"Protect the point" is a phrase commonly used among independent financial advisors. It refers to the advisor's goal of netting at least 1% of investment assets after certain expenses. In the era of robo advisors and big-firm bureaucracy, taking control of your own investment process will give you tangible value in your clients' eyes that will allow you to protect the point.
That point can easily be eroded. If a client is charged 1.5%, the advisor hopes to keep 1% (a point) after the registered investment advisor, or RIA, or independent brokerage firm takes its cut, and trading and third-party management costs are subtracted. From that 1%, the advisor pays all the expenses of the business that are not taken off the top by those other parties. Staff pay, office space, travel and client meals are some of the other normal expenses of a boutique, independent practice. A portion of what's left can go back into the business.
Here's how advisors can protect the point by offering tangible value to their clients.
Many advisors are in the business because they want to do well by others, and thus do well by themselves. With robo advisors and cheaper investment approaches on the menu for potential clients, protecting the point is getting harder for independent advisors, particularly small to midsize firms. But this segment of the advisory business may actually be in the best position to deliver the most direct, customized service to investors. After all, they are their own bosses, or at least part of a smaller group of professionals. There are no big-firm dynamics to muddy the mix.
Many financial advisors prioritize the development of holistic financial plans, guiding clients through the peaks and valleys of life, financially and otherwise. The paradox, however, is that so many of those same advisors are paid in large part based on the assets they have under management. The pressure on their fees is due to pressure from big financial firms that aims to commoditize the industry and reduce their ranks to a precious few.
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The explosion of digital communication and the nature of herd mentality make it tough for smaller firms to shout above the ubiquitous messaging that the largest firms can afford to dispense. For the boutique financial advisor, it is one thing to know you do meaningful work for your clients. It is another to get them to recognize that in a way that grows your assets, fends off competition from larger firms and allows you to protect the point.
Boutique advisors can fight back and preserve their specialized role within the expanding financial services industry. To do so, however, advisors must think and act differently than in the past. They are the underdogs, the undiscovered gems that need to be unearthed.
To do this, focus on an aspect of the business from which the big firms are moving away: developing an investment process and strategy that is more in tune with today's real client concerns. In doing so, you can go from an advisor who adds value through the somewhat esoteric process of "financial planning" to a go-to source of tangible value.
Taking ownership of your investment process instead of punting to a big-name firm will allow your clients to assign much greater value to that part of your offering. The more ways you have to impress them and distinguish yourself and your practice, the better off you will be in this new era of digitally aware, short-attention-span consumers.
There has never been a better time to adopt this mindset because of the precarious, historically unique condition of the financial markets. Stocks are near all-time highs, and bond yields are near all-time lows. Investor complacency, though it's hard to measure precisely, is likely at or near all-time highs. That puts a premium on advisors' ability to determine what investment philosophy, process and strategy they'll deliver to clients.
After all, if advisors are getting paid in large part based on assets under management, it follows that their practice, which they have built with their sweat and energy for so many years, is more at the whim of the markets than at any time in their career.
Also, outsourcing is expensive. While there is value in doing it, advisors should be seriously questioning whether the expertise they are getting is unnecessarily separating them from their goal to protect the point.
A good place to begin is by deciding what ground rules and guardrails to impose on your own practice when it comes to the range and intention of your investment decisions.
Define your methodology. In the 60-40 era, none of this mattered. Advisors didn't have to think too much about client portfolios, and they just let the market and some big fund firms take care of it for them. You can still use the elements of those strategies that you find valuable. But you can adapt to today's markets by offering methodologies that are not limited to what huge, constrained Wall Street firms can offer.
Whether it's more tactical management, a wider selection of exchange-traded funds, or seamlessly mixing stocks, ETFs and even options in your portfolios, there many ways you can invest more flexibly and at a fraction of what you pay others to do for undifferentiated investment outcomes. This may also go a long way toward identifying you as a source of value with the next generation of your current clients.
Redefine risk tolerance. Risk tolerance is another area of potential differentiation for boutique advisors. The established standard is that a client who is a 6 out of 10 on the risk scale should always be a six. The logic follows that when they drift too far from six, they should be brought back to it. But advisors who want to create a unique and attractive identity for their practice and brand can do so by questioning this conventional wisdom.
Last year, when the COVID-19 outbreak cracked the S&P 500 by over 30% in five weeks, there were likely many investors who would have appreciated that their advisor could temporarily position them lower on the risk scale. The market doesn't always bounce back the way it did. And if it doesn't next time, it can be life-altering for retired and preretired clients. Going through that discussion with clients is the kind of strategy that breeds confidence and attracts assets.
Break through the messaging. Boutique financial advisors have had to sit idly by as the investing public absorbed a decade of messaging. The idea has been this: Just invest in the best-known market index, keep fees low and you will be fine. This forced financial advisors to join the herd, watching the business profit margins for their talent getting chipped away.
So begins a larger, more introspective process of enhancing your practice's competitiveness. Whether you are looking to grow and protect the point or transition out of the industry, taking control of your own investment process will give you the tangible value you need to control your own destiny.