Written by: Peter Stanton, CEO of the Advisor Credit Exchange
How financial advisors can shift from reactive, reluctant loan providers to fully integrated wealth managers (And why they should)
Credit management is at the foundation of sound financial planning and wealth management.
Yet to this day, most financial advisors continue to focus primarily on asset management when that’s just one side of the story. Forward-looking advisors help clients make the most of BOTH sides of their clients’ balance sheet to build, manage and protect their net worth.
At the end of the day, it’s net worth – assets less liabilities – that helps clients meet their financial goals: buying a home, sending kids to college, launching a business, creating retirement income, and leaving a legacy for the generations to come.
For most advisors, beginning the lending conversation with clients isn’t something that comes naturally. Since loans require application, approval, documentation and funding, advisors are often unsure what is going to be on the other side of the proverbial door.
How can you compete against banks and lenders that have many loan options to offer? Will your client be approved for the loan requested? Will your rates and terms be competitive? These are all questions on the minds of advisors that wish to expand the level of service they provide.
The problem: Jumping through hoops
It is a common dilemma among advisors: you don’t want to initiate the lending conversation with clients due to fear of what you don’t know. As a result, most advisors hold back and only enter the conversation when the client asks for it, which is often too late in the process.
This typically occurs when the client has already been solicited by a lender or another advisor offering a loan. The conversation can also be sparked when the client is attempting to liquidate a large portion of investment assets held to cover a significant need. At this point, the advisor is reactive, not proactive — jumping through hoops to figure out what they can provide, with their backs against the wall (not an ideal position).
What can help shift advisors from reactive, reluctant loan providers to fully integrated wealth managers, addressing both sides of their clients’ balance sheets (and cash flow)?
While the recent expansion of credit products can and should be a key part of the solution, it is not the complete answer to engaging advisors to offer lending to their clients. As an industry, we have to make it easier for the advisor to truly be the lending advisor. (This does not mean training the advisor to be a lender, which has for decades been a primary industry focus — and an unsuccessful one.)
To connect the dots, the advisor must become skilled in using the data and information they already have available to pre-screen and pre-qualify clients for multiple loan types prior to ever having the conversation with the client.
The unmet opportunity
Consider the sheer size of the personal credit need. Americans’ mortgage balances today total more than $9 trillion, while student loan balances are around $1.5 trillion, auto loans are more than $1 trillion, and credit card debt is around $870 billion, according to the Federal Reserve Bank of New York. And that is not counting small business and commercial loans, at over $2 trillion.
Despite the size of this need, not to mention the advantage of meeting it in the context of an overall financial plan, credit is addressed almost entirely outside of the advised-client relationship. According to a 2018 Spectrem Group survey of clients of financial advisors, 83% reported to be interested in, and expecting, their advisor to help them manage credit, but only 3% actually get the financing they need from their advisor.
If we consider just one type loan product, loans backed by eligible investment assets, we estimate there to be well below $200 billion in total loans for the industry overall. Even the leading full-service firms with portfolios today of $30 billion+ will be the first to tell you that they have not yet begun to realize anything near the full potential.
The credit payoff
Advisory firms that do offer lending services to their clients report that these clients have significantly higher asset and production levels, provide six times the number of referrals, and maintain five times the retention rate compared to investment-only clients.
And through the exchange of information involved with qualifying for credit, these clients also provide advisors with unparalleled insight into all the client assets, including those investment assets held away from the firm.
As profit margins atrophy for asset management services, it’s the ideal time for advisors to take a proactive approach, and implement advanced technology and processes to help clients manage what they owe in addition to what they own. Demonstrating they can provide sound advice and guidance on credit products in addition to assets—as part of a fully integrated, holistic wealth management practice—is essential for advisors to strengthen client relationships, and remain competitive and profitable, over the long term.
Peter Stanton is CEO of Advisor Credit Exchange, a technology-empowered network that brings together lenders and wealth managers, enabling investment firms and advisors to deliver financing solutions to build their clients’ net worth and meet their financial goals. Advisor Credit Exchange provides lending solutions to advisors and their clients on the Envestnet platform through the Envestnet Credit Exchange.