With a challenging market ahead, Riskalyze CEO Aaron Klein says there are key actions advisors can take to be competitive – and some they should avoid.
What are you thinking about as we head into 2023?
“Over the years, we learned that, counterintuitively, risk is one of the most powerful ways to drive growth. These are times when financial advisors are needed more than ever. We must allow people to stop being frozen in fear and understand who they are and how much risk they can handle, get that aligned with their investment portfolio and get them on a good path to the future. And that's a long-term path, not reacting in the short-term to whatever they might see lurking out there.”
Interestingly, several advisors I’ve spoken to say the biggest strategic challenge for their practice they expect in 2023 isn’t losing clients; it is finding talent and making sure their talent doesn’t go to another firm.
KLEIN: “It doesn't help that there's massive inflation in the cost of that talent, either. I'm biased as the CEO of a technology company, but that's the benefit that great technology delivers. If you needed 30% more human power before, you can get away with 15% now and let software be a cost-effective way to bridge the gap. I look at any firm that might still be spending three to five hours preparing for a client review and say, ‘You know, you’ve got to get your technology stack in order so that it can come down to three to five minutes to prepare for client reviews.’ Realistically it might be 30 or 40 minutes if the client has a lot of complexity. But seriously, the days of building individual PowerPoint presentations and stitching them together by hand for clients are over. You can leverage tools with a live data feed of your client's holdings. Then you can pop it up and say, ‘Okay, great, the clients’ risk score is 45, here's the analytics all updated; I'm ready to go to meet with them and remind them of the decision we made six months ago and why it's so critical that we stay the course.’”
Put yourself in a financial advisor’s shoes. What are the things critical for them to do to be sustainable in 2023?
KLEIN: “First and foremost, particularly if you're a multi-advisor shop, you need to create a consistent client experience across your firm. You need a firm with a unified value proposition, message, and client experience. To start the growth flywheel spinning, you've got to accelerate [your engagement] of prospects, so they go from new client to satisfied, engaged, and retained. Even the best firms say retention gets a lot easier when you are telling the story consistently. They can look back and see the points made and know that it makes sense to continue the course that they're on. That's going to be a sticking point because of the attitude right now; the client will be very much a free agent. Everyone is kicking the tires and reevaluating where they're going. If you have promised your clients that your job is to produce great returns for them, that's probably true. If you have helped clients see risk ahead of time, it helps them to understand the relationship between risk and reward and the dynamics of markets.
“Secondly, how do we get our clients not to see days, weeks or even months, but how do we get them to see decades? We do that by counterintuitively helping them understand the short-term risks because we, as humans, react to risk in the short term. Get them to step back and say the people who do the best don't respond to risk in the short-term; they understand their risk. They get this is normal, allowing them to harness their confirmation bias and say, ‘I made the right decision; I need to stick to the right decision.’
“The third leg of the stool is how you put the compliance analytics in place to ensure that all your advisors are doing that and are on top of how they're setting expectations with clients and serving clients. Because if you've got pockets where the account is supposed to be invested like a Risk 35 and it is invested like a Risk 72, this will create problems in an environment like this.”
If we settle into a prolonged recession, how does the industry change? Out of the financial crisis in 2008, we saw robo-advisors take off. During the pandemic, remote became accepted.
KLEIN: “I look at those two epochs in time and think about how replacing advisors with robos didn’t work out, and then we get to the pandemic and how we did ten years of digital innovation in one year. So, the method we're engaging with clients has changed, but I would argue that this event demonstrates how badly investors need their financial advisors. I'm bullish on the future and financial advisors. As tough as the macroeconomic environment could be in 2023, great financial advisors will soar because many more people will realize they need their help.”
I suggest we cycled through product innovation to platform innovation, then through client connection innovation, and now we’re at a point of understanding innovation.
KLEIN: “That's a great point! You may have invented the catchphrase for 2023, the understanding innovation!”
It’s just that I’ve just heard several market strategists discuss how traditional means of investing won’t be as effective in the new market we’re going to experience.
KLEIN: “We haven't had a market or an economy like this for 40-plus years. Someone jokingly asked me about when I first invested in stocks. It was 1999. My strategy was to buy tech stocks, hold them for a little while and sell them. It was a super sophisticated strategy, you know. It's not going to be that easy now. You used to throw clients into index funds and watch it ride. It's going to be a little bit more complicated now. The stock market is likely to continue going up over the long run. In the meantime, what are we going to do right now? How are we going to protect our clients right now? How will we show them other solutions to help solve their problems right now? But I've always seen great financial advisors open to that part of the work. That’s where that understanding innovation will take place, cutting through all the noise of today.”