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Shifting Focus From Markets to Clients Can Build a More Valuable Financial Planning Practice


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Written by: Simon Hoyle

A key element in shifting an advice proposition from being market-centric to being client-centric is to prove to advisers that they can create greater enterprise value in their advice practices by changing, according to Russell Investments’ managing director of capital markets insights and US private client services, Tim Noonan.

Noonan says a business model built on aggregating funds under advice has served advisers well in the past. And he says it will continue to serve advisers well in the future, as long as “no one ever decumulates, and the market just goes up, and the cyclicality [of market returns] doesn’t bully people out of the market”.

Noonan (pictured) says an approach to creating investment solutions based on “surplus wealth” – that is, how much over- or under-funded a client is to meet their retirement objectives – is a subtle change from constructing portfolios based on risk tolerance, but it shifts the nature of the relationship between adviser and client and can change the economics of the advice practice.

“Advisers have to manage their clients’ money on the basis of their surplus wealth,” Noonan says.

“If their client has a lot of surplus wealth, they have lots of investment options. If their client is really close to the bone, they have far fewer options. So appropriate portfolios, the optimal portfolio, the efficient portfolio for the client, is not efficient with respect to a tangent line on some efficient frontier; it’s efficient with respect to the balancing point of how much risk does my client have to take, in the time they have, to meet all of their liabilities?”

If advisers can crack this nut, they will have a proposition that is relatively easy to articulate, obviously valuable to clients, which clients will pay for, and which does not generate variable revenue depending on market fluctuations.

Determine surplus wealth

Noonan says Russell has developed an online tool to help advisers quickly and efficiently determine a client’s surplus wealth. From there they can define a solution for each client.

“Here is the wonderful thing about constructing portfolios that are ratcheted to funded ratios: they are not all different,” Noonan says.

“They come in kind of groupings. There’s an investment strategy that is appropriate for someone who is extremely overfunded. There’s a portfolio strategy that is appropriate for someone who is profoundly under-funded.”

It’s a concept that at its core advisers are already familiar with, because many routinely undertake a similar exercise with clients but group them – and deploy model portfolios or asset allocations – based on risk tolerance rather than surplus wealth.

“Bingo,” Noonan says. He says all that is required is “a very modest refinement of that”.

“And in that very modest refinement, what I’m going to do is allow you, as the adviser, to move from being a market-centric adviser to being a client-centric adviser,” he says.

“Now [advisers] are hugging you. It’s like: ‘That’s what I wanted all along! I never meant to pretend like I was a little capital market expert, like I was a portfolio manager. I never wanted to pretend I was in that role – that’s why I outsource that stuff to you guys’.”

Greater enterprise value

Noonan says his job is to present evidence to advisers that the adoption of the “surplus wealth” approach will lead to building greater enterprise value in their advisory firm”.

“This sounds so simple and so banal,” he says.

“I’ve just got to prove to you that what I’m telling you to do is good for your business, right? The percentage of advisers, even very mature advisers, who actually understand the properties of enterprise value and how you build enterprise in a financial advisory practice is fractional.

“They think they do it by raising assets. They confuse the difference between revenues and profits. And they don’t see that retained profits over time is what builds value. They can’t see what structurally they need to invest in in their practice, on order to convert more revenue to profit. More scalable service models, for example.

“As you might guess, this enterprise value thing is more than an academic question at the moment because we have a lot of boomer advisers who are thinking about the back nine and if they can’t figure out how to transfer this enterprise value, either to a buyer or to a successor, they have essentially spent their life career building something which has become – I hate to put it this way – essentially a non-working asset.”

Noonan says the proof of value has to be supported by the tools advisers need to implement a refined way of implementing investment solutions. And the provider of those tools has to demonstrate a willingness to stick around and help advisers through the transition.

A very specific windmill

Noonan, who wrapped up a national road show of Australia this week, says his job over the past 10 years has been “really tilting at a very specific windmill”.

“That is to say to advisers, if you do not have a specific and precise understanding of your clients’ liabilities – by which I mean, what they are going to need in the future, their obligations, their promises, whatever language you want to use that conveys to everyman what they are going to consumer in the future – what is the means? What is the basis of the advice?”

Noonan says there has been “a meaningful gap between what advisers are needing, and what they’re able to obtain from their traditional vendors and sources in order to provide, basically, higher-quality advice”, Noonan says.

“By higher quality, that’s partly in regard to more personalised advice and the demands that the end investors have for solutions that are more sensitive to their specific outcomes, and less inherently product orientated.”

Noonan agrees that the gap reflects a difference in opinion between what advisers believe advisers do, and what some licensees believe advisers do.

“That difference became acute and accentuated with the convergence of two things,” Noonan says.

“[One was] the depth and severity of the global financial crisis and how long and lacklustre the recovery was. This cemented not just the belief but the fact in many clients’ minds that what they had gone though in the GFC was a legitimately threatening event to their personal financial security.

“And then secondly you have to consider the demographic moment it occurred: at a time when you were reaching this sort of tipping point of the boomers moving into retirement. So now you have this accelerated number of investors in the advisers’ client population who are moving en mass acutely to the same recognition: we need something more; we need something different; we need something that is more specifically reassuring to me, the client, that my outcomes are a) understood, and b) ratcheted to the correct portfolio solutions.”

Noonan says this changing backdrop means the industry has faced an uphill task to keep up.

“The industry has been primarily tooled to an accumulation mentality,” Noonan says.

“A lot of the accoutrements of the advisory business – the technical capability housed on typical adviser platforms – are really primarily orientated, still, towards accumulation and attitudes towards risk and so forth.”


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