Relationships are king

Asset management might be at the heart of what drives an individual toward financial advice, but savvy financial planners are realizing that it takes more than asset management to bring lasting value to the advisory relationship. The idea of asset management as a commodity service that can be outsourced is a recurring theme in the latest comprehensive study of the industry by Cerulli Associates Inc. in Boston. "What surprises me most is the extent to which financial advisers still feel like investment management is still part of their core value proposition," said Bing Waldert, an associate director at Cerulli. The report is Cerulli's third annual quantitative analysis of the financial planning industry. Among the key findings in the 248-page report, which includes at least that many charts and graphics, is the slow migration away from large brokerage firms, the focus on teams and professional referral networks and the constant push up-market toward wealthier clients and away from lower net-worth investors. Through 2007, according to the research, the number of independent financial advisers that are not affiliated with a brokerage firm grew to 14,451, reflecting a 23% increase from 2005. Assets under advisement by the segment over the same period grew by 52% to $1.4 trillion. Over the same period, the number of financial representatives affiliated with full-service and independent brokerage firms declined by 2% to 158,231.

HOLISTIC APPROACH

Although the independent adviser segment is still a small fraction of the brokerage-affiliated category, the migration is expected to continue in stride with the movement toward more holistic and fee-based planning. Some brokerage firms are already responding to the trend with innovative programs designed to create internal wealth management teams through enhanced training and top-down support. Ultimately, according to the report, the most significant areas of growth and opportunities are in holistic, comprehensive approaches to meeting clients' needs. The challenge for most advisers, however, is getting there. Similar to the transition away from commissions and toward fee-based pricing models that took hold a decade ago, the movement toward comprehensive planning is sometimes easier said than done. "If you look at 250,000 financial advisers, 200,000 of them still think they can build a better mouse trap with their asset allocation strategies," said Scott Smith, a Cerulli senior analyst. "These days, the relationship is where the adviser makes a difference." According to the Cerulli analysis of the mostly quantitative research data, there remains a sizeable gap between those talking the talk and those walking the walk. "With thousands of mutual funds, [exchange traded funds] and everything else out there, from one adviser to the next, the quality of asset allocation doesn't vary as greatly as do the other kinds of advice and services they can provide," said Mr. Waldert. "So, everybody's talking about [holistic planning], but not everybody does it." According to Cerulli's survey of 700 advisers across a range of brokerage affiliations and practice characteristics, about 50% of respondents said they outsource some or all over their asset management business. Those who do outsource said they spend on average about 7% of their time on trading and asset management. The bulk of the respondents' time, 30%, was spent meeting with current clients, followed by new client acquisition at 14%, the survey showed. When the same survey results are divided into categories based on client net worth, advisers are found to spend the most amount of time with clients in the highest and lowest net-worth groups. Client meetings take up 39% of an adviser's time when it comes to top-tier clients with a net worth of at least $10 million. For those clients who have a net worth of less than $250,000, advisers said client meetings take up 34% of their time. The findings both underscore the non-asset management demands on an adviser and make the case for migrating away from lower net-worth clients. "The value proposition is in the service, because asset management is commoditized to the point where I can pay about 35 basis points for a very crafty investment strategy," said Sam Jones, president of All Season Financial Advisors Inc. in Denver. The firm, which oversees $120 million in client assets, evolved over the past five years from an asset management group into a comprehensive wealth management firm. Over the past two years, All Season Financial, which now outsources most of the asset management duties, has hired professionals specifically to handle planning, accounting and legal issues. Mr. Jones said that the broader planning approach has led to fewer clients with more money. "We have 40% fewer clients and 10% more assets than we did two years ago," he said. "You can't attract that kind of business without offering a lot of other stuff beyond asset management." The other services — from tax preparation to estate planning — also create a "stickier relationship that can give you control of 85% of a client's net worth," Mr. Jones added.

AT YOUR SERVICE

A key to the wealth management strategy is flexibility, which is something the larger brokerage firms have yet to master, according to Harold Evensky, president of Evensky & Katz Wealth Management Inc. in Coral Gables, Fla.
"The big wirehouse firms still haven't figured out how to deliver financial planning, but the good news is, we're moving in that direction as an industry," he said. "The brokerage firms realize they can't get the ongoing advisory fees without the perception of ongoing planning." The wealth management offering does come with its own set of challenges, according to Mr. Evensky, whose firm oversees $600 million for clients. As part of the evolution toward more-holistic planning, Evensky & Katz two years ago tried unsuccessfully to introduce retainer fees to replace fee-based pricing. "We had trouble explaining retainer fees to our clients, and we were never successful," he said. "We're not money managers; we're financial planners, and we charge on assets under management, plus a premium fee for comprehensive financial planning." The evolution of independent-advisor firms toward more-comprehensive planning has placed increased pressure on brokerage firms to offer similar services through their reps, said Larry Papike, president of Cross-Search, a recruiting firm in Jamul, Calif. "Reps are moving away from the broker-dealer affiliation as they see more of their business go fee-based," he said. "They're realizing that if 90% of their business is already fee-based, they don't really need the brokerage relationship." Of course, the brokerage firms are a long way from the threat of extinction. Morgan Stanley this month kicked off a campaign to recruit mid-career professionals from a variety of non-financial fields to join planning teams at the New York-based firm. The firm has already hired 20 people through the program's launch in the New York area, according to company spokeswoman Christy Pollak. The program will be expanded to San Francisco in February, and eventually expanded nationally, Ms. Pollak said. Woodbury Financial Services Inc. in Woodbury, Minn., is enjoying 20% annual growth in its adviser ranks, according to Walter White, president of the independent broker-dealer for 1,750 reps. "We're finding that reps want independence, but they don't want to be completely left alone," he said. Part of the appeal to reps, Mr. White explained, is the practice-management training that promotes the outsourcing of the asset management duties. "With so much uncertainty in the market right now, reps need to be careful about hitching their business to asset management," he said. "It's a more complex world, and clients face more challenges, but the challenge for reps is in determining how to approach the opportunity." Ignoring or denying the opportunity to go beyond pure asset management is the biggest risk an adviser can make, according to Mr. Jones of All Season Financial. "I'm of the belief that a lot of people in our industry are just plain lazy," he said. "If you're only offering asset management, you're probably on a three- to five-year survival path." Jeff Benjamin can be reached at jbenjamin@crain.com.