The Advice Advantage: what your clients want
30 May 2018 | Practice Management
Demand for financial advice is growing, but what clients want is changing both rapidly and significantly.
In this webinar, Leo Schulz, senior investment writer, speaks to Garrett Harbron, senior investment strategist, about the way turnkey investment solutions and robo-advice are transforming the way value is delivered. They also discuss emerging insights from our ongoing survey into successful adviser-client relationships of the future
Leo Schulz: The advantage of advice: what your clients want. Demand for financial advice is growing, but what kind of advice are clients of the future going to be looking for? My name is Leo Schulz, I have with me Garrett Harbron, a senior investment strategist at Vanguard Europe, and himself an ex-financial adviser. Garrett, welcome to our monthly adviser webinar.
Garrett Harbron: Thanks Leo, happy to be here.
Leo Schulz: If you’re having trouble with the quality of the audio, there should be a window on your screen giving you instructions on how to dial in directly on your phone, and this should help to give you a nice, clear sound. For our live listeners, you should soon see a box into which you can type questions, we have a large audience today, so if we don’t get to you personally, we will definitely follow up.
The call will last approximately thirty minutes, the webinar earns participants a half hour’s worth of CPD points. You’ll need to request your certificates by contacting your usual Vanguard representative, or by writing to firstname.lastname@example.org, or by phoning 0800 9175508.
Our agenda today: Automation: threat or opportunity; the changing adviser value proposition; from returns to relationships; what do US clients want; will it be different here? And early results from the Vanguard UK client/adviser survey.
Leo Schulz: Garrett, one of the big changes affecting the delivery of advice, certainly in the US, and increasingly here in the UK, is automation. Like most changes, I’m kind of guessing that there are going to be some challenges and there are going to be some opportunities…
Garrett Harbron: You know, I think that automation is probably the biggest driver of change in the financial services industry today, apart from maybe regulation. If you look at the changes that have come around in technology over just the last ten years, ten years ago no-one had a smartphone, in fact, you know, people were saying when Apple launched the iPhone, that it was going to be a failure, that no-one wanted a computer in their pocket. Today they’re ubiquitous.
And I say that because I think it goes a long way towards just illustrating the changes that technology is bringing to the entire world, and I think we’re seeing a lot of those changes in the financial services industry.
Obviously robo-advice comes to everyone’s mind when we talk about technology in the financial services industry, but there are a lot more areas where we’ve seen a lot of technological change.
I mean just the way we run portfolios – it used to be that when you rebalanced a portfolio you sat down with a calculator and a piece of paper and did calculations by hand – today, with the right software it happens automatically, you tell the software how to do it, and it just executes it on whatever rules you input, so I think that automation has driven a lot of change in our industry and it’s just going to continue to do so.
There are two ways that we can view technology in the financial services industry; one is as a threat, and I think that that comes from, you know, as we look around at the tasks that advisers have traditionally performed, like portfolio construction, and rebalancing like I mentioned earlier.
We see that more and more of these tasks are being taken over by computers, and so from that perspective it can be seen as a threat, but it’s also a real opportunity like a lot of technology is.
And you can see this in what we see as being the evolution of the advisory business, which is the chart we have up on the screen right now. We think what is ultimately going to happen with the advice industry is that we are going to see it become more segmented, and segmented in terms of which clients are attracted to which space, and how much adviser engagement is required to deliver advice in these spaces.
But it starts, if you look at the chart there, from embedded advice solutions, and these are things that we have right now, like multi-asset funds and target date funds, where the advice that the adviser would give the client is actually embedded in the product itself, so there’s no direct advice going on – it’s all handled by the portfolio manager.
Next on our spectrum then is digital advice, and that’s really what we think of as robo-advisers today, that’s a little bit more bespoke than the embedded advice solution, but there’s no human interaction there.
Leo Schulz: So the embedded advice solution, Garrett, how are clients accessing that?
Garrett Harbron: Mostly through product, so mostly this would be like - pick a target date fund for a great example, a client comes to their adviser and says I want to start saving for retirement, what do I do?
The client’s needs are fairly simple, the account may be relatively small in comparison with some other accounts, a target date fund is ideal for that particular investor perhaps because of their limited assets and relatively simple needs.
So that’s, and that goes beyond just target date funds, that’s any multi-asset fund, that’s any off-the-shelf product that has embedded advice.
Leo Schulz: Okay, and so we go up a step from that is digital advice, so that’s like robo-advice where you answer a few questions online and that gives a profile…
Garrett Harbron: Right, and there’s still advice, human advice there in the background, right, there’s human thought and human advice that underlines the algorithms that drive the robo-adviser, but there’s no direct human relationship there.
Leo Schulz: So another step up from that then you’ve got your digital relationship…
Garrett Harbron: That’s kind of these new hybrid advice platforms that are coming out, where it’s a little bit more bespoke than you’ll get with a digital advice solution, a pure robo, but a lot of the advice underlying the recommendations still comes from the algorithm, but you’ve got a human adviser who is available to answer questions, do periodic reviews, but typically in a digital relationship these hybrid arrangements, access to that adviser is only possible through a virtual communication method.
Leo Schulz: So on Skype for example…
Garrett Harbron: Skype, telephone, chat, whatever it might be, right, it’s not a case where you go in and sit down face-to-face with anyone.
Leo Schulz: And sometimes that’s called screen-to-screen, is that right?
Garrett Harbron: Oh screen-to-screen – that would be another way to run into it.
Leo Schulz: Another description, and then at the top of the scale as it were, you’ve got wealth management.
Garrett Harbron: Wealth management is probably most like what traditional advisers have done in the past, that’s sitting down across the table or desk from the client, asking them questions about their goals and their objectives and their constraints, and really sitting down and creating a plan that’s bespoke for that client.
It takes a very high level of adviser engagement and it’s where advisers can add a lot of value as well.
Leo Schulz: So where are advisers going to focus their attention then in this new world, Garrett?
Garrett Harbron: Well I think it really depends on the adviser, and on the firm; what we see is a spectrum of adviser business, and we think most firms will end up offering more than one type of advice. So at the extreme they may offer embedded advice solutions for their lower net worth clients, and offer full on wealth management to their wealthier clients who have more complex planning needs, but the same firm could also offer digital advice in a digital relationship.
One of the keys in the future is that all of these different advice paths can be profitable, they can have good margins – it’s just a matter of matching the level of adviser engagement to the pricing of the product.
And what this new technology will allow, what this spectrum of advice propositions will allow firms to do, is to really leverage the most valuable resource these firms have, and that is the time of their advisers.
Leo Schulz: Okay, let’s just move on to the next item here, changing adviser proposition from returns to relationships, now the first thing that you want us to look at here, Garrett, is the value of behavioural coaching, and as I would understand it, from Vanguard’s Adviser’s Alpha Research, behavioural coaching is really the element of added value that is going to remain with the human adviser.
Garrett Harbron: Yeah, so you know I think behavioural coaching is a really good example of what that value looks like, more broadly the value that advisers are going to bring to those relationships in the future, is to do those uniquely human things that computers aren’t going to be able to do.
What we’ll see is a lot of the simpler, more basic, fundamental things get done by computers, but there’s still going to be this uniquely human set of activities that only advisers can do. And the advisers that are going to be the most successful in the future are going to be the ones who centre their practice around those uniquely human things, and behavioural coaching is certainly one of them.
And this chart that we have up now really shows the value that behavioural coaching can add to a client relationship, so what this chart shows, is it shows a client that has an account at the top of the last market in October of 2007, and in this case it’s a fifty-fifty equity/bond portfolio, and they ride that down to the bottom of the market in 2008.
At this point the client starts to panic, and does one of three things that we’ve illustrated here, either they sell everything and they go to cash, in which case at that point they’ve locked in a 16% loss, and because cash is essentially nothing over the last ten years, they still as of the end of 2016, are down 16%.
Client number two represented by the green line does a little bit better, they decide to go all to bonds instead of all to cash, and as of the end of 2016, they’re up 36%, and this is peak to peak, not trough to peak.
But for the adviser who is successfully able to coach their client to remain disciplined and to stick with the plan and take a more long-term view of the markets, that client as of the end of 2016, was up 67% peak to peak.
Leo Schulz: So it’s a big difference, isn’t it?
Garrett Harbron: A big difference, yeah, 84 percentage points between the cash and the equity, exactly over a ten-year period – that’s a pretty significant value-add.
Leo Schulz: If we just, and I think the thing about behavioural coaching really is the client has to trust you, don’t they, they’re not going to listen to somebody that they think oh yeah they know how to buy a fund or whatever, but they’re not going to tell me what to do, there’s something, the client really has to be ready to listen, don’t they, and ready to act on what they’re asked to do.
Garrett Harbron: Well I think you hit it right on the head initially in saying it’s all about trust, if you think back to our last chart where we had the client who was wanting to sell out at a market bottom, that’s a period of maximum emotional stress for the client, right, and at that point, what’s going on in the client’s head is that they feel like getting out is the best thing for them, right? They see everything just crumbling and coming to an end and losing everything and at this point they’re not worried about long-term, they just want to stem the losses, and they’re in a very emotional place at that point most of the time.
And so to come in and say look I know this is what feels right, but this isn’t the best thing to do, in order to be effective at that it takes a lot of trust on the part of the client because really what you’re telling them at that point, is you’re telling them that they should be doing something that really feels like it’s not in their best interests.
And to get anybody to do anything that feels like it’s not in their best interests at the time, really requires a lot of trust.
Leo Schulz: And that’s got to happen kind of before the event, doesn’t it, it’s no good on the day the market’s crashing…
Garrett Harbron: Right, absolutely, if the first time you’re having a conversation with a client around these sorts of things is at the bottom of the global financial crisis and you’re telling them stick with it, don’t sell, you’re probably not going to be very successful in coaching that client, the trust has to come first and it gets built over a long period of time.
And that’s why relationships are so important in this business today, and why they’re going to continue to be important and probably become even more so.
Leo Schulz: I think just looking at this infographic that you have here, Garrett, it’s been interesting seeing some of the research that Vanguard has done on breaking up the components of trust, and thinking about how trust is built through those different components.
Garrett Harbron: Right, so and the graphic we have up right now is based on some research we did in the US regarding adviser relationships and what causes clients to trust their advisers.
And one of the things we found when we did this work in the US was really surprising, and that is that we were able to identify three elements of trust: the functional, the emotional and the ethical.
And just to describe them briefly, the functional is kind of what we all think of when we think of trust, or what makes people trust professionals particularly, it’s do you know how to do your job, are you a good adviser? Do you know the markets? That sort of thing.
The other piece that makes a lot of sense, and that we also think about, is probably the ethical, right, and that’s just are you honest, can I trust you? And while as the graphic shows, both of those play a role in building trust with clients, what surprised us a little bit, was that the emotional piece was much more important – in fact it accounted for more than half of what made clients trust their advisers.
And the emotional component encompasses things like do I feel like my money is in good hands? You know, do I feel like my adviser is an advocate for me and they really have my back? Can I sleep well at night knowing that everything is right with my financial plan and my retirement plan?
And according to the survey that we conducted, more than half of what made clients trust their advisers was emotional, which if you think about it, means that how clients feel about their relationship with their adviser, is actually more important than what advisers do and how they do it combined, which was a really surprising result for us.
Leo Schulz: That’s really interesting. I know we’re in the middle, or you’re in the middle of a big adviser client survey here in the UK, and that’s partly to see what, so we’ve done these surveys in the US and now we want to see what the landscape is like here in the UK, and I think that’s going to be really interesting, but just, and I know you’ve got some early results that you would like to share with us there, Garrett, but just before we go on to that, I think if we just look at how you would see the model of advice changing in this new world.
Garrett Harbron: Sure, well, and I think that’s an important point because this is going to be one of the things that does change as technology continues to grow in the financial services space, previously the traditional model of advice, and this is the model of advice that I used when I was a financial adviser, you know, it’s all built on the promise of outperformance, right, I can beat the market for you – that’s why you should come and let me manage your money for you.
And then everything else was built on that promise, so portfolio construction, behavioural coaching, and to the extent that it happened, relationship management was all an extension of that promise of outperformance.
But in a world that’s driven more by technology, where we have computers and algorithms taking over much of the portfolio construction process, that changes, right, because it goes back to those uniquely human activities being the most valuable, in this old traditional model of advice that’s not what happens, right, the relationship management is way up there at the top.
And so we think that this traditional model of advice is actually completely backwards today, we think that everything begins with relationship management, and that is the foundation of the adviser value proposition, and then everything else, the behavioural coaching comes as a result of relationship management and is enabled by it, right, and then portfolio construction outperformance, those things are all still part of the model, but now they’re results rather than foundations.
Leo Schulz: Garrett, let’s move to some of the early indications of the UK survey,
Garrett Harbron: Sure, I mean just before we do, that reason that I just mentioned, the fact that relationship management is the foundation of financial advice in the future, that explains why adviser engagement is one of our two axes on our little chart here, right, is because as you increase adviser engagement, as relationship management becomes more important to the relationship and you mix in more of those uniquely human traits, that makes the advice more valuable and that means that advisers can command a higher fee for that type of advice.
Leo Schulz: Okay, so that’s really interesting, so in fact getting the relationship right is actually, is part of the value-add.
Garrett Harbron: Well absolutely, in fact one could certainly argue that on some level getting the relationship right is the value-add, because all of these other things that we’re talking about, they’re uniquely human, especially the behavioural coaching piece, it all rests on that relationship and if you don’t have that relationship, it’s going to be really hard to show where you add value versus say an algorithm.
Leo Schulz: I’m just going to jump you a little bit ahead here, Garrett, because I think there’s a good connection here, one of the things which you have been identifying in the results is in fact the type of relationship that clients want, I thought that was really an interesting point.
Garrett Harbron: Yeah, so you know, it’s interesting how this came to be, as we were presenting these survey results that we had from the US here in the UK, and I got asked a couple of questions after doing presentations based on this work, but do you think this holds in the UK, I mean you can’t just necessarily assume that what’s true in the US is true here, and so what we decided to do was conduct our own survey here along very similar lines.
And that survey work is still undergoing, is still underway, and we expect to have our results this fall at our adviser Symposium, but we do have some early results that kind of indicate the direction that we see things headed.
And one of the things that we did find was that it does appear from our early work that clients really do want deeper relationships with their advisers, but that the relationships that they want today may be different from the ones that they had with their advisers in the past, or how they thought about adviser relationships in their past.
In fact one of the clients we interviewed told us, he said I want a close relationship but I don’t want my IFA to be a friend like they used to be, things have changed, they need to be a trusted professional like a psychologist or a GP.
Leo Schulz: I think that’s really interesting because that’s kind of telling me that what a client wants now is a much more structured and formal relationship.
Garrett Harbron: Right, and I think, yeah and I think it even goes beyond that, I think it’s structured, it’s formal, they don’t want to feel necessarily like they’re investing money with their pal or their mate – they do want to feel like their money is being handled by someone who is competent, who is professional, who is well qualified, and who has their best interests at heart.
Leo Schulz: Someone who still cares for them as a person.
Garrett Harbron: Right, exactly, who cares for them, who cares for their objectives and goals, and outcomes, but not necessarily a friend.
Leo Schulz: No, I think that’s a really interesting distinction, and I think that’s something, which I think would be interesting to look at further, referrals was another issue, which I think came up, Garrett…
Garrett Harbron: Yeah, that was another place where we saw some really interesting results here in the UK based on our early interviews; it’s probably not going to come as a surprise to anyone on the webinar today that advisers rank referrals as their most important method of getting new clients.
What was a little bit surprising, though, was that clients also told us that referrals were the most important way that they found their advisers. One of our clients that we interviewed said that word of mouth recommendation is the best way to find a financial adviser, it negates the need for all the upfront due diligence and reduces the fear factor of making a costly mistake.
So there’s a nice overlap there, of client interests and adviser interests when it comes to the referral process.
Leo Schulz: It’s interesting that a referred client is almost starting from a position of trust…
Garrett Harbron: Well absolutely, I mean because you’ve got a couple of layers of trust interacting there. You’ve got the trust that the client has in the person who referred them, so I trust you, and if you refer someone to me, I trust your opinion, and then that trust then gets kind of transferred to the adviser, well if Leo trusts you, then you must be okay and I feel like I can trust you.
Leo Schulz: So that’s a really great starting point, isn’t it?
Garrett Harbron: It is, that’s a really good place to start building trust.
Leo Schulz: So that’s really important, so again, and getting those referrals I think is very much about having those engaged clients, people who…
Garrett Harbron: Yeah, and again it all goes back to relationships, right, you know, if I trust you and we have a good relationship and you’re meeting my needs, then I’m much more likely to refer you than if I feel like you’re just trying to sell me a product.
Leo Schulz: Just talking of product, Garrett, and the point about personalisation, to what extent is, when the adviser thinks that they’re personalising something, but does the client see that and understand that?
Garrett Harbron: That was one of the really interesting disconnects that we found in our work, is we ask clients and advisers to what extent the advisers customise their advice and their product offerings to the clients, and ask the clients the same question, how bespoke do you feel the advice you’re getting is?
And by and large, advisers reported to us that they spent a lot of time coming up with customised solutions for their clients, the interesting thing is the clients reported to us that they weren’t feeling that, they felt like mostly what they were getting were kind of out of the box, off the shelf solutions that didn’t have a whole lot of customisation to it.
So one of the keys for advisers going forward as far as being able to show more value is concerned, is kind of letting clients see the work that went into developing those customised strategies and really letting clients know that it is a bespoke solution just for them, not an off-the-shelf solution.
Leo Schulz: I guess there’s a balance there, isn’t there, because of course the adviser needs to use some ready-made products, but at the same time it’s got to show that it’s not something that you could have just bought directly.
Garrett Harbron: Right, and I think part of that comes down to what questions do you ask, and how many questions do you ask, and does the client at the end of the day really feel like when they walk out of your office, you understand what they’re trying to accomplish and how important it is to them.
There’s probably more to it than that, but I think that’s probably the number one thing that advisers can do to make clients feel like it’s a bespoke solution.
Leo Schulz: So I think that just brings us to our final point for today, Garrett, and I think from what I understand the research has been showing a broader gap in perceptions between advisers and clients.
Garrett Harbron: Yeah, so as we were looking through the results of our interviews, we identified several areas like the bespoke solutions question we were just talking about, where there really appears to be a gap between what advisers think they’re offering, or what advisers think their clients want, and what clients feel like they’re receiving and what they really do want.
And as we go through and we finalise our survey, that’s one of the things we’re really going to dig into, is identifying these gaps and ultimately suggesting ways that advisers might be able to close those gaps and in so doing, show greater value for their clients.
Leo Schulz: I think that’s going to be really interesting. Garrett, when you have that research ready, and that will be formally unveiled in what you call the fall, and which we call the autumn, the results of that survey will be unveiled at our symposiums. In October there’ll be one in London on Tuesday 16 October and the show will carry on in Leeds on 17 October, details will be in the follow-up email to this webinar, and I really would urge you to register sooner rather than later.
I’ve just put a few conclusions up on the final slide; automation will likely prove a threat to advisers who centre their value proposition on portfolio construction; for those who differentiate themselves it may prove a significant opportunity.
Uniquely human services like behavioural coaching can add a significant value to the client relationship. Our survey in the United States indicates that emotions play a powerful role in building trust and we heard some really interesting insights I think from Garrett today on what is the significance of that.
Do UK clients feel the same way? Well, early indications think yes, but that work is currently underway and we’ll review the UK survey results as I’ve just mentioned, at our adviser Symposium in October.
There’s a white paper setting out the results of our US survey, the Evolution of Vanguard’s Advisers’ Alpha: from Portfolios to People, and that is now on our website and again we’ll put a link into the follow-up email.
And Garrett has written a blog giving a summary of some of the key points of today’s call, and that will also be on our website, vanguard.co.uk.
To find out more, please do get in touch with your Vanguard representative, or call 0800 9175508, I’ll say that again, 0800 917 5508, and again that will be in the follow-up email, or write to email@example.com.
You’ll need the same, use the same contacts to claim your CPD credits, we’ll be back next month as always on the third Tuesday at 2 pm – that will be 19 June, our topic will be Vanguard’s LifeStrategy: why it’s elementary. The Vanguard LifeStrategy funds will be seven years old in June, the age of seven I believe in the old days used to be known as the age of reason, so that’s a big anniversary, and we thought it would be interesting to look at some of the characteristics of the LifeStrategy funds that have made them one of the most popular multi-asset solutions in the UK today.
Your host in June will be Alice Shepherd, and her guest will be Ankul Daga, a specialist in portfolio construction in our Investment Strategy Group here in London.
Well we certainly hope to see you all at the Symposium in October when much more will be revealed, that’s us for today, so thank you to Garrett, thanks to all our listeners and goodbye.
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