The investment advice industry is a constantly evolving ecosystem. Few trends, however, are as pervasive as the secular shift from commission-based compensation models to asset-based fee structures.
The future of the fiduciary rule may be uncertain, but the industry has continued its steady march toward improved fee transparency, clearly influencing investors' and advisers' preferences for lower-cost investments strategies.
But investment selection isn't the only side effect of the trend toward fee-based compensation. Advisers are starting to think about relationship management beyond the scope of customer service and more from a business development angle.
Relationship management has become the focal point for a successful and growing practice as asset gathering and retention outweigh the emphasis on transaction volume. Furthermore, the advice industry largely hinges on referrals. In fact, in a Vanguard survey of nearly 4,000 individual investors when asked how they found their current adviser, the majority cite referrals.
So what should advisers focus on to increase their chances of gaining a referral? In a word, trust.
Shocking? No. But what's notable is how important trust is to getting a referral. Clients who highly trust their advisers are more than twice as likely to refer their adviser as those who have more modest levels of trust. What's more, those "high-trust" clients are six times less likely to leave.
Client referral and retention hinges on a relationship founded on trust, which takes time — not just time in the sense of client tenure but time spent interacting with the client: face time, phone time, emails, etc.
Not surprisingly, most advisers will tell you their time is in short supply but high demand. So how might the average adviser free up more time for clients and prospects?
According to Cerulli, advisers spend 20% of their workweek on administrative tasks: office administration, management and operations, as well as compliance and other similar tasks. (See chart below.) Crucial responsibilities, indeed, but a prudent use of time, staffing, and technology might help the typical adviser recapture a good portion of that time.
Similarly, advisers reported that they spend nearly 20% of their time on investment management, half of which is dedicated to portfolio-related tasks like research and due diligence. However, many platforms offer managed solutions such as ETF model portfolios and separately managed accounts that can ease this burden. Off-the-shelf portfolios are available that fit many different investment strategies and client circumstances.
By our estimates, the time savings from streamlining administrative tasks combined with standardizing product research and due diligence could save advisers about eight hours a week — nearly an extra week each month — and lead to several dozen additional value-added client opportunities.
Ultimately, clients decide how they value advice. Our research indicates clients clearly value — and reward — an adviser they highly trust. But establishing this level of trust takes time.
Advisers must judge for themselves the best use of their limited time, but the profits from allocating more time to their client relationships may be unsurpassed by other efforts. Time is an asset to be invested, not spent.
Donald G. Bennyhoff is a senior investment strategist for Vanguard Investment Strategy Group.