Behavioral finance can attract fee-based assets

Complement that with client segmentation capturing qualitative and emotional factors

Nov 8, 2017 @ 11:45 am

By Adam Malamed and Kirk Hulett

Most independent firms agree that successful adviser practices in the future must become more effective in gathering fee-based advisory assets.

But from there, industry views diverge. For some firms, it's solely about providing the latest technological bells and whistles for prospecting, while others purely emphasize mechanical elements of fee-based advisory work, such as portfolio construction and manager selection.

In fact, the process of determining how advisers can most effectively gather more fee-based advisory assets begins and ends with asking advisers one question: "What meaningful added value are you going to provide clients to justify your fees?"

Based on the latest research conducted at our annual ELEVATE fee-based advisory conference, one of the most important ways for independent firms to help advisers succeed in this kind of asset gathering is to help them lead with behavioral finance, and to complement that effort with client segmentation that captures qualitative and emotional factors for the adviser.


In an age when algorithms and robo-solutions have intensified fee compression for money management, advisers who are more comfortable talking about investments than emotions may find themselves challenged in defining a clear value proposition with prospects.

This is where behavioral finance coaching – the practice of better understanding a client's emotional makeup to help them avoid making emotional decisions about finances that lead to negative outcomes – presents enormous potential added value that advisers can offer.

Aging pre-retirees and retirees need enhanced guidance in navigating the emotionally charged life planning decisions many of them increasingly face. Meanwhile, the highest long-term growth potential client segment, Millennials, generally opt for advice from individuals who build a truly personal connection with them, in a relationship that is as much social as it is professional.

And these are just the ends of our '"barbell" demographics. Across the board, advice and coaching are becoming joined at the hip.

Indeed, numerous studies have shown that nearly half the performance results for clients in cases of successful investment performance can be attributed to behavioral finance-based advice, as opposed to technical investment expertise.


So how can independent firms help advisers in this area?

At a minimum, firms should provide basic coaching resources to advisers on how to talk to clients about the emotional and personal factors that drive financial decisions.

But firms that are serious about helping advisers gather fee-based assets need to provide easy access to education and training that leads to relevant credentialing opportunities.

There are a number of behavioral finance credentials available today, with one immediate example being the Behavioral Financial Advisor designation, or BFA, which is offered by Kaplan Financial Education.


Complementing efforts to lead with behavioral finance, firms can also support advisers by helping them perform client segmentation beyond just quantitative considerations.

Currently, many firms will encourage advisers with a fee-based advisory business to segment clients by assets and revenues into top, middle and lowest-tier buckets, each with preset levels of service and attention.

"Just the numbers" approaches such as this could wind up doing the adviser a disservice. Some clients with fewer assets may be particularly enthusiastic in making referrals because of positive personal chemistry with the adviser. Others may be part of a close-knit, well-heeled social group, such as a country club.

Perhaps most importantly, some clients with fewer assets could be individuals the adviser truly enjoys interacting with, and help fuel the adviser's passion for the business.


The future of the financial advice industry has yet to be written, regardless of what the doomsayers who periodically predict grim times ahead for our industry might say.

Indeed, with an enormous level of intergenerational wealth transfer poised to happen in the coming years, and population segments across all age groups that need behavioral finance-influenced advice more than ever, there's a historic growth opportunity for independent advisers.

The responsibility falls on independent firms to provide their affiliated advisers with the resources they need to capture these opportunities.

Adam Malamed is Executive Vice President and Chief Operating Officer of Ladenburg Thalmann Financial Services. Kirk Hulett is Head of Practice Management for Ladenburg Thalmann.


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