors business model today is driven by investment events. Changes in interest rates, equity markets, emerging markets or small cap versus large cap. But wealth management is driven by the needs of the clients and their life events. This entails retraining our advisors to capture life events and to bring centers of expertise to bear so we can employ more wealth strategies than we do today.
Corporate client segmentation is only useful for a corporation to decide what services and/or products to give for fee or free.
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Wealth Managers should be trained to recognize and bring to bear centers of expertise for life events because...
Today the advisor's business model is driven by investment events and revenue is almost solely derived from investments.
A Wealth Advisor's business model is driven by the needs of the client which calls for wealth strategies that encompass all advice, services and products.
To answer the question, are all assets good assets, it is not true as long as the current business model of advisors is solely based upon investments.
The retail financial industry it at a cross-roads on multiple mega-trends that threaten the long-term viability of the full service model. The average age of the full service relationship, the average age of a full service advisor, the percent of advisors under the age of 30 years old (5%), the growth of net new assets, fee transparency, recruiting expense, advisor versus broker legal model, inability to train a replacement salesforce and an unappealing offering to the younger generations to maintain longterm revenue streams. One just has to look at Schwab's net new assets growth year after year without advisors to realize that a serious review of the strategic initiatives is in order.
Facing these daunting challenges it seems that embracing an offering that limits entry level relationships based upon assets instead of retraining advisors to capture a bigger slice of the financial services spend rate is counterproductive.
All assets are good assets, it is all about how the assets are managed. My next blog will discuss how assets can be profitably managed no matter what the size of the assets.
