As technology continues to drive change for financial advisors, commoditizing basic tasks of portfolio construction and product selection and forcing advisors to add more value on top, the ripple effects of the shift impacts not only the financial advisor business model and value proposition, but also the way that insurance and investment product manufacturers - and their wholesalers - must interact with the advisor of the future. A microcosm of this challenge is already playing out in the RIA space - which for wholesalers, is notoriously difficult to break in to - and when combined with other industry trends, paints the picture of a highly challenging environment for wholesalers going forward.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss why I do believe there's a solid future for wholesaling in the coming decade and beyond, but why the nature of wholesaling is changing, and what wholesalers can (and must) do to continue to succeed in an advice-centric world!
Historically, "financial advisors" were paid to implement products, and the wholesaler was an ally in product distribution, educating advisors about not only the products themselves, but sales ideas to pair with them, what other advisors were doing to successfully sell the products, and even running wholesaler-supported events for clients and prospects.
Yet as financial advisors shift from a sales-centric model compensated by product implementation, to an advice-centric model compensated by clients, the relationship shifts, as the financial advisor is no longer a distribution channel to deliver good products to clients, but a gatekeeper that shields clients from potentially bad products. Which is a big deal, because it means that advice-centric advisors don't necessarily care about sales ideas, or free golf balls, or money for the next client/prospect event... instead, advice-centric advisors want: (1) a product that is actually, factually superior to something we're already using, and (2) an extremely knowledgeable wholesaler who can hold their own when it comes time to vet that product against what the advisor is already doing or using.
The second shift underway in the industry, that also impacts the advisor-wholesaler relationship, is the trend towards firms outsourcing investment management through a TAMP, or centralizing through a large RIA or broker-dealer's in-house investment team and investment models. The reason these shifts matter is that it means in the future, the actual “financial advisor” is simply going to be less and less responsible for the selection of the specific investments products that go in the portfolio in the first place. Which means there is less need for wholesalers broadly distributed across the country to call on individual advisor offices, and instead, a need for wholesalers who deal with centralized investment teams at RIA, TAMP, or broker-dealer home offices. And ironically that group – an investment team of CFAs and other investment experts – will be even harder for wholesalers to pitch to.
As a result, I have three tips for wholesalers out there struggling in the current advisor landscape. First, find a job at a company that actually has great products, because if you don't have great products to present, advisors simply will not be interested. Period. Second, invest in your knowledge and skills by pursuing credentials such as the CLU designation (for insurance/annuity wholesalers) and CIMA certification (for investment wholesalers), because the demand on you to provide real expertise is only going to increase as you begin to deal more with centralized teams of experts within advisory firms (and as advisors in general are compelled to increase their own educational standards). And third, please do your homework before you contact us. Don't mass email us asking to "catch up for 15 minutes" or "learn about our investment approach" when you can find a lot of that information on our websites or in our ADVs. Take the time to figure out exactly what you have to offer that adds value for our clients, and then make a targeted and direct pitch that is relevant; given how much advisors are swamped and overwhelmed with inbound wholesaler inquiries these days, targeted relevance is what it takes to break through the noise.
The bottom line, though, is just to recognize that the nature of the advisor-wholesaler relationship is changing alongside the shift from a sales-centric to an advice-centric industry, and with that shift comes changes in what advisors need from wholesalers, as well as the depth of expertise wholesalers need to deliver value to advisors. These changes require that wholesalers actually have a great product to offer, and reach out in a more targeted manner, which means wholesalers won't be able to reach out to as many advisors (and there may be fewer wholesalers more generally), but the future is still very bright for great wholesalers with real expertise and great products!
(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.
As you can see from my background today, I'm obviously not at the home office. I'm on the road traveling this week for a couple of advisor conferences that I'm speaking at.
And one of the things I like to do when I'm out at industry conferences is go into the exhibit hall during the session. I like to do this when it's a topic I didn't particularly want to hear about anyways, because it's a lot less crowded in the exhibit hall, and then that gives me some time to talk to all the wholesalers in the exhibit hall about what they're seeing in the advisory industry these days.
Because the reality is that wholesalers actually see a lot of different advisory firms in a wide range of different conferences and so I find they actually have some really good perspective on what's happening out there in the advisor landscape. And not to mention, I'm always curious and interested in checking out the latest products – the latest things that asset managers and insurance companies are working on and offering in the marketplace.
And so I was talking to one of the wholesalers yesterday at a conference and one of them, who happens to wholesale for a shall-not-be-named mutual fund company that's experiencing some significant outflows these days, asked me:
"Michael, do you think there's even a future for wholesaling as more and more advisors shift in the EFTs? Or do all of us in this room need to find another job in 10 years?"
Now, the short answer is yes. I actually do think there is a solid future out there for wholesaling in the coming decade and beyond, which I might surprise a few of you because I know I have been a little vocal in some public forums over the past year about my, shall we say, issues with wholesalers that just bombard our firm with inbound inquiries.
Dear Wholesaler: If you're reaching out "to learn more about my business", read my website & ADV. Stop calling me & leaving messages. Thx. pic.twitter.com/uhP5vWEqZ7
— MichaelKitces (@MichaelKitces) July 12, 2017
I don't know if any of you, as advisors, have been experiencing this as well, but there are a lot of wholesaler inquiries coming in these days to the point that I, as many other advisors I know, have started just to respond by saying, "Just stop contacting us. If we're doing research and we find out one of your products are of interest, we will call you." But it's not because I'm negative on wholesalers, it's because, frankly, I think a lot of asset managers and insurance and annuity carriers are setting up their wholesalers for failure in the first place.
And it's because the entire traditional approach to wholesaling, I think, is in the process of breaking down. Not because wholesalers will be gone in 10 years, but because the way that wholesaling gets done in the future is going to look very different than it does today, such that perhaps a lot of today's wholesalers aren't going to be around in 10 years. But I think that's actually what's going on.
The nature of the advisor-wholesaler relationship is changing, which almost any wholesaler who's ever been assigned to the RIA channel has discovered. Because in the wholesaling world, for those who aren't familiar, RIAs are notorious for being a really hard thing to get into. And it's because we, as RIAs, are most likely to embody that "don't call us, we'll call you" mentality with wholesalers.
And in the future, regardless of whether the actual RIA regulatory model is the one that wins in the future, where the broker-dealers figure out how to make a resurgence, I think that RIA mentality that wholesalers see in the RIA community today is actually pretty much the future of all financial advisors.
And yes, John is commenting [on Periscope] on how an educated consumer is tough and the changing education advisors ourselves is changing some of this dynamic. Because the RIA mentality that you see today is the mentality of an actual advisor, one who is not compensated by the products that they implement, but by the client directly.
The Shift From “Financial Advisor” Salesperson To Actual Financial Advisor [Time - 3:56]
And here is why that matters. This isn't meant to be a fee versus commission discussion per se, but there is a mentality shift that happens. When you're paid primarily directly from the client, your primary incentive is to take care of the client, and be a good steward for the client, so that you can keep their business. AUM models and advisory models, in general, are all about our ability to retain clients and maintain a good relationship.
Which means that when someone, like a wholesaler, approaches us with a new product, the first question is not, "Hey, what are some sales ideas about how I could pitch this to my clients because I want to do new business with old clients to grow my wallet share?' Instead, it's, "I've already got my whole client relationship. I'm here to protect my clients from bad products. Tell me why I should consider your solution at all." Not because I'm not eventually going to invest my clients into something. The dollars still have to be invested. We still use products in the RIA channel, but we approach the problem differently.
And in essence, I think what really happens is it's the shift from the advisor as a salesperson who is compensated for implementing hopefully good products to an advisor is compensated for being a gatekeeper to protect clients from potentially bad products instead. Which means every new product that's pitched at us isn't an opportunity to do more business. It's a reason we put our guard up and try to defend ourselves and our clients. And that's really the distinction here.
I started my career on the insurance side of the industry and then at a broker-dealer. And I remember in the broker-dealer world, when wholesalers brought new products and sales ideas to go with them, we would then take those to the marketplace, try to find clients who were interested in buying into that sales idea and product. That was how it worked. That was how we made money.
But as an RIA, when wholesalers come at us with product ideas, we act as gatekeepers to fend them off and try to protect our clients' money and only let us select the few who come through who really merit getting any access to our client dollars. Although if they do, we often do it systematically, which means you could get a big slice of all of our clients' dollars, which is actually a really big business opportunity.
But when this shift happens, what it means is that as an RIA functioning as an advisor, when a wholesaler contacts me, I don't really care about your sales ideas. I don't care about the golf balls. I don't care about the invitations to entertainment events. I don't want your money for my next client events where I get to present a new product and a sales idea that you gave me.
I don't even really want your practice management advice. I've got a lot of other places to go for practice management ideas. I'm getting that practice management content here at the conference I am at. And I hear there's some dude named Kitces who has a blog with a lot of stuff that you can read about practice management when you get home.
As an advisor working with a wholesaler, I really just want two things. Number one, a product that is actually factually superior to something I'm already using. And number two, an extremely knowledgeable wholesaler who can hold their own when it comes time for me to vet that product against what we're already doing and using to be able to prove to me why their solution actually is better. That's what I want as an advisor from my wholesaler. Wow me with your knowledge and give me a product that's actually better than what I've got. That gets my attention.
The Shift To Outsourced Or Centralized In-House Portfolio Management [Time - 7:12]
Now, all that being said, there is actually a second shift underway in the industry that I think will also dramatically change the nature of how wholesaling and distribution of insurance and investment products happens in the coming years. And that's the shift towards either outsourcing investment management altogether, for instance, to a TAMP, or the trend of both larger RIAs and even a lot of broker-dealers to centralize their investment management into a series of in-house models that get created by a dedicated investment team.
In some cases, it's just because the firms get better efficiencies and economies of scale by centralizing and standardizing an investment process. In other cases, it's because the advisor themselves decides they weren't actually really very good at picking investments, so they've made a good decision to let go that part of the process, outsource it, focus on providing value somewhere else in the relationship.
And as advisors shift more and more towards really doing comprehensive financial planning, a lot of advisors I see are just letting go of investment management as part of the process and outsourcing it to in-house portfolio models or third-party providers. Because the client does have to be invested, but it's not where they focus their value proposition even today.
And the reason why all these shifts matter is that what it means in the future is the financial advisor is going to be less and less responsible for the selection of specific products that go into the client's portfolio or for the client's dollars in the first place. The advisor will still have to match a client to the right model or strategy or type of product based on their planning goals and risk tolerance. That role doesn't change. But we as advisors won't necessarily be doing the product selection in the way that we do today as that increasingly shifts to centralized teams and focus product experts.
And what that means is there won't actually even be a need for as many wholesalers in the aggregate because large asset managers won't need wholesalers geographically distributed across the entire country to call on financial advisors in all those different branches. Instead, they'll need a much smaller number of wholesalers that will call on centralized larger RIAs, TAMPs, and broker-dealer home offices to pitch their products to that one centralized dedicated team that evaluates it.
And that group will be even harder for wholesalers to pitch to because their sole job in those groups is to vet and screen and do due diligence to weed out bad products. With an entire team of CFAs and other investment experts doing that vetting, if you're the wholesaler coming in and you're not a true investment expert yourself, you're going to get torn apart by those investment teams during their due diligence phase.
Or stated more simply (and going back to John's comment earlier), there's going to be a much, much higher bar on the raw investment knowledge and competency that any wholesaler will need in the future to get in the door as investment management and financial advisor processes become more centralized.
The Wholesaling Shift To Strategic And National Accounts [Time - [10:00]
Now, I know that a lot of investment managers, in particular, are already beginning to adapt to this shift. There's a lot of growth right now in what are often called national accounts or strategic accounts teams, dedicated teams, that work with these large firms' centralized departments in a much deeper manner, whether it's RIAs or broker-dealers, rather than trying to field a giant force of wholesalers to call on all the individual advisors.
And in general, a lot of the traditional dividing lines of the wholesaling channels are getting rewritten across the board. But, ironically, in the short term, this trend toward centralization of investment management is actually just making all of the dysfunctions between advisors and wholesalers worse in today's environment. Because as the investment management roles get more concentrated as the firms centralize, that means those centralized investment teams get blitzed with inbound wholesaler emails and phone calls.
I'm not exaggerating when I say our investment team easily receives more than half a dozen inquiries per day from wholesalers. In fact, I'm pretty sure if we added up both the outreach that comes to the firm directly and to our chief investment officer and to me in my research role and everyone else individually on the investment team, I suspect we get one or two dozen inquiries per day from various product companies and vendors.
Which means there's not even enough time to politely decline them all. We just basically have to ignore them and respond to the rare few who actually break through with something compelling to say. And it really is a rare few. And in part, it seems a lot of wholesalers are getting so desperate that they're just sending out mass solicitations without even really considering who they're calling on.
So I routinely get messages like, "Hey, we'd love to meet for 15 minutes and hear more about your investment process to see if we might be able to do business together." Our investment process is on our website. It's in even more detail in our Form ADV Part 2. This is all public information. Which means from my perspective, when I get those kinds of calls, it just means the wholesaler didn't even want to bother to do their basic homework before contacting me, which doesn't make me feel very confident in how diligent you're likely to be if we work together on an ongoing basis.
Now, I know that's harsh, but that's the reality as the advisor being wholesaled upon in today's environment. Please don't ask to waste my time so that I can explain to you information that's already publicly available on my website if you just bother to read it before contacting me in the first place.
The Future Opportunity For Great Wholesalers [Time - 12:30]
Now, again, all this being said, I feel like I still have to emphasize. I am not negative on wholesalers and the idea of wholesaling. As I stated earlier, I realize that I've expressed some public frustration about this over the years about how wholesalers keep calling on our firm without bothering to do their homework first.
Receiving literally dozens of inbound contacts every week.
If you don't think advisors have time to do research, you should see how little time we have for the sheer volume of wholesaler calls.
Not sure you realize how overwhelming the volume is for RIAs?
— MichaelKitces (@MichaelKitces) November 30, 2017
But it's not because I dislike wholesalers or what they do. It's because I dislike bad wholesalers and I dislike wholesalers that represent bad products, which, unfortunately, at least based on the experience we're seeing from the inbound solicitations we get, is a lot of today's wholesalers.
And so my advice to the wholesaler who raised this question with me yesterday and to all the wholesalers out there struggling in the current advisor landscape, especially in the RIA channel given this RIA gatekeeper mentality I think is only going to become the standard for all financial advice in the future, my advice is this. Three tips:
If you want to be a successful wholesaler in the future, find a job at a company that actually has great products or even just one truly great product that will make a positive impact for my clients. Because, unfortunately, there are a lot of mediocre products out there and I'm just not interested in them and I don't want to talk to any wholesalers representing those products. Because I'm not going to use them, so talking to you is a waste of my time.
Now, I feel really bad for a lot of wholesalers out there who get hired by companies that produce mediocre products and then rather than spending money improving their product, they spend money on a ton of wholesalers to throw a bunch of them at the wall and see what sticks. But if you're a wholesaler at a company like that, where you know deep down that the products you represent really aren't best in class at what they do, find another company that does have better products and do whatever you can to get a job wholesaling there. Because it's going to be a lot easier for you when you actually are representing positive solutions in the first place.
Step up on your own knowledge and skills. At a minimum, I truly recommend that every insurance and annuity wholesaler out there today should be pursuing their CLU designation and any investment wholesaler out there today should at least have their CIMA certification. Because, in the end, your ability to add value as a wholesaler to the advisor-wholesaler relationship is predicated on you have to know more than me about something, at least in your domain of expertise, so that you've got value to add to the relationship.
And as more and more advisors get educated, we get our CFP marks, the bar steps up on our end, that means the bar steps up on your end as well. And it will only get worse as investment management centralizes and now you're talking to teams that have CIMAs and CFAs and other professionals of this nation's certifications.
So as a wholesaler, if you can't bring that depth of knowledge and expertise to the table, simply put, you're not going to be able to add value. Even if your product is good, our firm might use your product, but I won't call you. I'll call your home office to get someone who actually knows how to answer my complex questions instead of working with you. So basically, there's an arms race underway for knowledge and expertise, and financial advisors, we are being tremendously pressured to step up with professional designations like CFP certification.
So if you want to succeed in the future of wholesaling, get your CLU designation or your CIMA certification, so that you can go toe to toe with us on knowledge and add value. And maybe as a side benefit, that additional expertise might make it a little easier for you to do due diligence on your own company and products and figure out whether you're working at the right place or if you need to go out and find a new firm and try to find that new firm that has truly best in class products for your next wholesaling job.
Do your homework before you contact us. I realize it's more time consuming to look up all this information on each advisor before you contact them and that you've only got so many hours in the day. That's a limit we all face. We've got to go get our clients too, we go through the same problem. But this current strategy that seems to be so popular that, you know, send out mass invitations, blind phone calls saying, "Can we catch up for 15 minutes because my investment manager is going to be in town," it's just not a good approach and you're going to find it less and less and less effective in the future.
Because from the receiving end as an advisor, there is already a completely unmanageable volume of these inbound requests. We couldn't do them all if we wanted to and even more importantly, it does nothing to make you stand out or make me think of all the inquiries that came in today, this wholesaler is the one that I want to respond to. If you want a response, you have to do your homework. Figure out exactly what you have to offer that adds value for my clients and make a targeted direct pitch that's relevant to me and my firm.
And if you have the expertise to demonstrate that you know what you're talking about and you really represent a best in class product that's superior to what I'm using and you connect with me by demonstrating this in your outreach effort, that's what gets the meeting. And you may not be able to do this for as many advisors, but you're going to get a lot more successful responses when you do it well and targeted.
But the bottom line here is just to acknowledge that, unfortunately, there are a lot of wholesalers who don't have the expertise and don't represent good products and don't do their homework in advance, and candidly, I'm sorry to say, they're dragging the wholesaling down for everyone by making us as advisors frustrated, overwhelmed by inquiries, and getting us to the level where we have to feel like we put up our guard and defend ourselves.
But what that actually means is that for good wholesalers you're going to see incredible growth in your personal careers in the coming years. Because in the end, again, as advisors, we still work with clients, we still help them implement. The money has to land somewhere, it's going to be invested, so the opportunity to be a wholesaler that impacts where those dollars go remains.
The only thing that's changing is the bulk of the flows are going to go to a smaller number of higher-quality products driven by a smaller number of really good wholesalers who have the expertise and do their homework to ensure they can get through that advisor gatekeeper when the time comes. Which means if you're ready and able to step up and be one of those good wholesalers, I think you actually have a lot of good opportunities coming in the next decade because a lot of other wholesalers are going to get whittled out.
I hope that helps and provides some food for thought about the current plight of the wholesaler (or what it feels like from the advisor's end), and why I'm actually upbeat on the future of wholesaling, but only for a small subset of really good wholesalers that represent good products.
This is Office Hours with Michael Kitces. We're normally 1:00 p.m. East Coast time on Tuesdays, but since I was traveling for a speaking engagement at the conference I mentioned, here we are on Wednesday instead. Thanks for joining us everyone, and have a great day!
So what do you think? Will financial advisors increasingly adopt a "gatekeeper" mentality when it comes to dealing with wholesalers? Is the future bright for knowledgeable wholesalers who represent good products? Should wholesalers be pursuing designations like the CLU and CIMA? Please share your thoughts in the comments below!