The Path of Least Resistance

"The path of least resistance leads to crooked rivers and crooked men"

-Henry David Thoreau

This quote is harsh, but it is a reminder that as humans, our behavior is often driven by the avoidance of difficulty yielding instead to what appears easy. As an industry, the financial services business is at a crossroads of sorts on this path of least resistance. Regulatory changes, robo technology and a shift in consumer preferences are just a few of the drivers that have led us to this juncture. In a column for Financial Planning Magazine, Bob Veres wrote about a couple questions he asked a “fee-only” group of advisors saying this: “At a recent NAPFA conference, I asked everyone in the audience to raise their hands if they were charging their clients based on assets under management. Virtually every hand went up…. Then I asked how many of them were considering a switch to retainers or other fixed compensation at some point in the next couple of years. Once again, virtually every hand went up” This dichotomy illustrates the hard decisions to make. Being paid solely on AUM for all services an advisor provides has worked for some time. But it is becoming increasingly apparent that continuing to do so places your practice at risk for overcharging when compared to the automated investment services (avoiding saying the word “Robo” too much). Additionally, the greatest value add human advisors provide their clients is through comprehensive financial planning and truth be told, many have stopped providing that service. Why? It’s hard! It’s hard to engage a client, convince them to pay a fee, collect all the data, coordinate with other professionals, help get the financial house in order and monitor the plan. Why go through all that work when you’re getting paid entirely by attracting more AUM. There are many firms that still do comprehensive planning, but of the hands Veres saw go up on his questions, I bet many have moved their practice almost entirely to investment management because…that’s what they’re getting paid to do. It’s the path of least resistance.

The RIA tribe of the financial services nation is not the only one at this crossroad. With wires and independent B/D’s moving almost completely to fees for AUM, they’ve got the same issue to deal with. And it doesn’t stop there. Those in the career insurance models have drifted away from their roots of selling predominantly life insurance towards annuities and AUM investments largely due to the massive 401(k) and pension rollout business (a market the proposed DOL regs could crush for many). Why? Selling life insurance is hard and rolling over a large chunk of money is much easier. Whether you’re a fee only advisor earning revenues on AUM, a life agent making a commission on sales or a hybrid broker earning a combination of both, we are all at a crossroads to align our compensation with the value we provide or risk becoming obsolete. And that value must be something other than a product sale or investment allocation, both of which clients will increasingly bypass you to get it faster and cheaper online.

So how do we get off the path of being paid for something entirely different than for the primary value we provide? And can it really be done?  I’ve had an experience that tells me, yes, it can be done. Back 15 years ago I headed up an initiative at AXA Advisors to convert commission based series 6 career life producers (perceptively the low end of the Financial Services food chain) into fee for advice Series 7/65 Investment Advisor Representatives. (Article about it here:  https://www.box.net/shared/4qynek0o35) Even back then, this was thought to be a way to place a focus on the value of the planning relationship while capturing more “share of wallet” after the plan was completed. Early on it was successful, but not easy. We started with a pilot in the state of Texas as somewhat of a test tube. The McKinsey folks working with me called it “proof of concept”. We had to change licensing, training, products, compensation, recognition…basically everything. And we had to do this while continuing to run a business as we knew it. We used to joke that it was like changing the tires while driving 60 MPH. Needless to say, it was the “turn on your head” kind of change that was unsettling. But our results were very interesting. Over the year where we made this seismic shift from essentially a product push methodology to a process driven fiduciary relationship, overall sales revenue increased by 30%. Naturally using a financial planning process and charging a fee for the advice, investment product sales increased 73% while non-proprietary sales in general increased 57%. But the proprietary sales revenues also rose 25%. It was a case where a high tide raised all ships. A win for the better served client, a win for the advisor who increased his/her income and a win for the company which increased all sales, including proprietary sales.

 Financial Planning magazine did an article on the initiative and made a statement at the end, “if AXA can develop such a strategy, it could transform not only its career agents, but the entire financial services industry” (FP Mag article here:  https://app.box.com/shared/sib7b18f8i) A pretty bold statement and probably true…but it didn’t happen. The fee for advice strategy was rolled out nationally with some success, but nowhere near the level that the Texas test tube experienced. Unfortunately, change requires leadership and while I had the vision, passion and commitment to make it work in Texas, the same level of leadership was not shared throughout the enterprise nationwide. When the market slid post 9/11 and expense cutting became the front and center strategy, the entire initiative was cut and the focus of the firm went back to the product push of old. The path of least resistance.

 So, CAN advisors, planners, agents, brokers, etc. change gears and be paid a fee directly for providing advice, yes. But WILL they change their strategy? Only time will tell. The path of least resistance is to keep on doing what we’ve always done.15 years ago my team made an attempt to get off that path with the planning initiative but ultimately it failed when we tried to force change nationwide. It was more painful to change than keep the status quo. But somehow today given the massive changes in the industry, I think most of us are sensing that maintaining the status quo may be more painful in the end. The path of least resistance has reached a fork and it's time to decide which one to choose.  

"Pain is inevitable, suffering is optional"