excellat, financial advisor, service, offering, strategy

Cosmetics, financial firms and the robo-advisor invasion

At a Hungarian-American Chamber of Commerce luncheon in Budapest in the 1990’s I had the privilege of speaking to John Reed then Chairman and CEO of Citicorp. When I told him I had an import, marketing and distribution company in American health and beauty products he was very interested in our sales numbers; current and projected.  When I questioned his interest he told me that beauty products tend to follow the same market cycles as finance.

It’s an interesting parallel and one that can be further extrapolated to answer the robo-advisor fear permeating the financial advisory business today.   For those of you unfamiliar with the beauty business, let me first provide some background.

Americans buy cosmetics and beauty products to the tune of $55+ billion per year.  World-wide that number is about $170 billion.  Despite numerous studies, tests, articles and scientific data showing that the difference between a high-priced department store cosmeticand a mass market brand is negligible,many women and men still prefer shopping for these products at a department store or specialty shop such as Sephora paying 5-10 times as much for similar products.  Why? People will pay a premium for a product that makes them feel good and is accompanied by excellent service.

The experience of shopping for cosmetics in a department store is superior.  A specialist, (or at least someone with a modicum of training) waits on you, offering suggestions and help in deciding what products are best for your skin type or what colors work for your complexion.   They take time even going as far as providing a lesson in the application of the product or providing a complete make-over.  You leave the store with products totaling on average $125 and a feeling that you received expert advice and made the right choice.

At a mass market retailer there is no service.  A customer walks into the store, peruses row after row of products, and then must decide what item to buy.  There are few samples to try and no assistance.  You leave the store with products totalingless than $25 butare satisfied because you have saved money.This is the equivalent of robo-investing.  It’s a product that works for some investors but not all.

The challenge for advisory firms is to up their game. The days of simply providing only asset management will not work in today’s market.  Numerous studies, articles and financial data show that active management is no better than passive investing, in fact, it is frequently worse.  So where is the value added?  If this is all your firm provides you should be afraid of the robo-advisor invasion.  Your firm is the mass market retailer of cosmetics when you need to be the department store.

In my book Passion is a Virtue: Ten Principles for Sustaining a Successful Independent Advisory Firm, the first chapter is about finding your underlying purpose which will define your differentiator. What sets you apart from other firms?  Why would an investor choose you over the approximately 40,000 other advisors working in the US today? What do you offer that others don’t?

The days of charging 2% for “off-the-shelf” money management are going the way of the flip phone.  Step up to the new reality.   Like department store cosmetics specialists, advisors have to offer something of more value to clients—additional client offerings and a higher quality service. Here are a few suggestions.

  1. Ensure that newclient offerings align with the firm’s vision and purpose: Seriously consider your firm’s target market. Ask clients what they would like you to offer.
  2. Add offerings for which the advisors or staff have expertise: For example, offering 401k plans to small businesses can be lucrative but the learning curve is steep if you have no experience or proficiency in this area.
  3. Avoid jumping in on the latest new idea: Social Security planning is a hot topic but if your business is focused on helping millennials handle their money then this is not a good fit.
  4. Pace the addition of new services: Adding one service at a time and making sure to have the processes surrounding the offering in place before adding others will make for a smooth and error free transition.
  5. Expand existing service: If you currently provide tax planning offer to set up a joint meeting with clients, tax preparer and advisor or offer to send all tax documents directly to the clients’ tax preparers so there is one less thing your clients need to do.
  6. Start small: Little things such as automating clients’ quarterly tax paymentscan have a major impact.

Do you have ideas that have been successful? What is working for your firm?   I’d like to hear from you. @lorraineell