Lately, I’ve been receiving feedback from my newsletter subscribers on the broad subject of “differentiators;” that is, things that make you stand out from the advisory firm down the block or across town. When prospects are looking for an advisor, what are the most important – and least important – characteristics of an advisory firm in the increasingly intense competition for their business?
If we have a clear idea of what foregrounds one advisory firm ahead of others, then we can deliberately cultivate those characteristics. This “differentiation awareness” is a powerful competitive advantage.
The problem is, nobody has ever compiled a comprehensive list of differentiators, much less ranked them according to importance. So, to fill that obvious void, I’ve identified 10 differentiators that I’ve personally seen advisors use in their positioning and marketing. They are sorted from the least to the most effective.
Of course, this is a subjective list. I’m going to ask each reader to do two things: Tell me if this list is out of order, and which differentiator you would put ahead of which others. And second, there will be survey questions sprinkled into the text which will give you an opportunity to offer feedback and help all of us better understand the value of the various differentiators.
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You can post your responses to the questions, and a corrected ordering, on the APViewpoint discussion forum1. I’ll collect responses and provide a working summary of what the community thinks.
Without further ado, we begin the list with:
10. National or global branding of your firm. Many of you have been (and some of you are) associated with a large firm that advertises nationally, working in a branch office with a huge sign on the street-facing side of the building, and perhaps the same sign near the top of the largest downtown office building. The firm runs advertisements during the Super Bowl.
This undoubtedly attracts clients. We know this because younger brokers who have no experience or expertise beyond what they received from a two-week marketing training course are currently providing investment advice to high-net-worth individuals. For those people, the power of the global brand is all-important. And I know brokers who are reluctant to leave their wirehouse firms because they worry that clients are more loyal to the brand than they are to the individual who represents the brand.
But I also know many former brokers who, when they left the firm, ended up taking more than 90% of their former client base with them. After they set up shop, they became the local branch’s worst nightmare. In a competitive situation, they would give the prospect a tour of hidden fees and captive investment recommendations. Of course, a series of scandals, regulatory breaches, whopping fines, enormous trading losses and other negative headline-grabbing activities have diminished the value of these global brands.
For a seasoned advisor, I think this is currently the least valuable of the differentiators. But a few independent planning firms that are establishing national brands clearly believe otherwise.
My poll question: If an experienced advisor were to join a clean, new nationally-branded financial planning entity that has offices in most major cities, would that help her gain new business and the trust of clients? If so, should this differentiator be ranked higher?
9. Past investment performance. Let’s say you routinely beat the market, and your clients are thrilled with your investment performance. Can you use that as a differentiator from the firm down the street whose returns are merely average?
I ranked investment performance near the bottom of the list for a couple of reasons. Even if you’ve gotten a terrific rate of return for your clients, there are a lot of obstacles to telling that story to prospects. Before you, as an advisor, can show those numbers to anybody, you have to jump through a lot of hoops to become GIPS-compliant. You have to create a blended number that includes your most conservative (a.k.a. lowest overall return) clients, or go through the GIPS certification process for multiple models, which makes it more complicated for clients to compare your results with a meaningful benchmark.
Meanwhile, there is no clear assurance that your terrific track record will continue into the future, and you are sternly prohibited from claiming that it will.
But more important than all that is the fact that poll after poll after poll shows that clients care less about returns than they do about various service and trust benefits. In fact, I’ve heard anecdotally that clients are actually slower to trust advisors who lead with their investment performance. (This may be a post-Madoff phenomenon.)
8. Packaging. You have a really cool website, with recently-created YouTube videos where you answer various questions that clients have been asking lately. You post a regular blog on your site. Your firm is branded in the social media outlets. You tweet. You have a nice office.
Does this get you any business?
Advisors who work with wealthy Baby Boomer or Greatest Generation clients tell me that a well-designed website is necessary. But it’s really table stakes, a feature where they don’t want to fall behind the competition. Most of these older clients won’t read the blogs, and prospects might look at the videos to get a sense of what you look like before they walk in your door.
Advisors who work with Generation X and Y clients tell me a very different story. They say that their prospects will stalk them, sometimes for years, reading their blogs, checking out their videos, using this free information to help them plan their wedding, organize their budget, buy a new car. By the time they walk in the door, they feel like they have a relationship with the advisor – which, in a sense, they do.
This, of course, makes it hard to know exactly where to rank your firm’s packaging on this list, but I’m pretty certain that it will rank higher five or 10 years from now than it does today. For a small number of firms, it may be as high as number three.
My poll question: What, in your opinion, is the most important part of your firm’s packaging? An attractive website? A blog? Social media participation? YouTube videos? A fancy office? Something else entirely?
7. Investment approach. A number of firms (many of them affiliated with Dimensional Fund Advisors) now openly tout their passive (or “evidence-based”) investment philosophy when building client portfolios. They believe the academic research behind it lends credibility to their asset-management activities. Advisors who specialize in SRI investing attract clients who want their portfolios to reflect their values.
Beyond that, I hear from brokers and reps who are actively touting the “Yale Model” investment approach, which seems to mean loading clients up on expensive alternative investments (hedge funds and private equity, for example) and non-traded REITs that pay generous commissions. What these investments have in common is that the Yale Endowment Fund wouldn’t touch most of them with a 70-foot pole. But I doubt we would be hearing about this investment philosophy if it didn’t have marketing legs among a credulous segment of the investing public.
The bottom line is that your investment approach clearly can work as a differentiator. But in my observation, most advisors aren’t using it that way.
6. Designations. By this, I mean whether or not you hold the CFP, CPA/PFS, ChFC, CLU, CEMA, MBA, a financial planning degree, all of the above – or none.
This is actually how the differentiator conversation started. Advisors were asking each other: How valuable is the CFP? Do clients ever ask if you have it? If you gave it up, would anybody notice? Would clients or prospects care?
You could ask the same question about the other designations, but I suspect that once you got past the CPA/PFS on the above list, the level of designation-related brand recognition would diminish fairly rapidly. Clients might be impressed if they see letters after your name on the business card, but they wouldn’t really understand what they meant, much less ask for them.
Based on the dialogue with my Inside Information readers, most advisors aren’t getting much marketing value from the CFP designation. Some report that some of their clients, once the designation is explained to them, are a bit more comfortable that they’re getting professional advice than they might have been before.
So why do they hold onto the designation? Two reasons have come up. Just like past advisors would admit that they would do the comprehensive, textbook-thick financial plans not for their clients, but for themselves as a confidence-builder, having the CFP is more for them than for the clients, a self-verification that they do, indeed have professional expertise.
And second, they believe that it’s good for the profession to have a viable designation, like the MD for doctors and the CPA for accountants. Someday, financial planners will need a viable designation to achieve true professional status, but today the financial planning designations don’t hold as much value as those for doctors or accountants.
My poll question: When prospects walk in the door, do they ask if you have the CFP designation? Do they ask about CPA/PFS? Or any other designation? If you gave up the CFP designation, would it materially affect your practice, or your credibility in the marketplace?
I think these may provide the most interesting answers of all the poll questions I’ve constructed here.
5. Years in the business. A 30-year veteran of the business can count on having more credibility with a planning prospect than somebody who graduated last week from an elite college-planning program, even if the young graduate is oozing expertise and knowledge out of every pore. Experience is a powerful differentiator.
But when a client is choosing between two advisors, does it matter that one has 10 years under her belt and the other has 30? I suspect that the differentiation effect tends to evaporate when the advisors competing for a client’s business both have been working for more than a decade.
I also suspect that there is a negative discrimination effect for Gen X/Y clients, who prefer to work with somebody closer to their own age than with somebody who could be their grandfather, who reminisces about food rationing during World War II during client meetings.
Bottom line: the best differentiation will be found in firms that have a mix of very experienced and younger, less experienced advisors who also have client-facing responsibilities.
4. Compensation model. Your choices here, according to the CFP Board, are fee-only, fee-plus-commission or (usually undisclosed) commission-only. As you move from the latter to the former, your credibility in the marketplace goes up. In fact, recently an advisor (his story will appear in next week’s issue) was faced with a choice: Give up his CFP designation or change his compensation status from “fee-only” to “fee-plus-commission.” He is leaning toward dropping the CFP designation, because in his market, fee-only is a more important differentiator.
There has been a steady, well-documented migration of advisors out of the commission world, and fee-only advisors will tell you that they have a clear marketing advantage over everybody else in their community. The fee-only message doesn’t resonate with every prospect, but for many – especially the high-net-worth cohort – it communicates objectivity and fewer conflicts of interest in the professional relationship.
In addition to that, many writers/reporters prefer to quote fee-only advisors in their stories, giving the minority of advisors who don’t take commissions a disproportionately large share of media coverage.
This is obviously not an all-powerful differentiator, as evidenced by the fact that dually-registered advisors and wirehouse brokers own significant market share. It may be most valuable in the initial prospect meeting, and somewhat less so as the client gets to know and trust the advisor. Once that trust has been established, clients don’t care whether or not commissions are involved in the relationship.
3. Area of specialty. Not every advisory firm has a clearly defined client niche, but those that do say that it provides them with a powerful advantage. If the advisory firm down the street specializes in humans who can fog a mirror, while you work exclusively with employees commuting to the large Merk office down the street, or with owners of dry-cleaning establishments, your focus is a strong differentiator. You know the language, you know the challenges that your niche clients are facing, you know where they hang out, what they read professionally and you can become part of their network.
This is another differentiator that will become more important as time goes on. But it will have a very hard time passing number two on my list, which is:
2. Reputation in the community. If people have heard positive things about you and your firm, anecdotally in the course of their daily lives, you are far more likely to get their business when they realize they need professional help. If you’re contributing to the community, if you have a visibly public reputation for integrity and for giving quality advice, you have differentiated yourself from a lot of background competition.
Of course, this differentiator cannot be achieved overnight; it requires decades of doing things right. This is one reason why I am so hopeful for the profession; smaller “lifestyle” firms are merging to form larger entities that will outlive their founders, and all of them are building that community reputation. As the wirehouses continue to shoot enormous holes in their own feet, this quiet accrual of scale and credibility will – I believe – accelerate the migration of market share from the big firms to the more professional ones.
This reputation for doing business the right way is also the key to creating relationships with allied professionals in the community – the so-called “centers of influence.” You have to be a center of influence yourself before you can start attracting alliances with them.
My poll question: What is the fastest, or most reliable, way to build a strong positive reputation in the community? Is there a process that these merged firms should know about as they acquire the necessary scale and longevity?
That takes us to the number one differentiator in the profession today:
1. A close relationship with your existing clients. Julie Littlechild at Advisor Impact has done a lot of research on what drives referrals. Referrals are the source of between 80% and 90% of all new clients across the profession, so her research is not to be dismissed lightly.
She has found, consistently, that “engaged” clients – that is, clients with whom you have more than a strictly professional relationship – will provide 100% of your referrals. The rest of your clients, who are probably receiving excellent advice and service, will contribute 0% of your referrals and add nothing to your marketing efforts.
What is a “more than strictly professional” relationship? I’ve defined it more comprehensively in a white paper on client service (if you send me an email, I’ll forward you a copy), but the Cliff Notes version is they are people you show a personal interest in, who rely on you not just for investment management but for advice on personal matters that relate to their goals. They are people you socialize with, who you invite to regularly-scheduled fun events and who you talk with about things that are not related to financial planning. They are the clients who invite you to their daughter’s wedding.
Of course, the close relationship factor only works with clients and referred prospects; not with people who are researching their options and identifying a financial advisor on their own. But if we are measuring differentiation strictly by the power to bring in new business, this one trumps all the others. And it is the most surprising, since – in my experience – most advisors believe that simply doing their job well will provide as much differentiation as they need. Since clients are usually not able to distinguish good advice from bad or mediocre recommendations, your best advice is really not making you stand out in their minds. Going beyond what clients expect, in terms of service and personal attention, is far more likely to give you that all-important differentiation factor.
Do you agree? I hope you don’t.
I hope you’ll take a moment to discuss my list, and reshuffle the rankings if you think I’ve got them in the wrong order. If you have the time, please answer the poll questions that I’ve sprinkled into this discussion in the APViewpoint discussion area. And finally, have I missed any important differentiators that should be on this list?
These interactions make us all smarter, because they help the profession learn from the collective wisdom of all of us. And what topic is more important than the components of differentiation in an increasingly competitive marketplace?
Bob Veres’s Inside Information service is the best practice management, marketing and client resource for investment advisors and financial planners. To get a free sample issue of Inside Information, send your request to [email protected], or order online at http://www.bobveres.com.
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