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What More Validators Mean for Your Business

Rising Internet use is creating more do-it-yourself investors.

David J. Drucker, 09/24/2009

In its industry report--"Online Tools & Advice: The Intersection of Technology & Self-Service"--released earlier this year, Tiburon Strategic Advisors chronicled the growth of PC and Internet use in the U.S. and the impact this has and will have on the financial advisory industry. The question is this: How is this likely to impact your practice given that online tools and advice are creating a growing base of Validator clients?

For those not familiar with this terminology, Validators are do-it-yourselfers who want an advisor looking over their shoulder to render second opinions and occasional advice. Delegators are more typical as financial planning clients, because they know that they must participate in the process but still expect their advisor to take primary responsibility for their financial success. Self-directed clients do it all themselves and don't seek the assistance of a financial advisor.

The growth in Internet connectivity, in general, is fairly staggering. Tiburon reports that the share of the U.S. population with Internet connectivity will reach 83% by 2013, up from 70% in 2007. The quality of connectivity will improve as well. The number of broadband Internet connections is likely to rise to 95% by 2013, reports Tiburon, up from 79% in 2007 and 90% in 2008.

We talked with Chip Roame, Tiburon's managing principal, about this report and its findings.

Drucker: Chip, in your report, you say, "The line between advisor and consumer technologies will blur as advisor technology gains more client interface options." What type of advisor technology and what type of client interface options are we talking about here?

Roame: Increasingly, consumer oriented technology and financial advisor technology are starting to overlap. Sophisticated consumers who invest on their own can use many of the same products as financial advisors. Morningstar research is a good example, serving both markets. Intuit, Microsoft, and other firms with a leg in the consumer financial world could be big disrupters in financial advisor technology.

Drucker: Your report goes on to say, "The share of high net worth investors that can be considered Validators is likely to reach 60% by 2010, up from 50% in 2007." The question most advisors who read this will have on their minds is... to what extent will the growth come from the ranks of Delegators as opposed to Self Directeds--that is, will their client bases be impacted?

Roame: The increase in Validators will come from both sides. The middle is growing. It will come from the Self-Directed ranks because, as Self Directed consumers come into various "liquidation events," like large pension rollovers after retirement, or proceeds from business sales, they will be more likely to seek some advice. Of course, there's some flow in the other direction too. Financial advisors have stumbled [in this trying economy] and many clients who might traditionally be Delegators will try their luck as Validators, instead.

Drucker: What other causes do you see for these changes?

Roame: The majority of financial services transactions will likely move to the Web over the coming years, including banking, brokerage, mortgages and insurance.

Drucker: If I understand correctly, that will expose more and more consumers to online financial activity that they might have relied more heavily on an advisor for in earlier days. As consumers get accustomed to managing their own affairs through increasingly consumer-friendly online mechanisms, they may realize they don't need advisors as much as they originally thought?

Roame: Not necessarily. We believe consumers will still likely demand in person advice which will lead to a swelling population of Validators.

Drucker: We talked earlier about the blurring of the line between financial advisor and consumer technology solutions. Do you see this happening in the core services financial advisors provide, i.e., financial planning, asset allocation and portfolio management?

Roame: Sure. The major custodians and mutual fund families (e.g., Schwab, Fidelity, Vanguard) offer some types of financial planning and asset allocation advice for a fee. This becomes a middle level offering between the consumer doing it himself and relying solely on an advisor. Schwab can offer a sit-down meeting with the consumer at its branches. Fidelity does it via phone. In any case, it's relatively simple financial planning, but that's fine because most consumers have pretty simple financial affairs. They just need some guidance in getting things done.

Drucker: How will the growth in Validators affect independent financial advisors. Will it change the nature of the relationship they have with certain clients? And, more important, will they lose Delegator clients who now want a Validator relationship the advisor may not even be prepared to provide?

Roame: First off, remember we are predicting just a 10% shift, so advisors don't need to revamp their businesses just yet. But, yes, we believe some Delegator clients served by advisors will shift their mindsets and demand more Validator-like services.

Drucker: It would seem to me that this will be more a problem for some types of advisors than others, depending upon what their current business models are.

Roame: True. For the typical wealth advisor, Validator clients will demand more services than these advisors may already be providing their existing (Delegator) clients. A Validator can be a far more expensive client to serve. He wants to ask more questions, be more involved, and meet more frequently. Advisors providing a full set of services to their clients need to decide if they even want to retain the Delegator-turned-Validator. They'll need to give this client more information and possibly charge more in the process.

Drucker: But some advisors' business models seem already geared up to profit from the Validator. You mention in your report that, "Younger consumers are even more likely to be Validators, and nearly two-thirds of Generation X investors consider themselves such." This suggests to me that one segment of the independent advisor market that already serves Validators are the hourly planners a la Sheryl Garrett and her Garrett Planning Network. If younger consumers will be more inclined to be Validators, do you see the number of hourly planners growing to accommodate them?

Roame: Yes. I feel this first hand. My non-industry friends are smart, are not intimidated by investment selection or monitoring, and they think many advisors are useless--especially traditional brokers. But these same friends are willing to pay a CPA or hourly financial planner to make sure their accounts are titled correctly, that their house is in trust, or that they have enough life insurance for their kids.

Drucker: So, bottom line, as advisors are confronted with more prospective clients seeking a Validator-type service, what should they do?

Roame: They need to decide, first, if they want to serve these clients. If so, they need to be prepared to give them more information [since Validators want more of a collaborative decision-making process] and they may need to charge more.

Drucker: And it would seem if you're already an hourly financial planner serving -- almost by definition -- Validator clients, you still have lots of competition from custodians and other large investment companies with simplified planning opportunities for the more modest client. In other words, you can look forward to enjoying a growing number of Validator clients but may need to fine-tune your process for landing these clients in light of the competition.

Roame: That is correct.

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