Blue Ocean
The future is bright for financial planners
Recently, an article in the Wall Street Journal described how wealthy young investors don’t see the need for traditional wealth management services from financial advisers. One of the reasons behind this is that younger investors are more inclined to do it themselves. They are not finding value in paying traditional financial advisors an assets under management (AUM) fee of approximately 1% to manage their investments. Unfortunately, most advisors in the industry continue to charge based on this model. A real-world example of this will be if a client has $1,000,000 in investable assets managed for a 1% fee that would equate to a $10,000 payment to your advisor. That seems pretty reasonable considering the size of the account and assuming that you would be making much more than that in returns on the portfolio. The beauty of this model (for the advisor) is that as the market goes up, so does the fee. I’d be remiss if I didn’t also mention as the market goes down and the account value goes down, so does the overall payment to the advisor. So if your account is no longer $1,000,000 but instead $970,000, the fee would not be $10,000; but rather, it would be $9,700. Again one can argue that this seems reasonable because the client and the advisor are on the “same side of the table” As the client makes money, so does the advisor. I’m less interested in debating the validity of the fees charged because, in a market-based pricing system, I think both parties should be free to enter into a contract and pay for and charge for services in a way they see fit.
This article, I think, highlights a more interesting and growing consumer segment. There are many clients after being subjected to years and years of marketing into the value of “low cost/passive” investments, think index funds. These clients see investment management as a commodity - anyone can do it. Furthermore, they are increasingly interested in alternative investments like Crypto Currencies and investing in real estate, i.e., air BnB. These investors tend to be more willing to take risks and value being in more control of their financial destiny.
The traditional wealth management businesses do not serve these clients well. Many are not equipped or even offer the type of investments that the clients are looking for. Despite this, there is still a massive opportunity for financial planning for these clients. Opportunities like this are often referred to as a “Blue Ocean Strategy” a term made famous by authors W. Chan Kim and Renee Mauborgne who wrote the book Blue Ocean Strategy, Expanded Edition: How to Create Uncontested Market Space and Make the Competition Irrelevant
Every advisor will say they are engaging with clients in a financial planning relationship and mention the value of advice. The opportunity lies with the advisors willing to put their money where their mouth is (literally) and price their services based on the value of the advice. This was the opportunity that led to the creation of my firm Vantage Pointe Planning. I tell clients that I am agnostic when it comes to the type of investment they are interested in. My only responsibility is to make sure it’s in your best interest and that it fits in your financial plan. My value add is further supported by the fact that I charge an hourly fee for my time. I’m a real estate investor and know the value that real estate can add to growing wealth. Since I am not compensated or incentivized for the client to move all their assets over to me in an investment account, I can objectively advise on what I think is in the client's best interest. That may be a high yield bank account, investment account, real estate, a new business, and dare I say even crypto (ok, a very, very small amount).
As information becomes more readily accessible and clients become more knowledgable and embolden into wanting to control their destiny, the advisor will have to change into a consultative role. The financial planner will be a professional in a position of trust to help the client navigate all of these opportunities and create a strategy that has the highest probability of leading the client to success.