We had a conversation recently with a financial adviser who recounted how he'd spent several hours with a client who had just inherited significant funds from a close relative. The client was wrestling with how to adjust to this steep change in his personal wealth, while deciding how to reengineer his overall financial plan under these new circumstances.
The adviser spent a considerable amount of time delving into the details of his client's changed situation, including modifications in his family's needs, new emotional priorities and significant questions his inheritance raised about his own estate planning.
REAL DRIVERS OF VALUE
When we asked the adviser how he had been compensated, he gave a puzzled look and responded, “I recommended certain insurance policies, I made sure he rebalanced parts of his portfolio to fit his new situation and I encouraged him to increase certain ongoing monthly investments in other vehicles. I was paid for some of the insurance transactions, and I was compensated on a percentage basis for the new fee-based advisory assets.”
It's noteworthy that nowhere in his response did the adviser mention compensation for the real drivers of value he offered for his client: his expertise, his experience, his time and his ability to understand the client's life goals and integrate them into a financial plan.
Therein lies a significant problem. It's time to reimagine the fundamentals of financial adviser compensation so advisers can be rewarded for their expertise and the value they bring to their clients' life goals.
One frequent comparison we hear in the financial advice world is between advisers and doctors. Both diagnose complex issues regarding health — whether physical or financial — and draw on extensive reserves of expertise and personal experience to recommend a course of action.
Very few people question a doctor's basic value proposition, while financial advisers are repeatedly asked to define and demonstrate their own. One core reason for this disparity is the difference in compensation models: Doctors are generally compensated for their time and expertise, while advisers are rewarded according to a model that, in many ways, was built to emphasize sales skills.
It is imperative that advisers be rewarded for the time they spend addressing clients' needs, with distinctions made for the following:
1. Comprehensive financial planning. Developing a true financial plan for a client — as opposed to offering basic recommendations on portfolio allocation or particular investment vehicles — is a time-consuming and rigorous process. It requires a tremendous amount of due diligence and expertise to translate the findings into a road map that can get clients where they need to go.
2. Understanding clients' needs. The work involved in staying current on clients' needs can be substantial. For many advisers, it involves engaged discussions with the client and a significant investment of time to keep all the details straight. Just as doctors are compensated for time spent on routine checkups, advisers should be rewarded for the ongoing time commitment it takes to stay up to speed on their clients' situations.
3. Bridging the gap for the younger generation. Bringing younger members of a client's family up to speed on their parents' financial plans is rarely as simple as inviting them to a client meeting. In many cases, a young person's interaction with their parents' financial adviser may be their first exposure to basic financial concepts. These situations often require substantial coaching on the adviser's part.
It's time for a revised financial adviser compensation model that directly rewards the delivery of an advice-centric client experience.
The firms advisers are affiliated with should serve as the primary agents of change in this regard by investing in the technologies, wealth-management platforms and other resources that create a true ecosystem of relationships among firms, advisers and retail investors, characterized by greater levels of transparency and an alignment of interests between each of these key parties.
Robert Moore is CEO and Adam Antoniades is president of Cetera Financial Group.