What do I mean by brokers versus wealth managers? A broker is one who derives that vast amount of their revenues through managing investments and a wealth manager is one who not only manages investments but also employs wealth strategies for solutions to client needs. These strategies usually employ the use of trusts and insurance products. Obviously financial advisors can offer many other financial products like mortgages and non-purpose loans. One only as to look at the revenue mix of a financial advisor to know that they are brokers as the revenue from investments is usually between 95% and 98% of generated revenues. Some people get confused on the revenues because they look at the firm's revenue mix which is totally different from a financial advisor's revenue mix. Firm's have capital markets groups that make the vig off of every trade made by a client both in equities and fixed income, they sell shelf space to outside products companies and they make money off of all cash balances and money market funds. Firms also decrease their own internal funding costs by selling structured products to their clientele and trading the underlying for their own profit. The financial firm's have successfully fought off any attempts to make their brokers advisors. Where this may seem like a small thing it would fundamentally alter the way financial firms could earn money through capital markets and product pay-to-play. But that is another story. To understand a broker's revenue we must study the individual broker's revenue mix.
First we can not get sidetracked by the different investment products. The rule of thumb we will follow is that if the investment vehicle ends up buying stocks and bonds it doesn't matter how the they are wrapped, mutual funds, ETFs, hedge funds, private equity, outside money managers, unit trusts or a straight purchase of a bond or stock it is an investment. Discretion or non-discretionary are platforms not products.
Financial Firms today are structured to support products. Internal and external wholesalers are assigned by product. Whether it is a mutual fund, ETF or a manager the product has its own P&L and internal structure in the firm. The product pays a fee to be on the platform in the form of an access fee. Firms have streamlined internal support by having one person represent all the investment products but that was done for cost cutting not for any altruistic reasons.
Clients are rated by assets kept at the firm and accounts with low assets, $100,000 to $500,000 and below, are considered unprofitable. This again is driven by the fact that the firm only recognizes investable assets and not the potential relationship. Brokers are only about investments and wealth managers are all about the relationship. The Firms correctly surmise that their brokers have not solved the Gordian Knot on how to capture and offer solutions for life events so they base the business model on a simplistic and ultimately wrong assumption; that assets are determinate of revenues. Assets are a function of revenue but not the ultimate determinant.
Financial firm's can restructure themselves in three (3) ways to start the process to become more client centric and to help wealth managers to capture life events.
1) Firms need to revisit how and why insurance is sold to it's clientele. Without access to any firm's sales numbers I would guess that the vast amount of insurance revenue generated is through the sales of variable annuities. This leads us back to the earlier premise that all investments that end up buying a stock or a bond is an investment. Variable annuities are an investment with an insurance wrapper design to minimize current taxes and in some cases minimizing any losses through stop-loss features.
Very rarely is insurance sold as a strategic solution for an estate planning issue. So how do we start changing how brokers use insurance.
First having annuity days is counter-productive. It is so product centric, so yesterday. Most firms have employ highly trained internal wealth managers to work with the brokers. These people meet clients with the broker to offer estate planning strategies. They are very good at their job and they will tell you the hardest part of their job is getting the brokers to let them in front of their clients.
Firms should use their in-house resources, insurance department and internal strategists, and outside strategists, most firms use Capitas, to develop a program to teach brokers estate planning strategies involving trusts and insurance. These strategies should be high level complex solution sets that are employed everyday in the world to solve a client life event. They should not be dumbed down in any way. By teaching your brokers through examples of complex strategies the brokers learn to spot opportunities when they present themselves. I know that is why we developed a financial planning tool. The tool will capture these opportunities. The problem is the tool creates a static solution set and misses opportunities when they arise. It is like you just finish a financial plan for a client and the next day he calls and says he has been told he has cancer. Things change.
By learning strategies the broker can have the confidence to actually broach the subject that they don't historically talk to their clients about. I have developed a theory about brokers and why we are so firmly entrenched in the investment world. It is called the "don't look stupid theory".
No human being will sit in front of another human being and look stupid on purpose. We look stupid everyday but we just don't do it on purpose.
By teaching our brokers complex strategies we are not asking them to execute the strategies we are asking them to recognize opportunities and bring the correct Center of Expertise to bear.
Lets consider a couple of examples. I have asked hundreds of brokers what would they say to a client, prospect and friend if they were told that they were expecting a baby. All but two said they would tell them to open up a 529 Plan. A plan that has dubious benefits and generates little to no income and a recent study shows that 97% of investors do not use the 529 Plan. Yet it is a fact that 86% of people expecting a baby actually increase their life insurance. Where do we want to position ourselves? Do we want to be brokers or wealth managers?
Another example. A thirty-five (35) year old hedge fund trader who has three young children who is in exceptional health asks a broker what mutual fund would he recommend as he gives $14,000 per year (tax-free) to each of his three children. Instead of recommending a mutual fund right away the broker could suggest that the trader could consider giving the money to a trust in his children's names and buying $10 million in life insurance on himself. Whether the strategy is accepted or even makes sense the broker has set themselves up to be a wealth manager and not just a broker.
Going back to the usefulness of the financial tool to capture life events with the last two examples. How could it have possible helped in a dynamic world of constantly changing scenarios? The broker must have enough knowledge to be confident to bring in Centers of Expertise when an opportunity arises.
Knowledge equals confidence, confidence equals sales.
2) Corporate Services. Firms have spent an enormous amount of time and resources and political capital to develop a fairly seamless backend delivery of institutional quality services to the retail client when appropriate. The political capital was spent developing the splits for payouts to the brokers and for what length of time they were paid for introductions. But again the entire system is product centric not client centric. Access to Corporate Services by retail brokers is by institutional desks not by a client need. Re-design the front-end.
It is important to note that one of the most significant advantages in working at a full service firm are rarely used by senior financial advisors and not consistently used in training of the new brokers. Training FAs to all the services at their finger tips is a competitive advantage that the firms treat as a throw away. In today's world of RIAs, robo-advisors and alternative platforms this is a mistake.
The access template that a broker uses should be based upon a life event. A client in a passing conversation mentions that he buys and renovates strip malls in Florida. What is the advice, service and product that can be brought to bear because of this conversation? Corporate Services should be designed to be queried by an life event and then present a quick presentation with a yes or no to whether we are in the business. If yes what are the 3, 5 or 8 qualifying questions to ask the prospect and finally a few examples of previous business done.
A concerted effort in recognizing opportunities and how to analyze their exiting clientele should be presented to the brokers consistently. A true example. A large broker was trying to close a very large prospect for a couple of years to no avail. The broker kept representing to the client investment ideas but this prospect was so large he had access to the firms at the highest levels and nothing made sense. The prospect loved the broker but couldn't wouldn't pull the trigger. It was suggested to the broker to offer the prospect a way to protect himself against interest rates increasing when everyone was predicting run away interest rates. The broker presented the trade to the prospect by email and was promptly responded to with the fact that the prospect had just instituted three trades with Goldman Sachs and gave the particulars. We reversed engineered the trades and figured out the broker would have received a $1.2 million commission. All the information about the institutional services was on the machine but in language that no one understood because it was written by the institutional desk. Communication written using institutional language and acronyms is not a highly effective way to increase understanding and driving business. Knowledge equals confidence, confidence equals sales.
3) Opening Accounts. When client opens an account at any firm they are asked a series of questions before the account can be opened. These questions are based upon two themes; what information the firm needs to know to legally open the account and what information the firm needs to understand about risk tolerances. Think about those two type of questions. What the firm needs to legally open the account is pretty much basic information, like name, rank and serial number. The second set of questions continues the business model that we are all about investments. We do not even try to understand the needs/goals of the client for possible applicable solutions we focus on just what can we invest in. I know we do financial plans. But basic questions can be asked to enhance the relationship with the client right from the start. Examples. Do you anticipate your children living at home after 21? Are you a sole business owner and do you have key man insurance? If you are ill for an extended period of time how will you pay for it? If your spouse is ill for an extended period of time and you have to work how will you handle it? There are a myriad of questions to ask that enhance the FA from a broker to a wealth manager and it is the firm's job to help with the questions.
Changing culture is a process. Nobody likes change. It is said that 97% of change comes through fear, 2% because you have to and 1% because you think it is a good idea. Change is hard but we should be fearful as robo-advisors and fee transparency is challenging our investment only business model. We need to rethink how we do business and how are firms are structured to support the new business model. If a multi-millionaire hedge fund trader invests all his money in his hedge fund because he gets better terms but then tries to open a $100,000 account a major firm we tell him no. We don't want your mortgage, insurance or lending opportunities because you will not invest enough money with us. Huh?
