CHAPTER 4
The Big, Fat Lie
Some frames, like the advisor-as-salesperson frame, are problematic because they limit clients’ ideas about what the advisor can do for them, reducing profits in the process. Other frames may be right on track—well placed and with good intentions—yet if the advisor fails to live up to them, client trust gets broken, damaging the advisor’s reputation. We’ll look at one such frame—that of “we’ll always be there for you”—in this chapter.
It’s a strange irony: Advisors regularly frame themselves as planners for their clients, but paradoxically, many advisors fail to plan—not for their clients but for themselves and their businesses when it comes to continuity, succession, and longevity. As asset management and distribution analytics firm Cerulli Associates has indicated, only 29 percent of advisors have a succession plan at all.1 A full 59 percent of advisors within five years of retirement do not have a succession plan.2 Those advisors who do have a succession plan may just be fooling themselves into thinking it’s adequate. The plan may look good on paper, but when put to the reality test, it can easily fall apart, as will become clear later in this chapter.
We’ll Always Be There for You . . . Until We Aren’t
Picture the following television commercial to gain insight into the “we’ll always be there for you” frame. The screen shows a young married couple bringing their first child home from the hospital. It flashes to the baby’s fifth birthday party, with the happy mom and dad giving their child a new bike. Next thing on the screen is the child’s college graduation, followed by footage of the adult child having her own child, with the loving grandparents nearby. The commercial closes with all three generations sitting on a bench outside an assisted living facility. The tagline of a financial services company appears at the bottom of the screen as a voiceover promises, “We’ll be there.”
This commercial, representative of those we’ve seen from financial services companies over the years, conveys the promise that every advisor makes to his or her clients, whether overtly or implicitly: the promise to be there for the client through all of life’s transitions, at each and every turn where financial support is needed. Whether it’s through TV, print, or online advertising; marketing materials; or the conversations advisors have with clients, most advisors and financial services firms court and reassure clients on the basis of this premise that they can be relied on no matter how much time passes or how uncertain life becomes. The reality is, however, that many advisors do not have an effective plan to ensure that the client will truly be taken care of over the years. I call this failure the big, fat lie.
Clients would be shocked to know that their financial advisor might not actually have a plan in place if he or she were to become ill or disabled or pass away, leaving both the clients and the advisor’s family unattended. A client who has signed on with an advisor who’s middle aged may be horrified 15 years down the road when that advisor dies during the client’s retirement years with no satisfactory replacement in place. Clients who have been told for years by their advisor that another firm is ready to take over in the case of illness or absence may be disappointed to learn when this contingency comes true that they don’t like working with the replacement or that the replacement has changed plans and does not want to work with them.
I’m reminded of a busy, successful advisor who lost sight in one eye and then the other. Although he had a partner, his partner decided that he no longer wanted to work with the advisor, and the advisor could not serve his clients on his own with his new disability. His clients were suddenly without an advisor, left to fend for themselves. The noble promise of the advisor is to be there for the client through all of life’s transitions—loyal and steadfast, like a rock-solid partner, rather than an opportunist who is merely renting the relationship. It’s the way that advisors frame themselves for clients, directly or indirectly. Unfortunately, even the most well-meaning advisors sometimes fail to fulfill this pledge and thus fall prey to telling a big, fat lie that they will always be there for clients, when at some point, in reality, they simply can’t or won’t.
Sunbathing in Florida at the Clients’ Expense
The example of Mick will give more clarity on how advisors are challenged to follow through on their promises to clients and how they sometimes render that promise a big, fat lie. Mick is a financial advisor who runs his own firm. He has been in the industry for 35 years and has had his own business for 25. Mick has a group of more than 100 clients whom he has served for many years. He has more than $150 million in assets under management and a sales assistant that knows the clients, perhaps better than Mick does. Mick has long enjoyed running his own operation because it allows him to work personally with his clients, as he feels will best benefit them, without being beholden to a larger corporate strategy that may or may not jive with his clients’ needs and lives.
Because Mick has always put his clients’ needs first, even going beyond his commitment to them by making house calls and working during holidays, they absolutely love him. He is authentic, reliable, and personable. Mick’s clients feel they can trust him now and into the future. He has always told them that he will be with them through all of life’s stages, and he certainly has been there to provide support as his clients have bought homes, put their children through college, and dealt with the illnesses of spouses and aging parents.
But at age 62, as Mick is starting to wind down professionally, the question is, What will happen to his clients in the process? Mick has told his clients he will be there for them through all of life’s big moments, but Mick is starting to disengage. The cold, hard facts are that Mick really wants to spend more time in Boca Raton and enjoy the sun while continuing to get paid as if he were working full time. How honest does he need to be with himself and his clients about his ability to serve them? Should Mick just keep taking his percentage while spending less and less time at the office, or should he make some changes to ensure that his clients are receiving all that they deserve, now and after Mick’s gone?
It’s a question that every advisor will eventually have to ask him- or herself as well, to ensure the best possible client outcomes and, frankly, to avoid engaging in any malfeasance. It’s time for advisors to invest in the human capital needed to truly deliver for the client, or to be honest with clients about the degree to which they can serve.
How Good Is Your Succession Plan?
With the average age of financial advisors in America being 50.9 years old, Mick has lots of company.3 Advisors across the land are graying, looking toward retirement, scaling back on clients, and figuring out how to transition out of their firms. The latest data from Cerulli Associates reveals that 5 percent of wirehouse advisors are expected to retire in the next five years and 35 percent will retire in the next 10 years, while 25 percent of independent broker-dealers and 30 percent of registered investment advisors indicate that they will leave their practices or retire in the next 10 years. Across all channels, one in four advisors is expected to leave the industry in the next 10 years. Financial services clients across the land are going to be affected as their advisors disengage or drop out of the industry.
For advisors who do have a succession plan in place, the effectiveness of that plan can easily be called into question. Let’s take a look at Mick’s situation to understand how. Traditionally, advisors like Mick who run a small operation have put plans into place to transition out of their firms by creating a buy/sell agreement with another advisor who will take over in case of sickness, retirement, or death. While this is certainly a good alternative to having no agreement, noble advisors have got to ask themselves whether such an agreement is really enough.
Take a moment to imagine how this all might play out not nearly as well as desired. Five years from now, Mick decides he is ready to retire. He triggers his buy/sell agreement with a younger advisor, Joe, and sends a letter to all of his clients, along with making a personal phone call to each, letting them know about his retirement and providing Joe’s contact information to ensure continuity of support. This sounds fair, and it certainly meets a minimum standard of ethics. Yet how are Mick’s clients going to feel when they learn that after years of working with Mick, they are now expected to switch to a completely different advisor at a different firm whose style is different than Mick’s—right in the middle of their own important life changes? Are they going to feel a sense of comfort and connection with Joe, or are they going to feel like they’ve been dropped in the lap of a random new advisor that they may—or may not—like?
Further complicating the issue, Joe may discover that right now, he only has room to take on 10 new clients rather than Mick’s 100. Or he may only want to work with those of Mick’s clients who need financial planning and investment strategies support but not retirement advice or estate planning, as Mick was apt to provide. It’s not unrealistic to think that Joe’s firm has evolved since he and Mick first created their agreement or that Joe simply did not accurately predict what kind of new clients he’d like to take on when the time came, yet this will leave many of Mick’s clients out in the cold. Mick—a dedicated, reliable, and caring advisor—is no longer able to deliver on the promise that his firm will be there for his clients through all of their life stages. As Mick’s succession plan disintegrates under pressure, it becomes clear that well-intentioned Mick has peddled his clients a big, fat lie without ever meaning to.
I don’t know a single advisor who would tell me that he or she is not focused on helping clients achieve their goals in the event of his or her absence. I’ve said it before and I’ll say it again: The majority of advisors are principled, dedicated, and client-focused professionals. They want the absolute best for their clients! Yet many of them are telling their clients a big, fat lie—that they will always be there for them, when in fact they have no succession plan or the one they do have in place isn’t particularly strong. To operate with integrity and to fulfill the promise of the “we’ll always be there for you” frame that most advisors convey to clients, advisors will need to take a look at their succession planning to assess how effective it really is. Ultimately, they will need to make a shift from the old frame of “I allow clients to rent my services until I choose to stop practicing” to “I build a legacy business that serves multiple generations to come.”
Rent-an-Advisor
It’s not that advisors want to leave clients so they are hung out to dry. This approach of serving the client until the advisor can’t serve the client anymore has often just been the way of things.
Right now, most advisors are set up so that they allow clients to rent the relationship with them. The client pays the advisor for his or her services until the advisor no longer can or will provide them, then the client is required to rent a new advisor.
However, there is an alternative to this approach—and the best in the business are already using it. It’s about building a team of professionals to support the client and creating a firm culture that transcends the single advisor. Suddenly, the client is no longer renting one advisor but has access to an entire team for the long term, a team that won’t expire when a single “lease” is up.
The advisors on that team have common values and work within a common culture, so if the need to switch advisors arises, the transition is far smoother than in the case of Mick’s clients being sent cold turkey to Joe. Throughout the years, the client knows that there will be support regardless of whether his or her lead advisor has to step away due to illness or other circumstances.
Your clients depend on you for guidance now and into the future. They also hope that the money they’ve worked so hard to save will be managed well when their children inherit it, and they would love to see their kids go on to work with Mom and Dad’s trusted advisor. What are you doing to make that happen?
The Next Generation of Advisors
As noted earlier, there is currently a scarcity of young financial advisors in the industry, with only 5 percent of the 315,000 advisors working in the United States younger than 30.7 This scarcity is believed to exist for a number of reasons. After the economic crisis of 2008–2009, many big firms stopped recruiting new grads and started hiring experienced advisors from other firms.8
Further, young people themselves appear to have little interest in joining the world of traditional financial advising. As Scott Smith, a Cerulli Associates director, puts it, “You’re asking a 26-year-old to take his parents’ phone book and convince all their friends to hand over substantial sums of money. Young people have a greater interest in being more holistic planners, and less transactional.”9 Enter opportunity, however. As the industry shifts more toward comprehensive wealth advising and away from a transactions-based approach, it may be a lure for the younger generation.
Younger advisors are certainly needed. As boomers get more and more ready to transfer their wealth to their Gen X and millennial children and as the millennials grow up into bona fide adults, the need for the next generation of advisors increases. The cold, hard truth is that most young people don’t want to work with Daddy’s broker. They need someone who understands the way they think, play, communicate, live, and work. What an opportunity this presents to savvy financial services firms who are willing to build a team of advisors that spans the generations. Doing so increases opportunities for business today as well as the opportunity to sell the firm down the line to an internal player.
Paul Pagnato, founder and managing director of Pagnato Karp, explains it like this: “Individuals like to work with and hire an advisor that they’re similar to in age. There are a lot of studies done, and someone who is 28 or 30 years old typically wants to work with someone that’s 30 years old. They don’t want to work with someone who is 60 years old. I believe that is an issue and that’s going to be a challenge in the marketplace.”10
Pagnato believes this situation brings opportunity, too. With their ease in using and embracing technology, he sees Gen X and millennial advisors with plenty to offer clients as technology plays a greater role in how money is managed. He is optimistic, too, that “as the financial system is healed [post-2008], you’ll see more advisors coming into the marketplace that are younger” as hiring trends increase.11
When asked what advice he would give to advisors in their 20s and 30s, Pagnato suggests that these young advisors train and enter the business as a fiduciary rather than associating with a broker-dealer. “I believe that is where the buck is going, that is clearly where all the regulators are going, [and] it is clearly where the assets are going,” notes Pagnato. “You can look at all the data, and the money is flowing to the independents that are more embracive of the fiduciary standards [while] . . . society as a whole is becoming much more socially responsible . . . People want to work with companies that are doing the right thing, and that’s what the fiduciary standard is all about. It’s about doing the right thing.”12
Conclusion
For years, advisors have been framing themselves as able to serve clients through all of life’s transitions and stages. Yet sadly, many of them are sole practitioners, and their businesses, which they worked so hard to build, will dry up and eventually fade away. This will leave clients scrambling in search of a new advisor to “rent” from a place of weakness and surprise rather than strength. These advisors are principled practitioners who value integrity, but they end up failing to fulfill their promise to always be there for clients.
The solution, as it turns out, is quite simple: Build a team of advisors that allows the advisor to create a robust business that survives—and thrives—even when the lead advisor steps away.
Once again, it’s a call for all of us in the industry to be noble. If we really want to think about the financial services profession in a bigger way and if we are truly grateful for the great profession that we’ve had the pleasure to be part of, then it’s incumbent upon us to really think about the successful service of the client. That means thinking about transitioning our roles now, with all the wisdom we’ve accumulated over the years, to other advisors on the team.
As advisors build a team and their clients grow comfortable with wanting to work with the team, advisors can work less, let the team do more, and increase the enterprise value of their business. That’s something to celebrate!