If You Give An Advisor a New Business Model: Changes in Fee Structure Require Other Changes As Well

In a well-known children’s book called If You Give a Mouse a Cookie, a boy’s initial decision to give a mouse a cookie sets off a domino effect of one new requirement after another. It’s a great story about unintended consequences and the need to take responsibility for them.

The story is a useful lens through which to view the early momentum for moving away from an AUM-based fee to a recurring fee. Three recent articles highlighted this shift: two addressing discussions at LPL Focus (one from Financial Advisor and one from Wealthmanagement.com) and one sharing the results of a survey.

Without a doubt, recurring fees – and the steady revenue they produce – can be an attractive business model. Just ask Netflix or Salesforce. The appeal may be even greater if you’re an advisor whose primary alternative is a model in which you make less money when the market dives while you’re working even harder to satisfy clients who are unhappy with their portfolio losses.

But here’s the catch: You can’t shift to a recurring, subscription-like fee and still do the same things as before. Why? Because charging a monthly fee and delivering tangible value only two or four times a year means you’ll likely end up with unhappy and angry clients. Two totally unintended consequences.

If you decide to make the shift to a recurring fee, you also need to change two key elements: value delivery and measurement of client satisfaction:

Value Delivery. It’s entirely reasonable for a person who pays a fee every month to expect to realize value for that fee on a monthly basis. If Netflix didn’t spend millions of dollars on content and instead only offered old movies, you would cancel your subscription. If you could never get to the gym because you didn’t have time or there was a pandemic, you’d cancel your membership. Advisors have always had to face the question of “what am I getting for my money and is it worth it?” Under a recurring fees system, it’s even more important that the answer to that question is “yes”. Advisors need to ensure that they are explicitly delivering value to their clients on a regular, ongoing basis.

Client Satisfaction. If an advisor charges a fee based on AUM, it’s reasonable to assume that the client’s satisfaction will be driven by the growth of his/her portfolio. Shifting away from this fee model requires also moving away from the assumption about satisfaction. Portfolio performance will undoubtedly always be a piece of the equation when it comes to assessing the health of client relationships, but under a recurring fee model with ongoing value delivery, it can’t be the only piece. Client relationship health will increasingly be based on the frequency and quality of communications, the accessibility and easy use of technology tools, and the availability of ad hoc support and guidance.

The bottom line: People pay and assess satisfaction based on the value they receive. If advisors who shift to a recurring fee don’t acknowledge this reality of human nature, they will undoubtably face the unintended consequences of losing clients and referrals.

“…after they’ve seen Paree”: The challenge for financial marketers post-pandemic

There was a popular song at the end of World War I, “How Ya Gonna Keep ‘Em Down on the Farm,” about how soldiers returning to rural America might be restless after having seen the wonders of Paris (“How ya gonna keep ’em down on the farm after they’ve seen Paree [Paris]”). We believe financial marketers should be feeling a similar anxiety about their customers today, who during the new reality of our social isolation have experienced very different ways of interacting with their financial vendors.

There’s absolutely no question that none of us want to continue living the way we have since mid-March, but customers’ experiences with new ways of conducting business are changing their expectations and needs with respect to financial services companies. Certainly, some of these experiences have been far from positive, but the forced disruption of the status quo has opened people’s eyes to new possibilities and has elevated new and different attributes to important and valuable parts of their financial services relationships. For example:

  • Financial advisors and brokers may not welcome as many wholesalers into their offices after finding that virtual conversations work just fine.
  • Small businesses may set a higher bar for their banks to provide digital support and services after going through the pain of PPP.
  • Middle market companies may not welcome one-on-one conversations with prospective commercial lenders.
  • Consumers may place even more importance on the availability and quality of phone and online customer support — enough to overcome their normal bank-switching inertia.

EMI is currently conducting research, in partnership with The Gramercy Institute, among asset management firm marketing leaders to understand how they are providing support to socially-distanced sales teams. This research has revealed many different approaches (which we’ll share in future blog posts), but a common thread is that these marketing leaders believe that many of the adaptations forced by social isolation are likely to drive greater alignment between marketing and sales. Whether or not rose-colored glasses are playing a part in these assessments, this positive outlook indicates that at least some of the new approaches will carry on even when our world begins to open up.

On the one hand, it’s a good sign that firms may be more inclined to challenge assumptions and “standard operating procedures” in favor of new ideas that could better serve client needs. On the other hand, there is danger in greenlighting even well-intentioned new ideas if they aren’t subject to any more validation of their effectiveness than the old ways of doing things. It is therefore vitally important that financial marketers treat our current reality as a testing opportunity, not just an exercise in making the best of a bad situation. The key to this testing mindset will be analyzing data for answers to questions like:

  • Has the volume of sales opportunities gone up or down?
  • Have salespeople had more or fewer direct interactions with customers and prospects?
  • Has the quantity of inbound inquiries increased or decreased?
  • Have customers and prospects interacted more or less with digital communications?

Many or even most of the new virtual and digital approaches have the virtue of being cheaper than their pre-pandemic equivalents. That is why it is so important for financial marketers to not only “feel” that a new approach has been a success, but also quantify the increases or decreases in sales performance and customer satisfaction. Failing to do this runs the risk of marketers waking up in a world of lower budgets (“you proved that you don’t need to do as many expensive things”) and even more unobtainable objectives. In short, unless marketers can provide an alternative narrative, senior management may easily assume that marketing really can do more with less — and make budget allocation decisions that are disastrous for financial marketers and their companies.

It’s Like You’re My Mirror: Marketing and Change Management

In a previous blog, we highlighted similarities between marketing and change management and suggested six questions that can serve as a foundation for successful change management initiatives. Taking one step further, here we look at the similarities in the communication requirements of these two disciplines that will be increasingly critical in both the pandemic response and next phase of economic recovery.

In his hit song, Mirrors, Justin Timberlake sings of the way his love is  the other half of him, completes him, and supports him. The song is great, but its relevance here is in the way his words perfectly capture both the similarities between marketing and change management and the way that understanding those similarities can make each discipline better.

In change management, ADKAR is a widely known and respected methodology. The letters represent the journey through which change managers must guide their audiences in order to achieve the desired new state.

The value of a framework like this is that it identifies all of the moments in the journey that need to be accounted for and addressed through communications and training. It also enables a leader to think strategically about where the biggest risks and opportunities for influence lie. For example, if a company is introducing a new software application to replace a much despised legacy system, the opportunity to drive change may be greatest in the Knowledge and Ability stages: nobody needs convincing that the new system is better than the old but they may need extensive guidance on how to do their jobs under the new system. Conversely, the introduction of a new process for customer onboarding that is projected to save money and increase retention may require more emphasis on building Awareness and Desire if the current process, to those using it every day, doesn’t seem “broken.”

In marketing, the customer decision-making journey is often defined through the following stages: Problem Recognition, Information Gathering, Alternative Evaluation, Purchase Decision, and Post-Purchase Assessment. As with the ADKAR framework, this model enables leaders both to think carefully about each stage of the process and to identify the stages in which the flow is most at risk. For example, a new entrant to the CRM software market may need to invest heavily in the Information Gathering and Alternative Evaluation stage in order to gain consideration by prospective customers. On the other hand, a company selling a new kind of service connecting corporate art buyers and artists may need to focus on Problem Recognition to drive prospects to consider their solution.

Interestingly, when we line these two models up next to each other, it is, in the words of Justin Timberlake, like each is “lookin’ at the other half of” the other. More importantly, the alignment brings to light the key objective in each of the five stages.

A subsequent blog post will provide more guidance on how these objectives can provide a powerful foundation for devising more effective change management communications, but to illustrate the potential:

  • The objective to “highlight the need” drives home that the efforts to build awareness of the need for change must be from a credible source and be seen as empathetic.
  • The objective to “Envision a better world in which the need is resolved” makes it clear that any attempt to build knowledge of how to change requires that the “how” be seen as irresistibly simple and clearly puts the better, future state close at hand.
  • Focusing on the objective to “Make it happen” will ensure that assertions of the audience’s ability to implement will minimize friction and build confidence.