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The New Key to Survival

As I look at the history of the financial planning profession, I find myself wondering if any other profession has experienced so many traumatic events in their long struggle toward maturity. The planning world's big “extinction event” came in the aftermath of the Tax Reform Act of 1986. Over the next 5 years, the new law wiped out the up-front tax benefits of tax shelter limited partnerships, exposed many tax shelter promoters as greedy hucksters, and put 30% of the people calling themselves financial planners out of business–either due to lawsuits, lost clients or sanctions from regulators.

A decade later, the Tech Wreck market collapse cost the profession a lot of advisors who had not only built their value proposition on managing assets, but who had gone all-in on the technology revolution, investing their clients' money where the losses turned out to be the greatest. The 2008 market downturn had a similar effect on advisors who bet their firms on their ability to get above-average returns, and whose margins were totally dependent on the stability of the markets and their AUM count.

Today, the profession may be entering another of those dramatic retrenchment periods–due to a different dynamic. I'm seeing a bewildering number of major innovations that some advisors have been quick to adopt, while others seem to be holding back.

Consider the list:

-Automated back offices, which handle the downloading, reconciliation, rebalancing and tax-loss harvesting. This technology has created the robo-advisor competition, but advisors have long been able to avail themselves of an even better suite of services through Adhesion, Envestnet, Orion and a host of others. Advisors who outsource these labor-intensive chores to robots and service provides will be able to spend more time with clients, dramatically reduce their overhead and raise profitability.

-Automated data input, using (as we've profiled in this newsletter issue) PreciseFP for the basic client information, and one of the account aggregation programs like ByAllAccounts or Yodlee to pull in a new client's portfolio account numbers. This allows advisors to free up even more of their time, reduce the paperwork requirements for their new clients, and start the planning work much more quickly for clients who crave instant gratification.

-Collaborative planning tools like MoneyGuidePro and eMoney Advisor, which allow clients to take the wheel and drive the planning process–and more fully buy into the plan that they, themselves, have had a hand in creating. Ironically, this provides a more satisfying client service experience AND it reduces the amount of time the advisor has to spend in the back office doing the planning work. Once again, this creates more opportunity for face-time and reduces overhead.

-Innovative platforms that engage a client. Many younger clients are receiving (from younger advisors) a dashboard which organizes all their financial and portfolio information in one place on the cloud. Before long, clients of a very large advisory firm will be able to dial into their account and select which of the company's approved investment vehicles they want to plug into the different asset allocation components created by the advisor. Advisors of the future will build the overall structure of client portfolios and let clients choose whether they prefer active managers, ETFs or SRI investments. This will take away the active vs. passive debate; clients will choose their preferences.

-New marketing avenues that attract clients. You see advisors using social media, creating YouTube videos that answer any question that more than one client calls in to ask, using their CRM to identify client interests and segment their referral efforts. Some are connecting their website into Vestorly to create a customized news feed for clients on subjects that interest them. As time goes on, the web is going to tie people together in increasingly creative ways, which will blend social interactions, marketing and customer research. Advisors who are on top of these trends will benefit and grow at the expense of those who never engage in social marketing.

-New generations of clients are asking for a different client experience. As baby boomers age out of the prospect pool, the Gen X/Gen Y cohort are looking for advisors who can meet with them via Skype. Instead of retirement planning, these younger clients want career counseling, debt planning and someone to track their frequent flyer miles and hotel points. To work with these clients, advisory firms will have to migrate away from the AUM revenue model toward a monthly retainer fee like the cable and phone bill. To maintain profitability in a post-AUM environment, advisory firms will need to embrace all of those labor-saving innovations listed above.

In other words, suddenly just about every important aspect of the planning profession is changing. And here's where the extinction event happens: some advisory firms are embracing these changes, innovations and features and positioning themselves for the future. Others are moving forward as they always have, using tried-and-true manual data entry, manual rebalancing, going into their offices and shutting the door while they create a financial plan in isolation and resisting all these newfangled social networks and Skype.

As the disparity grows between what I might call the Embracers and the Deniers, the Embracer firms are going to become more efficient, more profitable and more attractive for younger clients to work with. The Denier firms will do terrific work for an aging cohort of retirees, and their successors, if they have any, will be left with an entity that can't compete in a future that will bring additional changes that you and I can't foresee, but which will be hard to accommodate if you haven't been able to embrace the present.

In the past, the key to surviving these extinction events was building your value proposition on something broader than just the investments: on financial planning and a consultative relationship with your clients. This will still be important, perhaps more so in the future, because many of these innovations will make it possible to give clients more of your time and attention, and because the Embracer office down the street will take that opportunity and run with it.

But increasingly, survival will also depend on your ability to adapt to change–which, for most of us, means the ability to attract younger advisors and let them lead the difficult transition into and through unfamiliar business models and technology. If you can create a culture that is open to doing things better and more efficiently, and most importantly is willing to endure the (sometimes significant) short-term pain of changing things up for the longer-term gains of efficiency and better service, you are going to survive and thrive in a future that will have fewer competitors.

If not, well, the profession is going to miss you.