The lie advisors should never believe again

Join Riskalyze CEO Aaron Klein as he highlights how advisors can redefine the client experience, identify ways to highlight strengths and opportunities in their firm while negating weaknesses and threats, and use technology to elevate financial advice to a better future.

Transcription:

Aaron Klein: (00:06)

Well, good morning. It's Friday morning on what is going to be a holiday weekend. And so I know everybody is very focused on whether or not we're flight out's been canceled, but we're gonna just try to like move our minds right back here for just for just a little bit longer. Cause we've got such a great day of learning and content that, and so I'm really honored and excited to be here with you all. And I really enjoy what Julia just shared because what I wanna share with you today really ties into that really well. And I, a lot of advisors, you know, there's over the past decade or so there is this why that has taken root in our industry and in his two of countless hours of meetings and attention and energy and discussion it was a lot based in some beliefs about what it could accomplish for the end investor, that it would make things easier and faster and better create more access to advice. It was a lot so alluring that many of the best and smartest folks in our industry and every single one of our trade publications published

(01:40)

Things that elevated it from opinion to fact. But as we all know, we all remember that president Abraham Lincoln said, you can't believe everything you read on the internet. Right. And, but what we learned is that this was fake news. Okay. And it was fake news long before any American president actually used that term. So what was the lie? The lie that technology was going to replace the financial advisor today. I'm gonna try to show you how that cannot possibly be true, but more importantly how it really can't, you sit back and you look at the pace of technology growth, how it can't be true in our lifetimes. I felt like I was first confronted with this lie in, Nope, sorry. This is a relatively new talk and we're all getting back on the wagon here after COVID and I have only delivered this one time.

(02:52)

There we go. That's where I was trying to go. I was first confronted this line early 2015 when the robo advisor wealth front kind of declared that they were about to make financial advisors obsolete. Right. And their message was kind of simple. They're like, you know, technology is making everything obsolete. It makes things faster, easier, less expensive, more accessible to the consumer. And if you think about that for a moment, it kind of makes sense because we see that trend in technology. Right. We see that, the yellow pages was replaced by Google and apple came along and disrupted the phone company, right. Amazon came along and disrupted so many things. They're now onto disrupting ups and FedEx with their own fleet of trucks. Right. And we went from 9,000 blockbuster stores, doting the country to one left in bend Oregon.

(03:55)

And, you know, at this point, my company Riska Eli has really just get it just gotten started. It's about 2015. We just got like a couple thousand customers is all. And to hear a company backed by some of the smartest venture capitalists in the world say that they were gonna put every one of our customers out of business was just a little bit sobering. I started to think, do we need to think about how our business is going to transform? If every one of our customers is gonna go out of business and advisors would come up to me and say, I am just trying to figure out how to survive in a 25 basis point world. You remember hearing anybody talk about that? I'm just trying to figure out how to survive in a 25 basis point world. And so, as I talked to financial advisors and started to talk to more investors my view started to become more clear on this over time. And I was started to get a better understanding of the problem, and I hope you don't take any offense to this, but what became very clear is that financial advisors had a big blind spot. And the blind spot was this, that financial advisors don't really appreciate where their own value comes from.

(05:21)

They're largely blinded by their weaknesses and their threats. They don't see a path to neutralizing those and they underestimate the power of their own strengths. And all of a sudden it kind of became clear to me that we were already on the winning side. And a couple of weeks later, I found myself at one of those industry conferences. And I, as I was walking in somebody ran up and kind of shoved a camera in my face and a microphone in my face. And they said, what do you think about this latest thing that wealth front said? And I replied somewhat impulsively wealth front is really just E-Trade with an expensive coat of paint. So that was a fun day. And, you know, wealth front's then CEO, Adam Nash blocked me on Twitter. My mom called she's like, is this a big deal?

(06:17)

I'm like, no, mom, it's Twitter. It's never a big deal. Okay. But, but a couple of weeks on that I was on stage at another industry conference. And I remember what I said, because it just really struck me. I said, in the race, I'm trying to remember what I said. Yeah, there we go. You cannot out robo the robos. If you think about it, they've got hundreds of millions of dollars of venture capital and in the race to depersonalize our services, they're gonna win. So if that's what you make the fight about, you can't out robo the robos. Instead, we've gotta figure out how to empower advisors with the latest technology that is going to level the playing field, democratize access to their advice and make advisors faster, more efficient and more effective. So at that moment in time I did have a few people tell me that they thought that that was a brash prediction.

(07:21)

And you could take a look at this chart if you looked at the Google trend for robo advisor. Okay. I can understand why they felt that way. That kind of looks like disruption in the making, right. Maybe not. Okay. You know, it turns out that when investing feels easy, when markets are just screaming along to the, to the upward trend, we've got a little tire kicking going on right there. Right. We've got people who are kind of seeing what's going on out there and what their options are. But as it turns out when the going gets tough, when things start to get complex and important, okay. That's when the trend starts to change. And it's interesting to go back and look at the same Google trend for financial advisor. Okay. Because take a look at this.

Aaron Klein: (08:23)

Okay. Turns out somebody was needed more than ever before. You are not blockbuster. You're a little bit more like a brain surgeon. Okay. Now I've never had to have anybody operate on my cranium, but if I ever do, I'm gonna go find the smartest, most effective human being on the planet, who is well trained in doing brain surgery to do that operation. Now, I want them to be technology assisted. I want them to have the latest and greatest tools. I want them to be incredibly effective at their job by being technology assisted. But I want, when something inevitably goes wrong, I want a really well qualified human there to help us be successful with that approach. Let's think about that idea for a moment. I kind of love this photo because from the outside, a Ferrari looks like a really sleek and sophisticated and very simple object of desire.

(09:28)

Right now. I do not own one of these. I have three teenagers they're 18, 15 and 13. So I don't know who did the financial planning on that one. But suffice it to say, I do not own one of these nor will I, but if you think about it, you know, underneath the hood, this is a machine of immense complexity, right? There's a million different parts and your clients don't see the complexity that exists in your world and what you do. But I think at the end of the day, they actually do understand that there's some complexity there. And that is a key part of what they're hiring you to do because you see when things become complex and important, that's when we need a human being to step in for us. That's when we're willing more than willing and excited to pay the cost of having a human being step in place to help solve that problem. And what's really interesting is that I see a lot of financial advisors who believe their value comes from exposing the complexity to the client.

(10:39)

And I would argue to you that that's not true. Okay. It, when I see financial advisors who deluge their clients with 30 page archaic reports filled with our multiples and standard deviations, okay. You line up 10 average individuals and ask them what their standard deviation is. And I will show you 10 very confused people. I mean, after all four out of three Americans are bad at math. Okay. So it's just not a good idea. And I would argue to you that the financial advisor's value is about navigating the client through the important, through the complex and to a place of simplicity.

(11:26)

If you're making things more complex, you're losing. If you're helping the client navigate to simplicity, you're winning, but let's not stop there. Let's actually go back to business school for a second, because what I want to do is I want to pull out a tool that all the business school wants love. It's called the two by two. Okay. I dunno if you've heard about this, but we're gonna do a SWAT analysis on the human financial advisor for a second. Okay. SWAT analysis stands for strengths, weaknesses, opportunities, and threats. And if you, if you don't know how this works when I first saw one of thes way too long ago, I was like, I don't really understand, like aren't my strengths, my opportunities and my weaknesses, my threats, like isn't that how it works. Okay. So the way that these classically work is your strengths and weaknesses are things that are inherent to you and your business.

(12:18)

Okay. Your opportunities and your threats are the external forces that are gonna create opportunity or be a threat to your business. Does that make sense? Okay, so we're gonna break this down for the human financial advisor. Let's think let's think about this, and we're gonna start with some of the weaknesses. Okay. Let's get all the negativity out of the way. So we're gonna start with scalability. What's one of the weaknesses of a financial advisor, scalability. There's only so much time in the day, right. And our, our capacity to serve clients is based on how much time we have to engage with them, because each new human being we add to our practice we're gonna need some more time in order to serve them. So scalability is a weakness in our business model. Okay. I would argue time to growth. Okay. What do I mean by that?

(13:07)

Marketing is a challenge. It takes time to build a really strong client base. Right. The financial advice business can be a great one. We'll talk about that in a moment. Okay. But in the early days of building a financial advice, business time to kind of market and grow that business is a challenge because it takes time to build up that strong Compli that strong client base compliance. That's an interesting weakness in our business. What do I mean by that? There are many businesses where you don't have to worry about compliance. Okay. And that's not true with the financial advice business. You spend a lot of time worrying and thinking about compliance and making sure things are documented. So that is just a reality of every advisor's life. Another weakness you might say is liability, little bit connected to that compliance piece, right.

(13:56)

But we have for better or for worse, a regulatory framework in our industry that can allow hindsight to generate unfair attempts to arbitrate things that probably are not fair. In hindsight, it happens all the time in this industry. And that's a part of the business that we are in. And then finally market risk, right? Because there's an inherent weakness in our business that if we surprise clients with an unexpected outcome, that will have an impact on our revenue in many different ways. Does that make sense? Okay. So these are some of the weaknesses, any I missed here that somebody wants to volunteer?

(14:40)

Yeah. Okay. Let's keep going. Let's flip it over. And let's talk about the strengths inherent to our business. How about client relationships? Okay. I wanna pause for a minute minute on this one and just talk about this. There are two key things that are inherent to every business. Okay. Product and distribution, two key elements that are just inherent to every good business. Now, I hate to break this to you. Financial advisors do not have any differentiation in product. You can say it till you're blue in the face. We have a unique process at our firm. We have access to investments. Nobody else has access to. We have this. We have that. I'm sorry, like you can walk down. They there's actually ticker symbols on this client's statement. They can walk down somewhere else. They can buy the same ticker symbols from anybody else.

(15:32)

You do not have a differentiated product. Okay. So does that mean that we don't have any strong, inherent value drivers in our businesses as financial advisors? Oh, no. Not at all. Because see distribution is so incredibly powerful as a value as a driver of value in a business. Have you ever hold, heard the old adage? He or she who holds the gold? Makes the rules? Well, he or she who controls the distribution holds the gold. Okay. Because let me think about it this way for a quick second, in terms of product differentiation. Okay. Does apple have a differentiated product now? You are you Android? People like stay in your green bubbles. Do not argue with me on this. Okay. But seriously, apple has a differentiated product. Okay. You can't get like the iMessage thing, the FaceTime thing, a lot of the different differentiated features of iPhone.

(16:38)

Okay. You can't, and you can't get an iPhone from anybody, but apple it's a differentiated product. What did apple go and do a couple of decades ago, they built the apple store because they wanted to build a direct relationship with their customers and not be subject to the distribution whims of comp USA and best buy. Right. So they went and they built the apple store to build distribution directly to their customers and build a relationship with their customers. So let's think about it this way. If we think about the economics in a financial advisor relationship, they're kind of gonna be split up four different ways. I'm speaking very broadly here, but we're gonna split the economics up four different ways. Right. There's the advisory fee that our client pays. Okay. There's probably some piece of that. That's gonna go to perhaps an enterprise or something like that, that you're affiliated with might be your broker dealer might be an RAA you're affiliated with something like that could be the case. There is a custodian. There is an asset manager. Okay. If you look at all of those fees, okay. And you look at all of the cost of the economic relationship between your client and their investing, you're gonna end up with between 60 and 70% of those total economics.

(18:08)

Okay. Go, do the math. You're gonna end up as the financial advisor with 60 to 70% of those economics. Why? Because he or she, who holds the distribution, holds the gold. Okay. So this is a huge strength for financial advisors. I apparently miscalculated my time. So I'm gonna have to speed this up a little bit, or we're never gonna get to opportunities and threats. Okay. So I'm gonna do that. Okay. Financial advisor businesses have strong margins once built. This is an incredibly lucrative business. I'll tell you what, if you didn't have to start a financial advisory business with zero assets, there would be a lot more financial advisors because it's a great business with strong margins. Once it is built, it's got recurring revenue. Okay. Do you know how much blockbuster would've given their left arm to have some kind of recurring revenue in their business?

(19:02)

Right. Movie studios have to come up with the latest hit every single quarter or they have no revenue, not true with the financial advice business. It's a big strength. There are high barriers to entry. You have to have certifications and licenses and things like that to become a financial advisor. Not just anybody can just pile into the marketplace and become one. And finally it is a profession that rewards experience and expertise. That's why you're here. That's why you're learning. That's why you're investing in your business. Okay. So this is good. I'm seeing a lot that I like here. Let's flip down to opportunities and threats. Okay. Some of the threats, how about this regulation? Okay. There are a group of bureaucrats, we love them. They're wonderful people. They don't quite understand what we do.

(19:51)

They think that we are investment bankers on wall street, right? And so they write the rules that try to say how you should serve your clients. And they don't really understand what you do. That's a reality of our world. Okay. Regulation market volatility, downturns in the market. That's an external force that they impact our revenue. Our revenue can go down because of that. And finally competitors, right? If you build up complexity, other financial advisors can come in and demonstrate simplicity and take that client from you. Okay. And let's talk about opportunities. How about client referrals? Okay. This is an incredible opportunity when we deliver, especially during times of volatility, like we're in right now, clients talk, they talk to each other and they talk, they turn your success into their success. You know what? You wanna know what it sounds like I'm actually doing quite well. Okay. I'm not feeling super nervous. I chose that financial advisor. They're great. Okay. That's what it sounds like centers of influence are a really powerful opportunity for us. If you're not trying to take that client talking back into their center of influence with the estate attorneys and the accountants and the tax advisors and things like that is an incredible opportunity for a financial advice business. And finally market volatility. You go, whoa, what market volatility is an opportunity.

(21:20)

Yes.

(21:22)

Remember the Google trend. They understand that they need you now more than ever before. So I wanna share really quickly in closing how we kind of built Riska lies from the ground up to optimize for these strengths and opportunities and neutralize, these threats and weaknesses. Okay. So first and foremost I'm gonna blaze through this here. Okay. Our client relationships drive scalability and achieving scalability to drive those client relationships requires that I have consistency in my practice and in my message around my practice. Okay. When you add employees and you add advisors, you need them to deliver a more consistent experience. And that's a big part of why we help advisors roll that kind of consistency of client experience to drive those client relationships in their practice and create that consistency. I am trying, I'm just gonna have to blaze through some of this to get to cuz I am really getting the hook here and I get it. So we're not gonna get to go through all of these, but I'm gonna go here to the end. I had a lot of great stuff here too. Just FYI. It's all good.

(22:52)

At the end of the day,

(23:02)

We talked about creating the consistent client experience. When you do that allows you to document that you've met those clients' expectations and ultimately, create an opportunity to knock out a lot of the weaknesses and threats in terms of your liability, your market risk and your market volatility with competitors. At some point, you know, what I'm gonna do is I'm gonna take the rest of this presentation, cuz this was some pretty cool stuff, and I'm gonna do this part later and we'll put it online, but I'll put it this way. At the end of the day, you can summarize your strengths and your opportunities into what the financial advisor brings to the table. And you can summarize knocking out your weaknesses and threats with what technology brings to the table. And I'll close with this. I'm gonna lay through that slide, keep going.

(23:55)

I'm gonna close with this. We all know that the end of the story with wealth front was kind of interesting. A couple of months ago they announced that they were selling themselves to UBS for like $1.4 billion or something like that. Okay. And what's really interesting about that is in a world where Schwab, by the way, I pulled these numbers a couple of weeks ago. So they're probably way off now, Schwab was worth 156 billion. When I checked Morgan Stanley was worth $148 billion. And Goldman Sachs was worth 109 billion. The company that said that they were gonna put all of those companies and all of you out of business sold for $1.4 billion. And here's what I think is interesting about that. If you think about it, that was a 1.4 billion vote of confidence in the human financial advisor. What do I mean by that? Well, UBS didn't buy wealth front to get rid of all of their human financial advisors. UBS bought wealth front as a marketing and lead generation engine to drive traffic to all of their human financial advisors. The human financial advisor has won. I'm convinced you have won. And so let's never allow ourselves to believe that lie again. We can go out and be technology assisted technology, enabled financial advisors who deliver fearlessness and confidence and behavioral coaching and emotional support to the Fanan, to the clients that we serve every day. Thank you so much. Have a great rest of your day at invest.