How Some FAs Spend Too Much on Marketing
Source: FA-IQ, Apr. 12, 2017
BRUCE LOVE, MANAGING EDITOR, FINANCIAL ADVISOR IQ: Hello, this is Bruce Love with Financial Advisor IQ. And I’m here with Cullen Thompson, co-founder and CIO of Bienville Capital. Cullen, the marketing spend is quite a big part of most advisor’s budgets. Do you think it’s being used effectively and wisely?
CULLEN THOMPSON, COFOUNDER AND CIO, BIENVILLE CAPITAL: I’m not sure if I would say or argue if it’s used effectively or wisely. I think what’s interesting is to see how disproportionate the marketing spend for most advisory firms is relative to research and travel, for example. And so when we think about our business, we think about our product.
What is our product? Our product is ideas. We’re trying to find good ideas across the world, across asset classes, in order to be able to build a portfolio for our investors. In order to do that, we need to travel. We need to pay consultants. We need to pay for research. Oftentimes we will find local partners. It is very resource intensive.
However, we think that’s consistent with the fee that we are charging our investors. And so if they’re going to pay us, we believe they should get something for that. We don’t believe our investors should be paying us to turn around and use those dollars to market simply in order to raise assets.
And so whether it’s being used effectively, it kind of reminds me of the example of Apple for example. Apple has fantastic marketing, but they have fantastic products. The focus is on the products. You can tell by the history of the company and what they design and what they do they are passionate about their products in which they also market, market in order to really explain those products to their consumers.
Patagonia is another example. If you read the history of Patagonia, these were products that were built because they wanted to use them themselves. And so I think that’s one of the intriguing things about this industry.
The question to ask is are our product or our portfolios being built because the owners or the proprietors want to use them? Or are they just simply trying to sell them? And so what I would like to see is the emphasis being put back on building products because that’s what you want to use. And we’re the biggest investors in everything we do. We’re building them first and foremost because we want to do that. And the marketing really is just about communication.
BRUCE LOVE: The marketing should be about the communication. What exactly do you mean by that?
CULLEN THOMPSON: I think there are a variety of ways that you could communicate. And the first is brand. And so if we’re marketing to build a brand, what does that brand represent? When people hear your name or think about you, what image comes to mind?
For us, we like to cultivate a brand and an image that we are creative thinkers. That we’re willing to look around the world, who are very willing to take a truly deep dive into an investment idea in order to hopefully bring that to the portfolio in order to make money.
Other forms of marketing spend could be in communication, as we were just saying, just communicating what you’re doing. It’s getting materials or getting information to your clients. So at the end of the day, they understand what they own, what’s in their portfolio, and what’s going to drive that portfolio higher. How should they think about that portfolio in different types of an environment?
BRUCE LOVE: So when you are a financial advisor, how do you measure the effects of good marketing? Surely it’s just more-- it’s not just more clients, more money.
CULLEN THOMPSON: It’s a great question. I think it’s very hard to quantify. If you’re spending $1 here, what is the output of that dollar? What are you receiving back? Certainly one of the easier measurements will be increasing AUM. We would probably take issue with anyone coming into this industry whose principal motivation is to grow AUM. As we’ve discussed I think one of the things that I’m more cynical about is that tends to be the primary motivation for a lot of firms is just simply grow AUM which is why you see that kind of disproportionate spend on marketing and salespeople, not on research and travel.
The fact that many advisory firms spend so much more on average for marketing sales as opposed to research and travel begs a very interesting question: Why do they do that and how is that able to persist? And one of the interesting things about this industry is they’ve managed to exempt themselves, ourselves, the advisory industry, from showing performance. There’s an utter lack of transparency. And how they’re able to do that is for a variety of reasons. They say that all clients have customized portfolios, clients have some discretion over the portfolio, clients have legacy assets. We’re doing things for tax purposes.
We would like to think that despite all of those issues, you should still be able to create some sort of composite performance in order to show people how effective you are at your job and what they should pay for that in terms of price. I think if much more of the client marketing process was predicated on performance and actually demonstrating skill and acumen, then much more resource spend would go to finding good ideas, being research and travel.
BRUCE LOVE: But Cullen, this isn’t easy for everyone. I mean if you’re resource-constrained, I mean how do you start to find better ideas, have better communications with your clients about these ideas?
CULLEN THOMPSON: It’s not easy. And I think despite what size firm you are, everybody in some capacity has resource constraint. I think what drives, ultimately, where that spending goes is the culture of the firm. And so if you are in an organization that was founded by a private banker who is used to a marketing role, I would imagine a lot of that resource spend goes to marketing and raising assets.
By contrast, if the firm is driven by investment professionals, those who come from an investing background and see the value of finding good ideas, then I think it’s perfectly natural that most people will spend those resource dollars on things that drive performance with the expectation and hope that ultimately performance will drive AUM. And so we were talking previously about how certain things can be inverted, this is another thing that I think has become inverted is marking spend seems a priority over portfolio management and performance and idea generation, where we think it actually should be the inverse.
BRUCE LOVE: Cullen, thanks for your time.
CULLEN THOMPSON: Thank you very much.