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Don’t Get Lost in the ‘Value Added’ Wilderness

By Thomas Coyle September 8, 2017

That most sought-after of unique selling propositions – the “value added” – is vital to financial advisors these days. But it’s also an elusive concept fraught with wishful thinking and easy answers. To make your value-add work as a meaningful enhancement to a wealth management practice, experts in the industry say it’s worth taking the time and trouble to pin it down.

In plainest terms, value added is the process decommoditizing a commodity.

These days especially, value added is extolled as an antidote to some of the fiercest competition FAs face. Against a surge-tide of indexed investment products, robo-advice platforms and 24-7 digital capabilities lowering costs and decreasing clients’ dependence on flesh-and-blood FAs, it’s seen as a bulwark. In this light, the right value added — that certain something machines and assembly lines can’t do — is a client-service slam dunk, a sure and obvious manifestation of one advisor’s worth over all-comers.

But that’s a bit of a dream, says William Trout, head of wealth management research at Celent, a consulting and research firm. Many so-called value-adds are empty because “many advisors provide neither solid investment advice nor the type of comprehensive planning support that adds value for clients over the long haul.”

In other words, many advisors don’t stand out as much as they suppose they do. Worse, the value-added put forth by some advisors doesn’t keep them from working more for less pay in the face of more economical competitors.

A recent Schwab study of advisors cited by Trout in his “Looking Under the Hood” – a report on portfolio risk management – says 44% of those polled are providing additional services free of charge. Another 40% have been spending more time on clients this past year without raising fees.

“Reduced productivity in an age of automation points to the pressures facing advisors,” especially around fee compression and — in light of regulatory reform — rising compliance costs, Trout writes in the report.

Meanwhile, adds Trout, pure-play robos are getting wilier, adding artificial intelligence, account aggregation and retirement services to further chip away at key points of differentiation for brick-and-mortar FAs.

Michael Resnick

St. Louis-based Plancorp, which manages $3.4 billion, sees its value-added as the ability to help its clients “make smart choices about their money so they achieve their goals and fulfill their value,” says the firm’s chief investment officer Peter Lazaroff. “We do this by helping them get their entire financial house in order and keep it that way.”

Though it emphasizes a relatively broad offering, Plancorp’s claim to a focus on holistic planning as a true differentiator may be bolstered by the 32-year-old firm’s antecedents as a planning-only firm. “We didn’t manage money the first decade of being in business, which means that our value proposition doesn’t lean heavily on investment management” – something Lazaroff in any case considers “rather commoditized.”

In all, FA-IQ heard from about a dozen financial advisors on the topic of their unique value-added. Most highlighted nitty-gritty planning as their secret weapon against competitors.

Thomas Balcom of 1650 Wealth Management in Lauderdale-By-The-Sea, Fla., is an exception. For him, questions about his value-added are easy to answer — not because his firm, which manages $67 million, shies away from supposedly commoditized investment management, but because it embraces it.

“We do things for our clients that they could not do on their own,” Balcom tells FA-IQ. “We construct portfolios with investment vehicles that they would not have access to without our assistance and guidance.” More concretely, the advisor says about 40% of his clients' portfolios consist of “bespoke market-linked notes designed for our clients by a number of major banking institutions.”

Several advisors tell FA-IQ they stress retirement planning as a point of differentiation. Another says her value-added consists of education around “money concepts” for women.

But Trout doesn’t think these ideas go far enough. He thinks FAs have an opportunity to stand out – not by deemphasizing planning but by recognizing that most of them claim to be pretty good at planning. And they either imply they’re dab hands at investing or, more a la mode, they downplay alpha relative to beta.

“One area where I think FAs could add value, regardless of the depth of financial advice they provide, relates to portfolio risk, and specifically, client awareness thereof,” Trout says in an email exchange with FA-IQ. “By portfolio risk I mean exposure to another 2008-type downturn or severe volatility caused by a black-swan event.”

Trout’s point is that robos’ principal attraction — “low-cost and liquid exposure to the market via passive ETFs” — might not retain its luster “when the market tanks.”

Driving home for clients a sober view of portfolio risk is more powerful for being taboo. It’s “an ‘elephant in the room’ topic that neither real life nor robo advisors like to discuss,” says Trout. Broach it, he says, and you’ll both stand out and provide an invaluable client service.

But Michael Resnick, a senior wealth advisor with GCG Financial in Deerfield, Ill., says the subject of value added in the realm of financial advice is frustrating — in part because, in his view at least, it’s far from being commoditized.

“I find it a daunting task to express the incredible value that clients get for their planning and advisory fees these days,” says Resnick, whose employer manages more than $9 billion.

Pointedly referring to the entire industry at its best rather than just himself or his firm, Resnick adds: “In the do-it-yourself world of the discount brokerages” everything is based on the cost of the transaction, but true advisors today provide so much added value that clients simply don’t recognize it because much of it is done behind the scenes.”

Resnick provides a checklist of basic planning and advice services — highly personalized service, portfolio rebalancing, helping to formulate and monitor goals, plain-language insurance explanations and five other basic functions he considers indispensable, but hard to crystallize in terms of value added.