Executive Summary
Financial planning is an intangible service that is hard for most consumers to evaluate (at least, until they've actually been through it). And because of the uncertainty about whether the advisor will provide good financial planning value, perceived trust plays an important role in choosing a financial advisor. Yet, most advisors have few credible ways to convey trustworthiness, particularly when getting started - and as a result, will often choose to work for a large well-established firm, in the hopes of leveraging the big brand of a large firm to increase their perceived trustworthiness and ultimately win more clients.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore whether it's really necessary to have a big firm brand in order to succeed as a new financial advisor, and whether choosing to affiliate with a well-established national firm is really still the asset it once was.
Because while it's true that a well-known national financial services brand can lend credibility to advisors - especially for new advisors - and help them build trust with their clients, as we've seen following the most recent financial crisis, a firm's brand may become a liability as well. This is particularly concerning given that changes to a large firm's brand are almost always out of an advisor's control, even though the advisor's business may suffer the consequences.
Fortunately, the reality is that for most advisors, the importance of a firm's brand will diminish with time. While clients may initially rely it as the basis for their trust, after gaining experience working with an advisor, client trust begins to shift from the firm to the specific advisor they are actually working with. This shift helps to explain why most advisors still retained most clients (even if they worked at a large firm whose reputation was sullied by the financial crisis), and similar is why most advisors who go independent (to a firm without a known consumer brand) still end out retaining most of their clients.
Fortunately for advisors who may have no desire to work for a big firm, there are other methods for developing trustworthiness as well. Having an effective website, and maintaining professional appearance and conduct, really matter when clients don't have many other indicators of trust to rely upon. And independent advisors can and often do leverage the brands of their RIA custodians - most of which are national consumer brands as well. But ultimately, the "fastest" way to build a trusted brand is still through the development of a niche. Because the reality is that most individual independent advisors will never have the potential to become a nationally known consumer brand... but it is possible to become the known, liked, and trusted expert in a particular niche community in just a few years, which is more than enough for one advisor to build a successful practice!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome everyone! Welcome to Office Hours with Michael Kitces!
Today I want to talk about one of the challenges of getting started as a financial advisor. Today's question comes from Jeremy, who asks:
I recently finished my Master's degree in financial planning and I'm looking to start my career as a financial advisor. I wanted to join a big firm so that my future clients could have confidence in working with me. I have an offer on the table to join a Wells Fargo team, but now with all the bad Wells Fargo press about fraudulent account openings, I'm having second thoughts. What do you think? Does a new financial advisor need a big firm brand to succeed?
This is a great question, and one I've found has become increasingly common over the past decade – not just with new financial advisors, but existing ones as well. After the financial crisis, many advisors found themselves getting dragged down with the name of the firm they worked for, even if the advisors themselves weren't involved and didn't necessarily do anything bad.
This raised questions regarding the value of a big national firm that has a consumer brand. Advisors thought, "Well, I originally joined this firm because it had a great brand, but now the brand is turning from an asset into a liability!" And sadly, we've seen this cycle occur a couple of times. Now it's happening again with all the news around Wells Fargo, and I'm hearing from lots of Wells Fargo advisors lately who are asking this very question. Do they really still want to be affiliated with Wells Fargo, because that brand isn't feeling like much of an asset these days?
Advisor Trust And The Value Of A Big Brand [Time - 1:55]
I think Jeremy's question about whether you need a brand when you're getting started and the perceived trust and value associated with a brand are valid considerations that deserve to be recognized. Because in the end, the reality is that financial planning is an intangible service, and it's very hard for a prospective client to evaluate quality.
After all, financial planning isn't like a physical thing in the store, that I can pick up and twist around. It's not like a car, which I can take it for a test drive. Most people have never experienced financial planning, so prospects have to trust that they're going to get something they're happy with.
What that means is when you're selling an intangible service like financial planning, people can't evaluate the thing – "financial planning" itself – so they have to evaluate anything else they can find. Sometimes that evaluation reverts back to less-than-ideal decision-making frameworks. People start looking at the appearance of the advisor and his or her office, and the way he or she talks. And brand becomes a powerful indicator of whether a potential advisor should be trusted... at least, in the absence of knowing what else to look to. This happens because the financial planning is intangible.
Simply put, when we don't know how to evaluate the service because we haven't experienced it yet, we look to the brand. We try to evaluate whether the brand represents something we can trust as being able to deliver on the promise.
From that perspective, I think it's a fair point that having a big nationally recognized brand can help when you're getting started, because otherwise you're just Joe Blow solo advisor and no one really knows if you can be trusted. You have no brand. You don't have many other intangibles to support the sale of this intangible financial planning service.
Now, it's worth noting that that big brand only matters to a point. Your existing clients are going to trust you for you, and not your brand. That's why even advisors at some of the big firms that had problems during the financial crisis still kept their clients. All the consumer surveys at the time basically showed clients saying, "Yeah, I'm not really sure about the firm anymore, but I like my advisor and I trust him or her". Eventually trust gets shifted from the brand to the advisor.
I think that is a relief because otherwise affiliating with a big brand would forever put you at risk that the company sullies the brand down the road – which is usually entirely outside your control, even as it adversely impacts your business. Still, I think that's also one of the reasons why a lot of advisors ultimately break out to independent broker dealers and even go to an independent RIA. At some point, it's really about you being known, liked, and trusted in your community. That gets you business and that keeps your clients. You often don't really need the parent firm's brand anymore.
And the truth is, you pay for that brand, often quite substantially. It's not a coincidence that payout grids at large national brokerage firms and insurance companies are much lower than being an independent. You are paying, albeit indirectly, for that brand. Again, when you're getting started that may be a very reasonable price, because if you're going to pay them on a percentage of your revenue and your revenue is essentially zero, so it doesn't seem that expensive. But it does become a challenge later!
Building A Trusted Brand As A Small/New Solo Advisor [Time - 5:00]
All of that being said, if you're not going to work with a major brand and you want to get started, what do you do?
This is one of the reasons why I advocate so strongly for finding a niche – because it's one of the fastest ways to build a trusted brand to be successful when you're not borrowing someone else's brand and putting it at the top of your card.
Of course, building a trusted brand still isn't fast. It can take several years to really get going. But the truth is that if you're not going to have a niche and you're just going to be a generalist that can be found by anyone or everyone, it takes a lot longer than three years to build a trusted brand. Most advisors I know today are still broad-based generalists. And as a result, few people ever just call them out of the clear blue sky to say, "Hey, I heard you're an expert in such and such and I want to do business with you." Niches get that. Generalists do not, because they never build that brand for themselves, so they have to pay for and rely upon the brand at the top of the business card from some other company.
If you're going to focus on a niche, at least you can focus all of your energy on becoming an established person that's trusted and liked and a known brand in that community. Since most of us are going to have successful practices with no more than 50 to 100 clients, that niche community may be all you need. This is also why a lot of career changers starting out doing a niche that goes right into their prior company or their prior field of business. Because they're already known and trusted there from their prior role, they have a head start on the brand.
It's worth noting that when you're getting started, you can also look to external lead generation services. There are ones out there that you pay for leads directly. Though, frankly, I don't tend to hear very good buzz about these.
Some of the association groups like NAPFA seem to do well for leads, though not all associations deliver much. In general, we find anything that's got a niche solution tends to do a pretty good job in driving leads in their space. NAPFA drives leads for fee-only advisors. We find we can give leads to advisors at XY Planning Network because we're building a brand with Millennials and Gen X'ers that want a place to find an advisor who serves them. They'll go to XYPN to find an advisor that serves them.
More generally, though, if you do go out on your own, this is why it's so important to pay close attention to the details of how you market yourself. Do you have a quality website that builds trust? Are you professionally dressed? Do you conduct your meetings in a professional manner, which is especially important if you're young and trying to win trust? These things do matter.
A lot of the time I think we wish all that crap didn't matter. We like to think, "Why can't clients just see I'm an expert and I know my stuff?" But, those prospects simply don't know how to evaluate your expertise. It's ephemeral and they won't know until after they've paid, when they're trying to decide whether they should pay in the first place. So initially, they need some way to know whether you can be trusted.
The big brand may not be critical. There are other ways to build trust. But, if you're not going to have a big brand backing you, it is more important than ever to get everything else right.
How Independent Advisors Leverage RIA Custodians For Brand Trust [Time - 7:52]
The one last thing I want to note about how you build trust, particularly if you're not going to be affiliated directly with a big firm brand, is to look at how firms that are independent RIAs typically use third-party custodians – companies like Schwab, Fidelity, and TD Ameritrade. One of the virtues of that model (an independent RIA with a third-party custodian) is that most of those third-party custodians are known consumer brands and help to convey trust.
In other words, you say to the client, "We'll be working together for ongoing financial advice, but your assets will be kept safe at TD Ameritrade, a recognized independent custodian. You know their name from the TV commercials. They're a firm with retail branches across the country. If you're ever not happy with me, your money is still safe and segregated and you can walk into any branch and get help."
I know some advisors are actually very afraid to say that, because they fear that making it clear how easily clients can leave them to work directly with a retail branch will threaten their business. But, the truth is, showing people how easy they can leave, is actually more likely to make them join in the first place! Because taking that leap to work with you as a financial advisor is risky for the prospect. They're investing a lot of time and energy and actual dollar fees into the engagement. Reducing the downside and exit risk for the prospect makes it easier for them to say yes to you in the first place! And once they do work with you, we know from all the industry benchmarking surveys that as long as you continue to service them well, virtually all of them will stay with you.
The bottom line here, though, is just to recognize that having a big brand name at the top of your business card does help, but it's not crucial to starting out as an advisor.
If you're not going to go that route, then you should have a plan about how you are going to accelerate the process of building trust, focusing into a niche, and establishing your own brand. The good news is, you're going to free up some dollars to do that, because you're going to get a much better payout or keep more of your revenue if you don't pay it to a national brand that you affiliate with.
Recognize that you can have partners, too, including RIA custodians, third-party TAMPs, membership associations, and advisor network groups. All of these partners can help shine a positive brand halo onto your business and help enhance trust when you're getting started. Recognizing on your website that you're a member of so-and-so or you work with this third-party group, really does help to validate trust.
In the long run, most successful advisors end up building a successful brand for themselves anyway, as they personally become known, liked, and trusted in their communities. But the challenge in the early years is real. While a big brand firm isn't vital (again, many eschew them precisely because they're afraid that today's good brand will be tomorrow's PR disaster), if you're not going to go the big firm route, at least be certain you have an alternative plan about how you're going to get the trust that comes with brand going!
So I hope that provides some food for thought. This is Office Hours with Michael Kitces, 1:00 p.m. East Coast time, every Tuesday. Hope this has been helpful. Have a great day everyone!
So what do you think? Do you think a big name brand helps build trust? Is there a point where the brand is more of a risk or a liability, than an asset? Is a niche an effective alternative for building trust with clients? Please share your thoughts in the comments below!
Having started my own RIA from scratch and helping my wife start her own law firm, you certainly don’t need a big firm brand to be successful. But you do need the financial resources to carry yourself through the first year with little income.
If you niche well and spend the first year really sowing your seeds around the community, you should have no problem generating enough business in the following years. But it takes a year for enough people to hear your name from multiple sources to really get things going.
Michael, this is a great question to address! One other idea I’ll offer is that documenting your process, having sample deliverables, is another way of establishing trust. If you can say to a prospective client “Look, this is the kind of thing I will create for you, and look at all it addresses!” they can get some idea of the outcome of the engagement. Then, when you deliver it, it further builds confidence. I’m a big fan of creating a graphic of your process as well for the same reason.
Michael, What a great article! I think one of the biggest mistakes an advisor can make, and this is probably even more of a struggle for new advisors, is thinking that they have something that is truly unique and separates them from what other RIAs are doing. Seeking out someone who can help you test your assumption is essential to discovering or fleshing out your niche. This person or persons could be clients, other advisors or a consultant such as Stephen Wershing….check out this article from his blog where he addresses this topic very well….http://www.theclientdrivenpractice.com/checklistblog/your-niche-needs-to-be-more-than-i-work-with.html. I have had the privilege of partnering with Steve and have seen first hand what a difference his coaching can make in communicating your firm’s unique value.