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Showing Your Value

A client-centric approach creates opportunities for advisors and clients.

Kunal Kapoor, 02/11/2016

This article originally appeared in the February/March 2016 issue of Morningstar magazine. To learn more about Morningstar magazine, please visit our corporate website.

Think back to when you first entered the profession. Chances are you were focused on providing your clients a positive, long-term outcome, but the challenges to achieving that important goal were manifold. Not only did you have to get your client focused on the long term, but also you were limited by technology, information, and the ability to differentiate your services from other advisors. How often did a prospect or client begin a conversation with the question, “I’m not sure how to evaluate the value of your services”?

That is rapidly changing today.

Technology advancements are having an impact on the profession as meaningfully and positively as ever. Critically, they are allowing advisors to outsource many of the time-intensive, low-value functions that might otherwise soak up their time. Now, advisors are able to shift their focus to client-centric, practice-building activities. And as information becomes more timely and complete and fully integrated into advisors’ work flow, the quality of their advice will only get better. No longer do advisors have to worry, for example, about how to account for held-away assets as part of an overall plan. With the emergence of data-aggregation services, such as By All Accounts, such challenges are resolved quickly.

Importantly, these changes are driving client awareness. Clients today are better at evaluating the value an advisor is delivering to them and are more concerned about what, if any, conflicts an advisor might have. The trend toward fee-based billing is a direct result of this awareness, and with the likely adoption of a fiduciary standard in the years ahead, it will become de rigueur. The bottom line: Not only are clients getting better at asking questions, but also advisors are getting better at providing the answers. The best advisors will have little difficulty explaining their value to clients.

Client-Centric Approach
It’s no surprise that today’s top-tier advisors are leading the way by redefining the type of activities that advisors should embrace. The good news is that advisors aren’t lacking for options, but the bar is much higher than it was even a few years ago. Today’s advisors must align their thinking and approach more closely to those of their clients. Consider, for example, that clients often seek advisors because they need clarity and assistance in taking a goals-based approach to their finances. For many advisors, a goals-based approach will require them to adapt their practices and realign their priorities. The conversation now shifts from the veracity of stock tips a client may have heard at a cocktail party to whether the advisor and the client are on the same page about saving for college, preparing for retirement, or buying a house. The client is focused on what matters most to reaching these goals and wants to understand how the advisor is helping him or her get there.

This is where technology-based solutions such as robo-advisors enter the picture. These services, which are built on top of automated advice engines such as Morningstar’s Wealth Forecasting Engine, have captured the media’s attention, because they’ve also gone further in terms of introducing interfaces that are intuitive, easy to use, and allow for collaboration between and advisor and client. And the fact that they are mostly index-based solutions has kept costs down.

Collectively, they present a challenge to asset managers who are primarily focused on pitching individual strategies. It’s not that these strategies don’t have a place in the industry any longer, just that it becomes critical to pairing them with the right goals. And with cheap beta abounding, the premium pricing active managers have enjoyed will only remain pressured. To be clear, this isn’t the death knell for active investing, just a welcome reduction in fees and weeding out of weak, underperforming strategies at a pace that hasn’t been witnessed before. That means fewer asset managers over time, but ones whose value proposition is more compelling.

Additionally, asset managers seem to be warming to the robo-services themselves. Just recently, two of the largest asset managers, BlackRock and Invesco, made waves by purchasing FutureAdvisor and Jemstep, respectively. This led to a lot of head scratching, but if you step back for a minute, their moves seem perfectly rational. First, as much as all the talk has been about these services appealing mostly to millennials, early trends suggest that the types of households that make up the core of advisors and asset managers’ clients are the ones signing up. That’s right, wealthier, older households aren’t ready to be written off as an important demographic in this space!

More importantly, asset managers are likely to follow Schwab’s lead and give these platforms away for “free” as a way to retain assets. So, in effect, the robo-solution becomes another tool for the advisor over time, and the ability to differentiate is likely to be tougher, especially if the investment solution is primarily passive, as is the case today.

Gamma and Total Wealth
At Morningstar, we’re partnering with advisors and moving quickly to help them prepare for this future, and in a way that’s unique and differentiated. A few years ago, we introduced the concept of gamma, or the value of financial advice. More recently, we’ve been driving a Total Wealth approach. As you’ll read in the pages of this magazine, this approach is much broader than traditional asset allocation. It focuses on understanding a person’s risk capacity so that the advisor can more appropriately model how to help him or her achieve future consumption goals. The approach seeks to incorporate important attributes such as human capital that otherwise have not been considered in traditional financial planning.

We’re bringing this approach alive by more fully connecting the various pieces of an advisor’s work flow. By All Accounts is just one example. In the past, advisors relied on clients to share detailed information on all their financial and investment accounts. Today, By All Accounts automates that process and will soon be connected to Morningstar’s core software platforms. We’ve also added best-in-class rebalancing capabilities with our acquisition of Total Rebalancing Expert, which itself was built and founded by an advisor. Most importantly, we’re improving our goal-planning tools and driving a stronger connection between the accumulation and spending phases of retirement planning. We are creating a link between spending, saving, and investing.

We also recognize that as more advisors look to redefine the way they gather and share information with clients, the old ways of doing things may no longer be relevant. So, we’ve introduced an “advisor dashboard” in our iPad app that provides summary information of an advisor’s practice and the capability to drill down from there. We think advisors will find it easier to interact with their clients and broaden the scope of the advice they offer to clients’ family members.

In time, we plan to do more to connect these software offerings to our managed portfolios service so advisors receive a more integrated solution from us, which in turn allows advisors to do the same for clients.

More Challenges, Better Opportunities
As much as the future is changing, we think the opportunity for advisors to grow and share their value with clients is only expanding. But advisors will need to be selective in deciding where to focus their energies and be willing to outsource the time-consuming, low-value activities to achieve scale and drive good outcomes for clients. Clients today are focused on investing goals. This presents a challenge to advisors, but also an opportunity to build strong, long-lasting relationships with clients. Technological advancements allow advisors to apply this client-centric approach across practices large and small. These advancements are also making it easier for advisors to show their value. It’s a transformative time in the industry, and we’re excited to be your partner on the journey.

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