If you are willing to embrace a different approach, putting your clients first will build long-term value in your business.

If they haven’t got to you yet, they will. Regulators everywhere are assessing the decision of the UK and other for- ward-thinking nations to eliminate commission on investment sales. Europe is set to introduce a ban under Mifid II and even the US might be pre- pared to take on its powerful broker lobby to ensure retirement recommendations are not unduly influenced by the oodles of cash the plan-peddlers can earn. At the very least, full disclosure is inevitable. 

Logically, this makes sense; clients should know what they are paying, for the services they receive. Some adviser firms may view it as a potential nightmare but it doesn’t have to be. 

If you are willing to embrace a different approach this can build long- term value in your business. Our industry – from banks, investment managers and life companies to financial advisers is built on the premise of ‘selling’, not ‘advising’. 

No more short-termism

We are all guilty of talking about the long-term while adopting short-term sales strategies. This is particularly acute in the offshore world, where investment managers focus on promoting short-term returns and advisers play fantasy fund manager when investing their clients’ money. 

The outcome for the client too often comes second to the commission available. The results are predictable long -term goals are not met and clients become disillusioned. 

I suggest that more than 30% of many UAE advisers’ legacy books are invested in delisted, suspended funds or products with significant back-end loads. Clients are effectively stuck, with little hope of making good on capital losses or achieving the growth they require. Worse, some cannot even access their money when they need it. 

If you were one of those clients, wouldn’t you be disappointed? No surprise that those businesses fail to retain clients. Many offshore firms have significantly less assets ‘under advice’ than one would find in adviser businesses in markets where regulatory change has driven the focus towards long-term advice.

UAE clients are not alone, a study for the Luxembourg fund association ALFI* shows that, while the European mutual fund industry has posted re- cord highs, that is more down to market movements than tempting existing investors to invest more or enticing in new ones. This is despite the fact that savings accounts are delivering next to nothing. 

In fact, cash savings are on the rise, making up around 40% of European household wealth in comparison with 18% in the US. Those risk-averse investors have missed out on approximately €900bn ($1,021bn) of performance between 2006 and 2013. The question is why? 

There are a number of reasons, from exclusion to confusion and disillusionment. Investment managers and banks increasingly concentrate on the wealthy; but ALFI says they represent only 10% of the potential market. The remaining 90% get little or no advice. ALFI suggests a massive €2.5trn could flow into the industry if the ‘disillusioned investor’ could be tempted to return or the “confused saver” invests some of their long-term savings. 

A new approach

Before we get excited about the possibility of another €2.5trn in new business, let’s think about how we engage these clients. Our current approach will not work. Investors have been burnt by the global financial crisis, being sold last year’s best, this year’s worst, performing funds and any number of other events that have eroded their confidence. 

Perhaps they walked away because no one was there to help them pick up the pieces.  They do not need a sale; they need support and advice. 

The ‘confused’ savers are more numerous, and ALFI suggests they dis- trust the industry in general. And while they recognise the need to invest for their retirement, they are bamboozled by their choices. 

Someone needs to step up to the mark. For the forward-thinking adviser, there is money to be made if you change your approach. The old-school response to ‘confused’ or first-time investors would be to recommend a fixed-interest fund, on the basis that it will yield more than a savings account. This is the easy option but when interest rates rise, as they inevitably will, those cautious investors will suffer significant capital losses, placing them immediately in the camp of the ‘disillusioned’ and another long-term business opportunity will be lost. 

Many advisers recognise the need for change. They are beginning to transition away from large, unrepeatable upfront commissions towards stable annual revenues that deliver certain- ty and a clear path for expansion. To succeed they will need to stop selling and focus on educating and engaging their clients.

In an environment of continued economic uncertainty, volatile markets and an ever-increasing choice of financial products, the need for on- going guidance and advice has never been greater. 

Focus on reform 

  1. Item one on the reform agenda: focus on being advisers not investment managers. 
  2. Item two: resist the temptation to select last year’s top performer, focusing instead on products designed to meet client needs, such as investments de- signed to deliver capital protection. 
  3. Item three: think about outsourcing. Leave the selection of asset classes and investment vehicles to a professional, leaving you free to spend your time with your clients. 
  4. Item four: ensure a clear exit should performance fail to deliver or your client’s circumstances change. For off- shore clients, that flexibility is essential as many move countries or return home. They do not want to be stuck in an in- vestment or product that puts them at a disadvantage because of their domicile. Nor do they want to be left hanging when market conditions change. 
  5. Item five: be prepared to sacrifice some upfront commission and charge an ongoing adviser fee.

The next step

Follow these steps and align your interests with your clients. Long-term client happiness should equate to long- term, increasing income streams for you and in turn value in your business. Client happiness need not be based on expensive, individually tailored solutions or even face-to-face advice. It is important to segment your clients, identify their needs and deliver the appropriate service. 

Europe is heading away from full open-architecture environments to guided offers for some clients. Clients like choice but they don’t like to choose. Investors generally do not give a hoot about UCITs structures, annuities, tax- efficient wrappers and any of the other jargon we throw at them. All they want to know is will it get them to where they want to go and how much it will cost. 

A huge part of engaging clients is communication and education. Most clients leave their adviser because of poor relationship management. Rather than memorising a sales pitch, focus instead on how to keep in touch with your clients. This doesn’t need to hap- pen via time-consuming personal visits; a lot of it can be done online. 

Creative use of technology can help here. 

I recognise that while a new approach is required, there are many challenges to success. Good quality advice or guidance is sorely needed and not just for the 10% of clients we have focused on to date. 

It may not be a quick win but for adviser businesses prepared to make the move away from ‘short-term sales’ to ‘long-term advice’, the opportunities and rewards will be significant. Importantly, it will go a long way to winning back the trust of our clients and the support of our regulators.

Sponsored article by Rebecca Murphy, UK Director of Sales and Marketing Praemium

*Beyond 10%, MacKay Williams, Alfi (2013) 

This article wes first published in International Adviser

This information is for professional advisers only and is not intended to be relied upon by retail investors. Praemium UK Limited is regulated by the Financial Conduct Authority, Company Registration No. 05362153 T: +44 (0) 207 562 2450 E: enquiries@praemium.com W: www.praemium.co.uk Registered Office Address: 4 th Floor, Salisbury House, London Wall, London EC2M 5QQ