With market conditions remaining volatile and clients cautious about becoming or staying invested, advisors are finding it more important than ever to define the services they offer and how they provide those services. This “know thyself” approach may help them better compete for clients and assets. It may also, through the selection and marketing of these services, help them to operate more efficiently. And that is a great way for advisors to set themselves apart in the financial advice market and get closer to their clients.
In the same way that advisors regularly assess their business offering, Rydex AdvisorBenchmaking evaluates business practices of RIAs over time. Last December, we supplemented our survey that was conducted earlier in 2011 with a short questionnaire on current topics, including advisor ratings of their skills, use of ETFs, reliance on wholesalers and thoughts on the current market environment.
Advisors reported in our mini-survey that they still are not fully confident in the economic recovery. More than half said that the U.S. is still in some kind of recessionary phase: either in a cyclical or temporary recession phase (26%), or a systemic and permanent recession phase (24%); 44% of advisors agreed that the U.S. finds itself in a slow economic recovery phase.
Moreover, a majority of advisors (59%) said that their clients’ financial situations have changed little since the recovery started. While this may reflect the fact that many investors have been sitting on the sidelines during the market rally of the past six months or more, it underscores the impact of a range of pocketbook issues, including higher oil prices, Congressional disagreement over taxing and spending, as well as the caution created by the Supreme Court’s review of the 2010 health care law and the upcoming presidential election. As for the 41% of respondents who said clients’ financial situation had changed, half said their clients’ situation is worse and half said better.
Advisors’ Views on Economic Recovery (December 2011)
Critical to the long-term success of RIA firms is their service offering, which according to our survey from earlier in 2011, has not changed significantly in the last two years. The four cornerstones of advisory firms appear to be relatively stable and include: basic investment advice, retirement planning, investment management and financial planning. The second tier of services includes insurance, estate and charitable giving planning. The table below shows the percentage of advisors surveyed offering key services over the past few years.
Services Offered by Advisors (Spring 2011)
Managing tax impact is becoming a growing concern for investors as tax laws are likely to be a source of contention in the next Congress, so we asked advisors about this issue in our December survey. While most advisors said managing tax impact for clients is important, very few offered tax services or dedicated a significant part of their business to tax-deferred strategies. In our survey, only a third of respondents said they offer tax services or tax advice, and 67% said they do not handle tax work at all. It appears that clients may have to reach out to other service professionals if and when the tax laws change.
We also wanted see what advisors believed were their strengths in this volatile market period. The December survey revealed, for example, that advisors surveyed generally rate themselves strong on both client relationship management and investment management. In fact the largest share of advisors, 41%, said they feel proficient in both, while about a third (36%) cited client relationships as a core strength and about a fifth (20%) said investment management was their forte. Advisors gifted in both these aspects of the business do exist, but many find that skills associated with one aspect of the business cannot easily translate to the other, and prefer to team up with or delegate to a colleague.
Advisors’ Self Ratings on Strengths (December 2011)
Regardless of whether an advisor believes he or she is skilled in both client and investment management, there’s still the practice to manage. That means determining a service offering while being sensitive to the needs and concerns of clients. And of course there is the pressure for advisors to keep up with the constant stream of new investment products. They want to offer the appropriate mix to their clients, but to do so often must rely on the expertise that financial wholesalers and other intermediaries provide as a way of learning about the potential in new products and services.
Our mini-survey showed that advisors continue to expand their horizons in terms of investment vehicles and strategies, with between a fifth and a third of advisors actively seeking more information on new index strategies and a variety of ETF strategies. Alternative indexing strategies continue to gain ground, with advisors showing similar levels of interest in a range of approaches: cap-weighted indexing (30%), equal weight indexing (31%), fundamental indexing (23%) and active indexing (27%). ETFs are gaining in popularity with more than three quarters of advisors (79%) making allocations to these vehicles—and 28% of advisors allocating more than 20% of client assets to ETFs.
Percentage of Advisors with a Range of Allocation to ETFs (December 2011)
To obtain useful information on new products and services, advisors often rely on wholesalers. When dealing with wholesalers, about half of advisors meet with reps at least once a quarter, and advisors value character (“integrity and honesty”) and product knowledge over all else. Character and knowledge were the most important wholesaler attributes, with 66% of advisors rating “integrity and honesty” as highest in importance, followed by “depth/breadth of product knowledge,” cited by 56% of advisors. Responsiveness and effectiveness in problem solving were the next two most important attributes. More than half of advisors (52%) meet regularly with wholesalers—once a quarter or more frequently.
Shaping a business model is critical for advisors, regardless of the market environment. Our recent mini-survey suggests that advisors take this aspect of their profession seriously and see value in bringing together the right skills and service offering. The markets may well be in a slow recovery, or something even more challenging like a systemic recession. The advisors whose businesses are best positioned to weather uncertainty will focus on their strengths, while choosing the services and the best way to provide services that are in the long-term interests of their clients.