The Biggest Trap Financial Planners Face When Marketing Themselves

Posted by Michael Kitces on Monday, December 9th, 7:01 am, 2013 in Practice Management

With the growth of financial planning and the CFP certification over the past decade, just doing comprehensive financial planing is not the differentiator it once was. As technology commoditized first investment transactions, and now increasingly the basic elements of diversified portfolio construction, advisors are forced in the direction of providing more holistic financial advice to add value to the relationship. While this is ultimately a plus for consumers, it also mean that providing financial planning services to consumers is a much more crowded, competitive space than it was just a few years ago.

In response to a more challenging environment, many advisors have doubled down on their efforts to be generalists, seeking to cast a wider and wider marketing net in the hopes of attracting more prospects to become clients. Yet unfortunately, it's not clear whether such efforts really result in more clients, or simply more marketing work for the same - or even inferior - results. After all, it only takes a few advisors becoming specialists to attract away key potential new clients, to the point where while each specialist may only be able to grow within his/her niche, the generalists can't grow at all. And the end result is that the advisor sees even more prospective clients, but gets fewer actual clients.

Accordingly, the real key to turning around the trap of the wider marketing net is to recognize that for a business that is already undifferentiated and struggling to grow, casting an ever-wider net will not result in more clients and business. Instead, the key to differentiation is to turn around 180 degrees, and become more focused and specialized, to truly become the best-in-class for a particular type of clientele that can be served effectively and profitably. While that might result in fewer prospects, real differentiation ultimately results in more actual clients, allowing advisors to grow their businesses smarter, instead of just working harder.

Plight of the Typical Advisory Firm

There was a point in time, not so many years ago, where simply being a comprehensive financial planner was a differentiator. In 2004, there were an estimated 340,000 people calling themselves a “financial advisor” according to Cerulli, but a mere 45,000 – or roughly 13% of the total – were actually CFP certificants. In other words, to have the credentials to actually establish yourself as a financial planner, and to provide comprehensive financial planning services, was a differentiator.

Fast forward 10 years to today, though, and the landscape has shifted. The number of advisors has dipped down close to 300,000, and the number of CFP certificants is pushing 70,000, which means the percentage of advisors who are CFP certificants has nearly doubled over just a decade from barely 13% to almost 23%. And arguably, the number of people who hold themselves out as comprehensive financial advisors and wealth managers is even greater, given the growth of the CPA/PFS designation, the emergence of new programs like the CPWA, and the ongoing proliferation of other certification and designation programs (of varying degrees of quality).

Coupled with these trends is the challenging reality that many of the services for which financial advisors were once handsomely compensated are now being brutally commoditized by technology. It was “only” 20 years ago that most consumers had to actually wait for the newspaper to find out the price of a stock from the prior day, and call a stockbroker just to get a trade executed. Constructing a well-diversified portfolio was an even more complex affair. Yet by 10 years ago, the rise of online brokerage services and the expansion of the internet had driven the cost of executing stock trades down by ~90%, pushing advisors in the direction of constructing diversified portfolios instead. Yet now that service, too, is becoming commoditized, from the rise of sophisticated portfolio analysis and trading tools available directly to investors, to retail branches of online brokerage firms offering portfolio construction advice, to a new breed of online “robo-advisors”like Betterment and Wealthfront that can craft, implement, and monitor a high-quality passive strategic portfolio for a mere 0.25% or less.

While this doesn't mean the robo-advisors will eliminate the human advisors or that giving financial advice is being totally commoditized (in fact, financial planning is the anti-commoditizer right now!), it does mean that financial planners are facing a crisis of differentiation unlike anything seen before.

The Trap of the Wider Net

For advisors struggling with slow client growth, there is a natural temptation to try to overcome the challenge by casting a wider net for new clients. The rationale is fairly straightforward – if my current marketing approach isn’t netting many/any clients, it must be because the net is not being cast widely enough. Open up the available services to a wider range of prospective clients, the logic goes, and there will be more potential people to work with. Accordingly, advisors back away from their asset minimums, get more flexible on their fees, and increasingly offer to work with and be an expert for "anyone" who's willing to pay.

Yet the reality is that paradoxically, casting a wider net for potential clients can actually reduce the effectiveness of the firm’s marketing. By doing more of everything-for-everyone, the firm becomes less differentiated, less unique, and therefore less appealing to anyone in particular. The end result: by casting the net wider, the number of potential clients may be greater, but the number of prospects who actually become clients is often fewer.

In other words, the process of widening the net may result in more prospects but no more actual clients (in fact, it may even be fewer clients)! For instance, instead of closing 30% of the next 15 clients, firms cast a wider net and close 10% of the next 30 clients, bringing in fewer clients (3 instead of 5) despite working twice as hard in prospecting (30 prospect meetings instead of 15). Sadly, the conclusion of many advisors at this point: well, if there were only 3 new prospects, that must mean it’s time to cast the net even wider, and try to get 40 or 50 prospective meetings. Never mind that as the paradox of the wider net plays out, 50 prospect meetings may drop their closing ratio to 5%, reducing their new client flow to only 2, despite the fact they’ve now tripled(!) their prospect meetings.

The end result - casting a wider net causes the firm to work harder and harder meeting more and more prospective clients, yet not necessarily bring on any more actual new clients.

Understanding Why The Trap Is A Trap

So what’s the path out of the wider net trap? To understand the way out, it’s first necessary to better understand why the wider-net marketing approach is so ineffective at converting prospects into clients in the first place.

The fundamental issue with the wider net problem is that by doing everything for everyone, the advisor is not uniquely differentiated as being the best at anything for anyone. For instance, imagine a world with 5 advisors: the first specializes in doctors, the second specializes in entrepreneurs, the third specializes in teachers, and the fourth and fifth are generalists who will do anything for anyone.

Now imagine what happens when a doctor who needs a financial advisor begins the process of searching for one. The doctor will likely interview three of the advisors – the one that specializes in doctors, and the two generalists, as clearly it doesn’t make sense for the doctor to see advisors who specialize in teachers or entrepreneurs. At the end of the process of interviewing advisors, which of the advisors will have the most credibility for being able to solve the doctor’s problems? Which is most likely to have worked with other doctors the prospect knows and trusts for referrals/references? And who’s most likely to win the doctor’s business – the advisor who specializes in the precise needs of that doctor, or the two generalists who do anything/everything for anyone/everyone? The answer seems pretty clear: the advisor who specializes in doctors is going to win over the overwhelming majority of doctors, compared to the other two.

Now imagine that an entrepreneur begins the search for a financial advisor. The entrepreneur will likely interview three of the advisors – the one that specializes in entrepreneurs, and the two generalists, as clearly it doesn’t make sense for the entrepreneur to see advisors who specialize in teachers or doctors. At the end of the process of interviewing advisors, which of the advisors will have the most credibility for being able to solve the entrepreneur’s problems? Which is most likely to have worked with other entrepreneurs the prospect knows and trusts for referrals/references? And who’s most likely to win the entrepreneur’s business – the advisor who specializes in the precise needs of that entrepreneur, or the two generalists who do anything/everything for anyone/everyone? The answer seems pretty clear: the advisor who specializes in entrepreneurs is going to win over the overwhelming majority of entrepreneurs, compared to the other two.

Now imagine that a teacher begins the search for a financial advisor. The teacher will likely interview three of the advisors – the one that specializes in teachers, and the two generalists, as clearly it doesn’t make sense for the teacher to see advisors who specialize in entrepreneurs or doctors. And once again, the likely outcome of this process is clear; the advisor who specializes in teachers is overwhelmingly likely to win the prospective client’s business.

The end result of this process: by casting the net wider and wider, the generalist advisors have more and more prospect meetings, but it simply leads them to lose out on more and more business to other advisors that are perceived to be more specialized, trustworthy, competent, expert, and capable of solving each particular client’s problems. Note that in the end, each of the specialists had 1 meeting and got 1 client, while the generalists each had 3 meetings and no clients. The generalists worked drastically harder doing more prospecting for clients, with drastically inferior results.

Sure, in the real world the generalist advisors can and do still win a client here and there – not every potential client has a specialist who serves them in the first place – but it’s clearly an uphill battle. And as more advisors become specialists over time, the pool of prospective clients who don’t have a specialist serving them shrinks smaller and smaller. If the advisor responds by trying to cast the net wider and wider, the paradoxical end result will just be an increase in prospective client meetings but not an increase in new clients, as the generalist advisor loses out to competition that is more targeted, more specialized, and more likely to be perceived by the prospective client as the ideal solution.

Crafting a Niche

So how does the advisor escape from the paradoxical trap of the wider net? Simply put, by turning around 180 degrees and moving in the opposite direction, with a goal to become more specific, more specialized, and more focused. The goal is to spend less time in meetings with prospective clients, but become so focused that the advisor wins the overwhelming majority of the prospects that are seen, because now the advisor is the specialist with the best solution that attracts clients away from the generalists.

In other words, this is why the movement towards specialization and having a “niche” matters so much. In a world where just being a financial planner was a differentiator – as was the case for the past several decades – the mere fact that the advisor could credibly claim to offer the service was sufficient. But in today’s marketplace, where the number of financial planners is drastically higher, differentiation is being pushed to the next stage: fpr consumers, it’s no longer just about getting a financial planner, but a financial planner who’s specialized enough to solve my personal needs and problems. The age of the generalist is coming to an end; the age of the specialist has begun.

It's worth noting that yes, you can still “specialize” in being a generalist. The model exists in other professions, like doctors who are general practitioners. But remember in the medical world, the generalists typically earn less than the specialists, and have been under pressure for years. And they succeed in part because they specialize in being a generalist; someone who can provide an initial review of the situation, and refer the patient out to the necessary specialists, which in turn means the business model for generalists would likely resemble a simple, low-cost fee-for-service model that virtually always ends in a referral to another (higher priced and more specialized) advisor, which may not be an appealing business model future for today's generalists!

And bear in mind as well, even that generalist position for doctors only works in part because the medical system is increasingly subsidizing the cost of seeing a general practitioner for a regular checkup (i.e., low co-pays or no payment required at all for an annual check-up), because the insurers have found preventive care is less expensive for them in the long run. In other words, one might say that the primary reason general practitioners in medicine as still as successful as they are is because insurers are trying to get patients to use them for a lower price rather than see a specialist at a higher price. Which doesn’t exactly paint the most bullish picture for the career of the general (financial advisor) practitioner, especially when there is no insurance coverage to steer consumers in their direction as a first step.

Getting From Here To There

For the advisor who’s starting a practice from scratch, the natural implication of this evolution is to recognize that, from the outset, starting to craft a niche is probably a very good idea going forward. No, that doesn’t mean the new practitioner has to turn down every prospective client who doesn’t fit the niche as they try to build their business; when starting out, any new client and business revenue is often crucial. But the point is that, done well, there frankly shouldn’t be very many non-niche prospects and referrals in the first place, and the new practitioner should recognize that spending time with prospective clients outside the niche is likely to have a much lower success rate. While it’s good to get any clients possible when starting out, be careful not to waste too much time meeting with prospective clients whose business you’re not realistically going to win in the first place… especially when that time could be better spent building relationships in your niche instead!

For established advisors who already have some client base, but would like to grow it further and are struggling to do so, the options are more plentiful. Advisors in this position have a choice: to choose to point the practice in a new direction towards a new target niche, or to look at the existing client base where there may already be a partial niche, and steer the business further down that path. If you already have a number of entrepreneur clients – and like working with them! – you can expand in that direction. Or if you have a lot of doctors, or teachers, or executives, or workers from a large local company where you know their retirement plan and employee benefits cold, etc. The business doesn’t have to be reinvented from scratch (unless you wish to do so); it can simply be tweaked and adjusted in a direction where there’s already been some success, to build more. Again, as with the new advisor, this doesn’t mean the established advisor will automatically turn away any other referrals and business opportunities that come along. But again, if the practice is doing a good job focusing on the niche, most/all of the prospective clients who get referred should be in the niche anyway, and with a much higher close ratio than the non-niche referrals.

The bottom line, though, is simply this – as financial planning continues to grow, just being a financial planner is no longer the differentiator it once was. Instead, advisors who want to grow and succeed from here must differentiate themselves further, by demonstrating to a certain target clientele why that advisor is truly more focused, more specialized, and more capable than the competition. And the only way to do that is to craft a niche accordingly. To go the opposite direction, and cast the net wider to deal with struggling growth, will only lead to the paradoxical result of an increase in prospects and activity, but not an increase in new clients. Which means viewed another way, focusing in on a niche provides an opportunity to work smarter, instead of just working harder.


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