Sage Advisory Regional Consultant Roman Samuels walks through the six characteristics that comprise the Ultimate Financial Advisor.
Senior Regional Consultant
Vice President, Research & Portfolio Strategy
Total time: 35:56
Komson: Hi this is Komson Silapachai. I am the Vice President of Research and Strategy here at Sage, and today we're going to turn the tables a little bit and interview Roman about some of the insights that he has on constructing the ultimate advisor. But first let's get to know Roman a little bit. So Roman, how's it going?
Roman: Komson, how are you man?
Komson: Can you just talk to us about your past, what got you interested in this business, what you enjoy about it now in your role at Sage?
Roman: I remember my sophomore year in college I read the Intelligent Investor, a book by Ben Graham. And since then I was completely hooked. And shortly after college, I got a job at a mutual fund company and started helping that company build out their distribution into the advisor channel. And it was a group of mutual funds that did value investing, and I thoroughly enjoyed working in that side of the business, and that style of investing. And then about three years in, I decided to leave the financial industry for about a year. And I took a year to be a professional full-time musician for about a year. And I play guitar. I write songs. And it's also been a passion of mine. I always tell people that music was my first passion and investing was my second.
Komson: I think today, when you look at the ESPN.com articles about constructing the perfect quarterback, you know, arm, brain, athleticism -- in that same vein, I want to ask, how do you construct the ultimate advisor? So, what are the best practices? What are the best kind of qualities that you've seen across the wide swath of the thousands of folks that we talk to?
Roman: I think the ultimate financial advisor has probably six main components to what they're doing. I would say the first component is be in control of your business, don't let your business being control of you. And I can elaborate on these as we go through this. So that would I think be the first component is are you controlling your business? The second is ignore the Pareto Principle at your own risk. And there might be some people listening who don't know what the Pareto Principle is. And we can go into that in a little more detail. But if you ignore that principle, I think you are setting yourself up for failure in the advisory business. The third component of it, I think, is to be a consultant with a process rather than a sales person with a product. And our businesses really is moving from a transactional brokerage model to more of a fee-based model now, so I think being more consultative and being more process oriented is going to be the direction you need to take your business. I think the fourth component is to be very, very clear with your clients about where your value is coming from and what they're paying your advisory fees for. And I think a lot of a lot of advisors have a mismatch on the price-to-value perception. So getting that really right. The fifth is then to develop an exceptional client service model. The six component is probably something that a lot of advisors are maybe not thinking about right now, but it's how are you future proofing your business? There are a number of things changing in our industry right now. One is the gravitation to ESG investments. And we're seeing more and more that that is going to be the future and the way that we start analyzing investments through this additional lens. So what are you doing about that? And then the second component of that would be how are you preparing for the greatest wealth transfer in the history of our country, from baby boomers to millennials? Are you securing your business to really take advantage of that transfer? So I think those six components -- if you have models for those six buckets -- I think you've got a pretty damn good business.
Komson: So you know, being in control of your business and not letting it control you. So what do you mean by that?
Roman: Yeah, that's a good question. So let's take an example. If you've got a book of 600 clients and you step back and say, Can I really manage 600 relationships in a in a highly effective way, looking at the time I have on hand and the resources and the energy I have on hand? And this was actually something that happened to Merrill Lynch back in the mid-1990s. They were going through a very, very impressive period of their wealth management division getting a tremendous amount of assets in the door. And their advisors were very, very well trained to production. And what was happening was the advisors were getting these very, very massive books, you know, 3 –, 4--, 5--, 600 clients on a book of business. And if you think about that, every advisor really by a function of time only has a certain amount of closet space to hang, your suits, you know what I mean? So, as you keep getting more suits, you start running out of closet space. So that's what started to happen across these advisors’ businesses, where now you had 600 people making demands of you and making demands of your time. And as you're doing that, as you're being demanded at the same time by 600 people, you can't plan for the growth of your own business. And so you're playing a very, very reactive game. And I see a lot of advisors that we work with it Sage, and a lot of our clients, we see this in their businesses. We see that they are kind of frantically trying to keep all the pieces together. And that's it's very, very hard to plan a business and move a business forward when that's the dynamic. So I would say that being in control of your business means, do you have operations and systems in place that are going to allow you to scale? If you do, you're in control. And if you don't, then then you're basically not in control.
Komson: And another way to kind of be in control is to focus on what matters. So I was reading a book, it's now becoming pretty big, it's called “Essentialism.” And there's a quote in there, “less but better,” you know, you mentioned in your second principle, the Pareto Principle is 20% of your effort produces 80% of your results. And so having those 600 clients, there may be 120 of those clients that are giving you the most of your results. And so that could be one of the ways that you can take charge of your own business.
Roman: That's exactly right. I mean that leads really nicely into the Pareto Principle, which is exactly what you stated. It's often referred to as the 80/20 rule, and it was an idea that was created by Vilfredo Pareto. Pareto was an Italian economist in the 1800s. And he came across this discovery when he was looking at the Italian economy, that 80% of the country's wealth was controlled by approximately 20% of the population. And then what he started to find is that when he looked at more and more countries across Europe, that it was the same case there. And since then, we have seen the 80/20 rule just show up all over business. It just seems to be this law of business. And so it exists very, very strongly in the financial advisor businesses, it also exists in the asset management businesses, our business. And that is that 20% of your clients are going to roughly account for 80% of your revenue. So the first way to start getting in control of your business is to segment your business, and to identify who are the top 20% of your clients that are contributing to the majority of your revenue stream? And in some cases, you might find that maybe it's more of a 90/10 right? That 10% of your clients are accounting for 90% of your revenue. That is not outside the realm of possibility. I remember reading a story of an advisor who had about 600 clients, his business was running him and he was trying to regain control and he looked at his book of business and he had 600 clients, and he started looking through which clients were adding to production. And he found that out of a book of 600 people, 33 clients accounted for 90% of his revenue. And he was spending 90% of his time on the other 500-plus clients that were adding to 10% of his revenue stream. So when you come across an insight like that, and you realize that, oh my goodness, no wonder my business isn’t growing -- that's the first way that you can start gaining clarity. And what that advisor actually did is, he actually slashed his book, he shrank his book of business from 600 people down to 33 clients. And by doing that, he created a tremendous potential and trajectory for him to then start growing.
Komson: It's funny, I think one of the things that we overlook in coming to that conclusion, you first have to be able to track your time. And so I think the first step is just tracking where are you putting in your time? That way you can have a scoreboard by which you can measure success or where you can improve.
Roman: Absolutely. So if you're not mentally tracking where your time is going and who those clients are who are benefiting from that time expenditure, if you're not measuring that, you're not managing it. And if you're not managing it, then you are not in control of your business.
Komson: There's a book called “Effective Executive” by Peter Drucker. It's my favorite and probably the only management book that I just give away to people. Of all ages. And that's step one.
Roman: Yeah, it will always be relevant.
Komson: And so, you know, moving on to the next principle of having a process and not necessarily being a salesperson just with a product. Now that we know that you should take charge of your business, focus on what matters, what does that process look like? You give some examples described as general principles of habit, of process, and some examples of things that you have found be successful.
Roman: You know, the financial advising business is going through a change, and some of that changes are really driven by regulatory change. And we're seeing a move now with the new DOL rule. We're seeing the move from more of a transactional brokerage model to a fee-based model. We're seeing this a lot at Sage with a lot of our clients and in the field, we are seeing a lot of advisors right now who have a tremendous amount of their business in retail accounts or in traditional brokerage accounts of transactional models where the form of compensation was by selling either a security, a stock, bond, or a mutual fund, something like that. So now with this fee-based model coming to the forefront, advisors are faced with this question of, okay if my compensation is now no longer tied to the sale of a product, for what are our clients compensating me? And we very strongly believe that you are being paid for your financial planning process as a financial advisor. You're not being paid to sell them mutual funds or sell them ETFs or sell them managed accounts. You are being paid to be their family CFO. They're the CEO, you're the family or the businesses CFO. With that, you need to be a consultant with a process. You cannot just think of yourself as a sales guy and sell products. So what does that mean? That means you have to come up with a process, you have to come up with a financial planning process, you need to really think through what is your process of discovering somebody's financial needs? And not just going through a risk profile. Suitability questionnaire -- that's not what we mean. We mean what are your clients’ real aspirations in life? What do they really want to accomplish in their life? And where do they want to go? How are we going to get there? And really figuring out what's driving them and putting meaning into their financial lives. The second thing is, and this is something that we see in a lot of our top financial advisors, the advisors who are doing a lot of business with us every year and who have very, very big practices -- they've branded their process and trademarked it. So they've named it you know, the Sage Advisory planning process. It’s just an example. Or some type of unique, give it a name branded, trademark, and make it a very, very concrete component of your value proposition to the client. And so I would say that's a huge component of building a successful advisory business that's in a fee-based platform.
Komson: And so you talk about the next principle being transparency and saying, Okay, now they have this process, I'm going to add value to your life, your financial life, and then your ex-financial life, things outside of your financial life. Talk to us about kind of showing your value and being clear about that.
Roman: Yeah, this is another issue that we see advisors struggling with. They're moving from a compensation model where I'm getting paid to sell you something, and then moving into, now you're paying me a fee. And I'm going to do something for you. A lot of advisors believe that their value to the client is to help them outperform the S&P 500, and we see this we see this question a lot with newer advisors who have just come to the business. And they think to themselves, okay I'm a financial advisor, I have to be an expert on investments, and I'm going to help my client put a portfolio together that's going to outperform the S&P 500. And if any component of your value proposition is coming from, I'm going to help you outperform a benchmark, then you are painting yourself into a corner. That is basically you're doomed to disappoint the client at some point in time because no matter how great you are at choosing investments, there's no investment that is consistently going to shoot the lights out and always outperform expectations. So if any component of your hundred basis points that they're paying you is attached to, I'm going to help you outperform, then we think you're operating at a real disadvantage. Because you're now not managing expectations correctly. So we think the first thing is to get very, very clear about what your clients are paying you for. What does that hundred basis points really get? So we think that it's much more effective to look at the two main components that really drive an investor’s return in their journey. And we think that those two components are, number one, their asset allocation plan and their investments, which we've talked about at length. But number two, and this is often overlooked, is the investor’s behavior through market cycles. And that is a huge component of an investor’s journey is, what do they do when another 2008 hits? Do they do the right things in that time period? Because it's moments like that when being coached behaviorally to do the right thing could be the difference between you hitting your goal and not hitting your goal. That's where we see a tremendous source for the advisor’s value proposition is to a client who doesn't know, is not an expert, on financial investing, and is prone to get scared when they don't understand what's going on in the markets. And they turn to their advisor, and they either they want to pull out or they want to sell at the bottom or what have you. And having a really good financial advisor who can provide behavioral investment counseling at that moment in time to make sure that they either stay invested, stay on the plan, whatever it happens to be. That is what we think the main source of financial advisors’ value proposition is. How do you quantify that? So what's really interesting is if you look over any real main period of time, if you had a client who bought an S&P 500 index fund and was kind of investing alongside the S&P 500, what's the average investors performance versus the S&P 500 over, let's say, one year? You know, five years, 10 years, 20 or 30 year, anytime, any annualized time period. And what we found was that the investor, even if their investment was the S&P 500 index fund, on almost every single time period that we looked at, five years out, 10 years out, 20 years out, the investor underperformed the S&P 500 by a factor of you know, right around 5% on any time period, simply by being left to their own devices with no guide. No, you know, guide through the choppy waters and so we the data is clear, the investor without an advisor is going to lag not just the market but their own investment by a factor of somewhere around 5%. So an advisor can come in and say, look, just by coaching your behavior, just by managing you, you the client, I can add back somewhere in the realm of 5% of annualized performance. And for that, I'm going to charge you 100 basis points per year. And we think that that’s a cleaner way of quantifying the value.
Komson: Well, you know, it's that success equals reality minus expectations. The reality of market returns, market versus a benchmark or whatever, but you also have to manage expectations. And the psychology I think that's what, kind of that face to face human interaction, that's where the value is.
Roman: Absolutely, and there's this huge debate going on right now, and it will probably continue to go on, which is, will robo advisors displace human advisors? My personal feeling, just having worked with advisors for the last seven years and being really involved in their businesses and putting together portfolios for their clients, what I tend to find is that give a retail client the most advanced tool technologically to invest in the market and they will still want somebody to validate their decision. Is this the right thing to be doing? Should I be doing this right now? They want somebody to talk to. And more than that, they want somebody to talk to who has a very strong, clear financial planning process that is more of a consultant that isn't the salesperson trying to sell them a product. But they want somebody who knows intimate details about their lives and their goals. This ties really nicely into a belief that we have here at Sage, which is money has a utility, right? When you're looking at my, what is the money being invested for? That's always a question to go back to: why are you investing this money? Usually it's to earn a rate of return so that you can fund some type of future liability, whether that's retirement, whether that's education, whatever that happens to be, you don't have the funds right now, you're gonna need the funds in the future. You need a rate of return that's going to get you there within a risk parameter that you're comfortable with. So you need an advisor to understand that all you're really needing from the markets is a rate of return that gets you to where you want to go. You don't necessarily need the best rate of return, you just need the return that's adequate enough to get you to where you want to go. And then you need an advisor who's gonna help you stay invested so that you hit that goal.
Komson: Right, so principle number five, kind of going along the lines of human interaction and guidance, having exceptional client service, what does that look like?
Roman: So this is this is probably the cornerstone. So you have to have an exceptional client service delivery model. If your clients are not getting exceptional service, you're not going to be referral and you need to be referral because that's going to be a huge driver of acquisition. So what does an exceptional client service model look like, going back to that that former book of 600 clients? I don’t really know if it's possible to implement an exceptional client service delivery model with one advisor to 600 clients. I mean, if somebody is out there doing that, I would love to interview that person. Because I don't think it's possible. We think that the right number sits somewhere around 100, 100 clients to maybe 150 clients to deliver exceptional service. What does exceptional service look like? The mechanism that moves an exceptional client service delivery model is scheduled contact. That's the mechanism that makes that engine drive. So most financial advisors don't have a scheduled contact plan with their clients. It's more of a, maybe I'll check in once a quarter or drop on the line once or twice a year. Maybe I'll meet with them once or twice a year. You know, if the client needs something they'll call me and then we'll handle that but there's no there's no scheduled contact. Now contrast that with a dentist's office. Okay what happens when you go to the dentist? You go to the dentist and before you've arrived at the dentist you've received a phone call yesterday saying, hey just wanted to remind you of your appointment tomorrow. Are you still able to make it? Great, if not, do you need to reschedule? The dentist isn't calling you. It's the front desk calling you to check up on that, support staff. So you get into the dentist's office. Your teeth are cleaned, and not cleaned by the dentist, they’re cleaned by somebody who works for the dentist. And then the dentist comes around and checks your teeth and then -- and this is probably the most important component -- then what happens when you walk out? When you leave the chair, you got you walk out. What do you schedule? Another appointment with the front desk for another six months or whatever it happens to be. Let’s get another your six months check in and you set another appointment in the future right then in there. That's exactly what we're talking about with schedule contact. So financial advisors need to first put the calendar really I think in charge of your client associate and your support staff, and you need to have them functioning more of, almost like a dentist’s or a doctor's office-type of approach to get that scheduled contact in the book. So that's the first component. But the second component is, okay, I'm, I'm going to schedule these contacts. Okay, how frequently are we going to speak and what are we going to talk about?
So there's a very, very interesting model out there that I would point a lot of advisors to called the supernova model. And the supernova model, there's a great book called The Supernova Advisor, which I would highly recommend. And they map out a really interesting model called the 12-4-2 model. The 12-4-2 model is 12 monthly touches, four quarterly meetings that are more in depth, and then two of those meetings are in person. The 12 touches might be a 20-minute phone call, where you're just giving a certain business owner client an update on the private equity market, right? Or it could be a 20-minute update of what's happening in venture capital these days, or whatever they could be. Maybe one of the 12 touches could be maybe more of a 40-minute more in depth, hey, you wanted me to review some of your insurance options. You're looking at maybe 12 monthly touches in the form of some type of phone call. Then your quarterly reviews are going to be a little more in depth. You're getting a little deeper, has anything changed since we last talked? Has something new come into the picture and, this is a really again, goes back to being that process-oriented and having an ongoing process of financial planning. And then two of those meetings, being in person and really, really deep, very, very intimate. I know a lot of advisors who are using the 12-4-2 model very, very effectively. But you can only do a 12-4-2 model with about 100, 150 clients. You can't do it with 200 clients. Because if you're doing 124-2 and you average that out over 300 work days per year, that's roughly 30 appointments per week. And that's six appointments per day. There’s little time constraints to implementing an exceptional client service delivery model in a book of business. This is why segmenting is really important. And in fact segmenting isn't just important. Segmenting is a non-negotiable. You cannot afford not to segment and focus on who’s your top 20% of clients, you know going for 80% of your revenue. So you have to segment, and then you have to get really serious about figuring out what your client service delivery model looks like.
Komson: Right and so the book is called The Supernova Advisor.
Roman: Yeah, it was written by Rob Knapp, and he was a he was a managing director at Merrill Lynch. And that story that I told I got from the book. It was in the mid-1990s, Merrill Lynch was going through this kind of, you know, transitional period where they had a lot of assets under management and very, very low customer service ranking. And they were starting to realize, okay, well, the markets were just going up and it was a good time for business, but the clients were very dissatisfied with the service so out of that problem was hatched this solution called The Supernova Advisor, and a supernova star is something that contracts first and then once it's contracted, it then burns brighter. So that was the model that they created because what it basically did is Okay, first let's segment the advisor’s business, figure out where the money's coming from, and then let's contract the business. In other words, the clients that are not contributing to your bottom line significantly, you need to offload them, you need to give them to somebody else. And you need to focus your business on the people who are really your ideal clients and contract your business. And that's what these advisors started to do. And then they started to implement this exceptional client service delivery model, this kind of model, and what they found was that not only did customer satisfaction go through the roof, but also supernova was also geared for growth because what started to happen was the advisor became highly, highly referable. So if any advisors listening, if you have not read The Supernova Advisor, I would highly recommend that book. And actually, I flagged a little piece of this book because he talks about what drives exceptional service.
There's five drivers, so I'll quickly read it if you want me to. The five drivers are scheduled contacts and conversations. The second one is rapid response to problems. The third one is attention to details. The fourth is anticipating issues before they become urgent. And the fifth is the depth and breadth of services offered. So those are kind of the five components that he lists of an exceptional client service delivery model. And I think a lot of those components cannot be achieved if you've got a book, 600, 700 clients, whatever it happens to be.
Komson: So last but not least, looking to the future. And tell me a little bit about the trends that folks need to be paying attention to, some strategies they can take to prepare for that.
Roman: Yeah, this is a really important issue because one thing that our leadership saw here at Sage was the investor appetite is changing, and where it's changing is to become -- they want more transparency from companies and they want those companies to be a lot more tuned into the environmental, social, and governance implications of their operations. And so from that now you're seeing investors demand strategies that tracking the companies that are adhering to those kind of three tenants. And so if you're an advisor right now, you need to be thinking about, who are your asset management partners, who are the companies that are managing your clients’ money? What are your current asset management partners doing to make sure that their businesses are staying relevant to the investment business? If you're not moving into things like ESG and if you're not looking at what's happening -- more and more women are entering the workforce and are investing in the marketplaces. You know, more and more Millennials are now getting the baby boomer generation -- those assets are now starting to transfer over to millennials. Millennials are different investors than baby boomers. So paying attention to those types of demands. And further, who are you partnering with to help you meet those demands?
Komson: But on the topic of millennials, we think that the nature of communication changes. I mean, you know, you always hear about not as many phone calls with the Millennial generation or text messaging or emails, you know, what does the nature of that communication look like?
Roman: Yeah, that is a great question. The millennial client is going to want to communicate with their financial advisor differently than, say, a baby boomer client. In some cases it will be the same. I think you're hitting the nail on the head, you know, Millennials like to text, we like text, we like screens. We're much more comfortable writing a long email explaining exactly what we want rather than just picking up the phone and having a 10-minute conversation. So those are things that an advisor will have to adapt to, but also what an advisor will have to start thinking about is how are you going to make your millennial relations profitable in this industry? This industry seems to think that millennials cannot be profitable clients. It's not true. It's just you need to start thinking about different pricing models. So our current pricing model on fee based is pricing as a percentage of AUM. And that’s been the fee-based model. Millennial clients don't have the AUM, right, they don't have 100 to 200 grand sitting in the in the bank. So right now they're ignored by the financial advising business. So but what do millennial clients have? They have they're starting to get very, very high incomes. So they're starting to get there. They're young professionals. Now they're getting into tech jobs and finance industry and you know, they're starting to earn more money than they've ever made in their life. And they're earning very, very high incomes. So though they don't have assets, they do have high incomes. And they also have a tremendous desire to start planning their financial lives because they're very conservative by nature. They've seen their parents’ and their grandparents’ generation go through the ‘08 crisis that kind of left this conservative mark. So we find that millennial investors tend to be more conservative in nature and millennials are not going through this process of, okay I'm earning a lot of money, I'm probably getting married soon or probably having kids soon, and maybe I want to start a business or whatever. And all these things are happening in my life and these all require a mastery of you know financial planning.
So these millennial clients really desperately want, they're Googling like crazy, they're reading blogs like crazy, they really want to have somebody who can help them, but they don't have the assets. But they do have incomes, and they're used to paying monthly subscription models for almost every other thing in their life. Phone bills, internet bills, cars, the rent. Everything is a subscription. So why shouldn't a financial planning be a subscription as well? So now you're seeing financial advisors out there who are running, you know, six-figure businesses that are charging an upfront planning fee for a millennial client, and then charging an ongoing monthly retainer to be kind of their on-call financial person. Or maybe have I've seen prices of $75 a month, all the way up to maybe $200 a month. Because if you're a millennial, young professional, and you making six figures, you're making north of, let's say, $8,000 a month and you're making more money than you've ever made, and you want to start putting it to good use. What's $200 a month if you're making that much of an income.
Komson: Being more financial literate should theoretically help you recoup it not overtake that cost.
Roman: If you actually look at the cash flow and the revenue generated from a millennial client using that model, it's right in line with the $100,00, $200,000 AUM account at a 1% management fee. It's right in line. So millennial clients can be very profitable, and they can be very, very good clients, but you have to be willing to be flexible with your pricing model. And a lot of advisors aren't thinking outside the box, so I think that if you're an advisor right now who has a book of business of baby boomers and what have you, I think it behooves you to start generating relationships with your millennials, their kids, their grandkids, you know starting to get to know them get into their lives and starting to maybe experiment with some pricing models that would be attractive to that type of client. And see if there's a lot of room there to maybe even hire a junior advisor who is a millennial and put that millennial advisor in charge of your millennial initiative or something like that. I think these are things that you need to think about as an advisor right now to help figure out how you're going to be relevant.
Komson: That's great. So Roman, so you're in control your business, you focus on the 20% of efforts that gather 80% of the results, you have a process, you have great client service, great transparency into where you're adding value, and you're preparing for the future, you'd be the ultimate financial.
Roman: I think you'd be the ultimate financial advisor.
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