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Practice Management

It's not just about products anymore. To stay current, advisors need to take a holistic approach to their practice and rethink their playbook.

This Practice Management article is intended for financial advisors only (registered representatives of broker/dealers or associated persons of Registered Investment Advisors)
 

As a branch manager earlier in his career, David McWilliams often noticed that some well-qualified candidates turned down job offers. "It became obvious to me, as I interviewed people, especially women, that they didn't want to be on commission. So I lost a lot of really good people because of our pay structure," he recounts.

Now McWilliams, head of UBS's wealth management transformation team, is in a position to take on some of the industry's sacred cows, like the insistence that new recruits hustle to bring in as many dollars as they can. A year ago, UBS launched a new wealth management training program. It placed 50 of its 300–350 new hires in a salaried position within an established team. For two years, they will work with a financial advisor to change the culture within the firm into one that's based on financial planning. "My whole training as a broker was around products, and making sure you understood the products you were selling," McWilliams says. "Now, it's all needs-based, and a lot of times those needs have nothing to do with investments."

No longer are clients looking for insights on stocks and bonds that they can get on any number of websites. But they do want more transparency on fees, as the recession eroded the trust that many of them had placed in their advisors. To stay current, McWilliams says, advisors need to take a holistic approach to their practice and rethink their playbook.

The UBS executive is hardly alone in terms of envisioning a greater role for holistic advice. Aite Group's director of research, Alois Pirker, says 36% of assets under management at the wirehouses are fee-based, compared with only 10–15% 10 years ago. He thinks the percentage will rise to nearly half of all assets in coming years.

There's a lot at stake as the wirehouses' share of assets under management has steadily fallen since the Great Recession. In 2007, wirehouses controlled 47.5% of those assets; five years later, that was down to 42%, according to market researcher Cerulli Associates.

A Graying Talent Pool
But if there's one number that truly scares the wealth industry, it's 51. That's the average age of a financial advisor, according to Cerulli analyst Kenton Shirk.

During the next 10 years, a third of advisors will retire, leaving a looming question about what will happen to the assets they manage. "Over the next five years, a smaller percentage of advisors will enter retirement," Shirk says, "but between five to 10 years is where it really spikes up."

The famed Wall Street training programs that once spawned legions of reps for the wirehouses and the large regional investment firms still haven't recovered to prerecession levels. To replace departing or retiring advisors, the industry has relied on fierce recruiting wars, luring away established advisors—and their clients—with enormous bonuses. To be an attractive prospect, an advisor needs to have many years of experience under his or her belt and a sizable book of business, so it's easy to see why young talent doesn't fit the bill. "The path to success for a trainee has become substantially more difficult," acknowledges Bill Willis, a Los Angeles-based recruiter.

Shrinking fees make smaller accounts unprofitable, putting tremendous pressure on new recruits to bring in large accounts and build up their books straight out of the gate. "The minimum you need to survive is $10–15 million, and that naturally favors someone who is older with more contacts," Willis says. Some recruiters peg the attrition rate of these training programs at close to 80%.

There is much hand-wringing on all sides over these demographics. "Of course, it's self-serving to be concerned about it," admits Susan Woltman Teitjan, CEO of broker-dealer Girard Securities in San Diego. "But we don't want our advisors retiring and their assets walking out the door."

It's not just a succession issue, observes Cerulli's Shirk. Advisors with large practices are coming up against capacity constraints if they can't find more talent to take on the overflow. "At a certain point," he says, "advisors feel like they don't have time to focus on revenue-generating activities and that puts a ceiling on growth."

Investing in Training
The way out, many believe, is training that's better suited to today's realities—an approach that underpins UBS' shift to financial planning. "If you look at what people want, it's not something that was asked of us 10 years ago," McWilliams says. "We're trying to create the ability for financial advisors to deliver on those things."

There's also more emphasis on helping trainees succeed. Instead of bringing in large numbers of recruits, firms are more eager to get the right candidates in place and then make sure that they stay.

Robert W. Baird, for example, revamped its training program eight years ago by pairing trainees with established advisors. It also introduced salaries for a portion of the trainees' total compensation. Last year, according to Kimberly Thekan, Baird's director of talent acquisition and integration, 32 people went through the two-and-a-half year program, a sharp rise from the 13 who completed it the year before. "This helps new recruits succeed and increases the likelihood that they will make it," she says. "We don't let people go into a standalone situation." Thekan estimates that about half of the trainees stay at Baird for five years.

Likewise, Bank of America's Merrill Lynch has begun placing rookies within more established teams, easing some of the initial pressure to meet production goals. Those younger advisors might work with smaller accounts, like those belonging to the children of a senior advisor's clients. Merrill also is leveraging the Bank of America's branch network, by placing some training program graduates at the branches to work with private client groups.

Teams also allow people to specialize. Says Aite's Pirker, "The vision of one broker doing trading, advisement and relationship management—that model is clearly going away."

Hoping to nab young talent even earlier, Baird is also working with the University of Wisconsin-Madison's business school on the curriculum for a capstone wealth management course to launch this fall. Their goal is to sign up 20–30 students.

"If we don't turn things around, the industry as a whole is going to suffer," Thekan says. "There won't be qualified talent to serve the needs of clients, so a significant amount is at stake."

Looking for Future Clients
If current trends remain in force, there also may be fewer clients to serve. "It's not just the advisors who are graying," observes Rob Dearman, senior vice president of advisory practice and platforms strategy with Jackson Life Insurance's broker/dealer, National Plan Holdings. "The assets are graying too."

High investment minimums limit the industry's appeal to an older, more established profile. "There's no doubt that the full-service firms have been going upmarket," Pirker says. "There's a huge service gap that's even moved to the mass affluent."

But while older clients with $1 million or more in assets may be highly profitable now, they might not remain so. "If you have an older clientele, there's going to be a drawdown of your assets," says John Anderson, director of practice management with SEI Advisors. "Younger advisors bring in younger clients," he adds.

With some $30 trillion in wealth expected to transfer from baby boomers to their millennial children in the coming period, appealing to younger clients is increasingly pivotal. The 80-million millennial generation dwarfs the boomers by about four million individuals, yet until recently they've been largely ignored by wealth advisors. Now, the industry is trying to figure out how to work with these younger clients, even if it will be 10 or 20 years before they amass significant wealth.

At Girard Securities, there are a number of parents plus children advisory teams, says CEO Woltman Tietjen. Each member of the team can work with his or her corresponding generation. McWilliams of UBS has noticed this trend at his firm too.

Large firms, Aite's Pirker says, might consider a model like Merrill's, which rolled out its Edge platform three years ago. It offers discount brokerage services for smaller accounts and gives the wirehouse the inside track once they reach full-service status.

Still a Bunch of Older White Men?
As much as young people are missing from wealth management, there's an even more glaring absence of women and people of color. Only 13% of brokers and financial advisors are women, according to Fidelity's 2012 Broker and Advisor Sentiment survey.

Carina Diamond, managing director with SS&G Wealth Management, an Akron, Ohio, advisory affiliated with Cetera Financial Group, admits that the industry hasn't always made women feel welcome. "It's historically been very male dominated, and you see this at conferences," she says. "After the sessions, the men are hanging out in the bars and the women go back to their rooms." But she also frets that many women rule out the profession because they don't understand what it entails or don't have a strong math background.

The frosty reception that the business has given some women has been addressed by the courts. Last September, Merrill Lynch agreed to pay $39 million to settle a gender bias case with some 4,800 current and former women financial advisors. In 2007, Morgan Stanley paid $46 million in a similar gender-bias settlement. Citigroup reached an agreement with female brokers in 2008, and Wells Fargo paid $32 million to settle claims of gender bias in 2011.

It's harder to come by concrete statistics for minority advisors. Although wirehouses must disclose the percentages of the women and minorities they hire to the Equal Employment Opportunity Commission, no wirehouse publicly reports them. Court documents in a racial discrimination suit filed by a Tennessee broker against Merrill Lynch give us an indication: According to the filings, African-American brokers constitute less than 2% of the firm's advisor workforce.

How seriously is the industry taking this situation? By most accounts, it is something that is top of mind for many firms for the simple reason that they don't want to miss out on potentially well-heeled clients. According to Fidelity's survey, 73% of women prefer to hire a female financial advisor. "You can't have a workforce that doesn't resemble the type of client you're going after," agrees UBS's McWilliams.

At Girard, the firm's CEO, chief operating officer, chief compliance officer and chief technology officer are all women, yet when it comes to the broker/dealer's 700-odd reps, only 20% of them are female. Woltman Tietjen wants to cultivate more women advisors, and to this end, Girard's CEO points to something interesting. "While the advisors are men, most of their assistants are women," she notes, and they are starting to take on greater client responsibility. Woltman Tietjen sees them as a natural talent pool and wants to groom them as next-generation advisors. In mid-February, for example, Girard hosted an Assistant University at its headquarters in San Diego, a multi-day meeting attended by 40 assistants from around the country.

At UBS, 35% of the new wealth management practice analysts are either women or members of a racial minority, and to work with the growing Hispanic population, the firm is looking to train more Hispanic advisors. McWilliams thinks the new trainee compensation structure has a lot to do with attracting a more diverse candidate pool, because it places less emphasis on sales.

Baird, too, is intent on diversifying its talent pool. Thekan notes that four of the six members of its Foundations course, a training program for recent college graduates, are either women or racial minorities. These efforts are paying off, at least according to posts made to the forums on glassdoor.com, a website where users can share insights about what it's like to work at different companies. "Very old boys club is finally getting some diverse members," one recent post said of Baird.

Pressure is mounting from regulators too. Section 342 of the Dodd-Frank legislation will establish an Office of Minority and Women Inclusion to oversee diversity and recruitment efforts at financial services firms.

Technology: Scalable Intimacy
While the industry is turning its ship around on age and diversity, some firms have turned to technology to compensate for the advisor shortfall. Technology enables advisors to work smarter by integrating different aspects of their operations, from performance reporting and rebalancing portfolios to risk monitoring. This has the potential to free up advisors, giving them time for more face-to-face interactions with clients. "Technology becomes a way to facilitate scalable intimacy," says Dearman of NPH.

The right technology—such as portals where clients can view robust, up-to-the-minute information on their entire wealth picture—eliminates many mundane tasks, allowing an advisor to scale his or her practice and, in some cases, work with smaller accounts. "For the commoditized data, the commoditized tasks, you can use the technology," Dearman affirms. Better adoption of technology also allows advisors to work with smaller accounts, if they can automate some of the tasks previously performed by investment professionals.

According to researcher Ovum, technology spending in the wealth management industry will reach $32 billion during the next four years, rising by a few percentage points a year. Ovum predicts that the big spend will be less about relationship management tools and more directed toward client-facing interfaces, especially mobile apps. To stay relevant, says NPH's Dearman, advisors need to accept that today's clients want a greater level of transparency for their accounts. They may accept their advisor's recommendations, but still want to conduct their own research, and they want real-time account access.

Many firms, though, are still behind with their mobile and tablet strategies. It's most glaring at bank-owned brokerages, which offer highly innovative client experience platforms, but very limited technology for their brokerage services. "On the bank side, you see all these gadgets like remote deposits, but we're behind on the wealth management side," Pirker confirms.

Plugging in with Social Media
Social media, in particular, has enormous potential to change the way advisors work with clients. "If I can see every time my client changes jobs, talks about getting married, plans a memorial for their parent, this is how plugged in I want to be," Dearman says.

But navigating the world of social media presents numerous challenges. Says SEI's Anderson, "You need to talk to clients in the way they want to be talked to, and not just how you want to talk to them."

Financial social media is no longer about gathering likes and followers, agrees Natalie Taylor-Grasso, head of marketing at Wedbush. Clients want to engage with their advisors on social media, and they want to see that their advisors are influencers, she says. "The next generation is going to have social media as its preferred mode of communication," Taylor-Grasso believes.

Compliance issues around social media complicate this. The Financial Industry Regulatory Association (FINRA) came out with its first set of rules governing social media usage in 2010, and has tried keep pace with the latest innovations, but these have come hard and fast, keeping the regulatory agency in a semi-permanent state of catch-up.

This regulatory uncertainty gets especially hairy for the brokerage industry, which operates under much more restrictive policies than registered investment advisors. FINRA allows brokers to use social media without preapproval, but firms have drawn up their own policies and often do require preapproval or the use of canned content. But in the near real-time world of social media, canned content can be a death sentence. "The regulations have not kept up with technology," admits Nancy Lininger, a compliance consultant.

That may be changing as more advisors seek to be active on social media. "The good news is that advisors are asking, if not in some cases demanding, that their brokerage firms develop a social media program," says Gary Liu, vice president of marketing at Hearsay Social, a company that provides streamlined compliance for brokers using social media. Clients include Wedbush and Raymond James, where 6,000 brokers, or about a third of its North American-based advisors, are active on Twitter and other social media apps.

From technology to demographics, the wealth management industry is fighting headwinds as it alters course. But as its wide, slow turn picks up steam, the change in direction is a breath of fresh air for all on board.

—by Ilana Polyak 


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