Driven by difficult market conditions and higher levels of anxiety among investors, the question of whether or not advisors are "stealing" client has been coming up more frequently in the past few years.
The overall growth rate for advisory practices has been stagnant for a decade, which is pushing sales management to scrutinize who is growing and why.
From a coaching perspective, the question is easy to answer: most advisors are not stealing clients, but a few are. Importantly, those advisors who are taking clients from others are growing their business, but the majority of advisors who are not simply cant. There are some important demographic and industry-wide trends that help explain why.
There Are Few Unattached Investors in the Marketplace
According to the 2013 Investment Company Fact Book, in 1980 only 5.7% of families in the US had a mutual fund investment. But over the next 25 years, ownership of mutual funds exploded; in 2008, 45% of families owned a mutual fund. This was a dramatic and unprecedented penetration of financial services into the American culture, as mutual funds made meaningful diversification available to individual investors who were not ultrawealthy. (In this article, we are using mutual funds as a signal of overall engagement with investing.) Starting in the early 2000s, ownership began to level off, and it has been dropping for the past five years.
Over this same time, the financial-services industry expanded dramatically. According to FINRA, in the early 1980s there were less than 200,000 securities and commodities brokers, but by 2002, there were 745,000 Registered Representatives. The industry has been shrinking since then, down to 629,000 reps in 2011.
This parallel is to be expected: as penetration grew, the number of advisors kept pace. The decline is also easy to understand. Industries tend to overexpand to meet a perceived demand, then rightsize as demand peaks and stabilizes. The past several years have been a period of rightsizing for the financial-services industry as our culture figured out what role financial advice will have in peoples lives in the future.
What Kind of Growth Can We Expect in the Future?
The short answer is: not much. While mutual funds make investing available to the masses, Financial Advisors seek to work with the few very wealthy families and ultrahigh-net-worth investors. The problem is that there just arent that many wealthy families to work with. Many advisors are surprised to learn how unevenly wealth is distributed in the US. In 2010, the richest 1% of families controlled 35% of the wealth.
This means that when the financial-services industry penetrated the wealthiest 10% of the population, which first occurred sometime in the late 1980s or early 1990s, we were already managing 77% of the wealth in the US. At 45% penetration, which we achieved in the mid-2000s, our industry had massively overpenetrated the number of meaningful investors available in the marketplace. Given that financial services are primarily about deeply personal, one-on-one relationships, its more helpful to think of engagements with people rather than engagements with wealth in aggregate terms.
This is an important distinction, because some analysts have observed that wealth in the US has not been expanding as rapidly in recent years as it did in the past. Such observations imply that new clients will be more available in the future, once the expansion of wealth returns to previous levels. While the observation that the expansion of wealth is slowing is likely true, the real issue facing advisors is that our industrys engagement with the small portion of families that control meaningful levels of wealth massively overexpanded during the past three decades. Todays advisors are facing a very different competitive environment populated by a much more sophisticated and experienced group of potential clients.
A few more statistics will help put this analysis into a practical perspective. According to a 2010 study by Phoenix Marketing Internationals Affluent Market Practice, there are just over 5.5 million families in the US that have $1 million or more in investable assets. This represents the number of meaningful investors who can be described as ideal clients for most full-service Financial Advisors. And, according to Cerulli Associates, today there are a little more than 300,000 client-facing Financial Advisors working hard to engage these investors. When you do the math, you see this means that each advisor has, on average, around 20 clients. But observations reveal that many advisors have far more than 20 clients in their book of business. Why is that, and is it fair?
What Does Fairness Have to Do with It?
As most of our grandparents said to us at some point in time, Nobody ever said life was fair. A small number of well-established advisors manage practices with hundreds of clients, while a much larger number of advisors struggle to build a critical mass of meaningful investors. Why the discrepancy?
Over the past three decades, many wealthier families grew their assets and became more sophisticated in their expectations from advisors. If an advisor didnt measure up to the higher expectations, clients migrated from one advisor to another. Its natural to assume that those advisors who could offer a higher level of service would become those with the larger book of business.
Some advisors want to cry Foul! and are quick to criticize other advisors who compete aggressively for new clients. This is where the idea of stealing clients comes fromas if clients are some kind of commodity that an advisor gets to control. In actuality, when an industry rightsizes after an overexpansion, the general quality of services overall is driven upward by the competitive pressure. This tends to be good for consumers, as their higher expectations set the bar higher for all providers.
How Can Advisors Respond to a More Competitive Landscape?
There are several effective responses that advisors can make to current conditions in the marketplace. First, it is important to accept that the good old days are gone for good: the days of rapid expansion are over. So is the comfortable assumption that an advisor will naturally grow her practice simply by providing good, solid services and a warm interpersonal relationship. Growth will no longer happen automatically; rather, advisors must approach growth as an intentional activity to which they dedicate meaningful blocks of time each week.
Second, the advisor who aspires to grow his business must differentiate the nature and quality of his services in order to distinguish himself as a superior provider compared to others. An elevated standard of care is no longer a competitive advantage; today its a requirement just to stay in the game. The good news, for those who wish to grow, is that most advisors have not yet accepted the degree to which the marketplace has evolved over the past few decades. By embracing a more holistic approach to client engagement and by expanding the breadth and technical depth of services offered, strategic advisors can still establish a competitive advantage over more complacent competitors.
Third, advisors who wish to grow will need to decide on an effective method for intentionally generating that growth. Prospective clients will occasionally find their own way to an advisors practice, but they will be few and far between.
The bottom line is that meaningful growth will come from intentional activities and targeting groups of prospective clients with effective messaging. Will this be seen as stealing? Perhaps, but as the number of prospective clients is not likely to increase significantly, the only way to grow your business will be to proactively pursue those who are already out there, whether they currently have an advisor or not.
So Who Is Out There?
There are two main sources for new clients. The first is those investors who are transitioning from active business or professional life toward retirement. For many mass affluent investors, this transition is the first time they engage an advisor and establish a financial plan. This is a classic money in motion strategy. This strategy will continue to work for years to come, if not decades, but only for a small number of advisors who position themselves aggressively.
The second is collaborative relationships with professionals who are in a position to refer clients. Rather than wait for the normal process of aging to trigger a wealth management event, create motion by educating referral advocates about one or more unique services you provide, thereby giving the professional a compelling reason to refer in spite of the fact that the investor may already have a Financial Advisor.
The key insight embedded in these observations is this: during our industrys period of rapid expansion, advisors who worked hard and showed up were able to capture their fair share of a growing market. Today, as normal economic and demographic dynamics force the rightsizing of our industry, it will be those advisors who compete most effectively who will win their unfair share of new business.
Ken Haman is the Managing Director at the AllianceBernstein Advisor Institute, visit
