Many readers of this blog contact me directly with questions and comments. While often the responses are very specific to a particular circumstance, occasionally the subject matter is general enough that it might be of interest to others as well. Accordingly, I will occasionally post a new "MailBag" article, presenting the question or comment (on a strictly anonymous basis!) and my response, in the hopes that the discussion may be useful food for thought.
In this week's MailBag, we look at a question about why "advisor review sites" - which aim to gather client reviews about advisors to help consumers choose a good one - just won't work in the financial advisory world anytime soon.
Question/Comment: Regarding WalletHub, you recently Tweeted:
Nice thought, but don't see how this can possibly succeed. "New Website Lists Consumer Reviews of Financial Advisors" http://t.co/WogXY22MDz
— MichaelKitces (@MichaelKitces) August 10, 2013
Can you elaborate on this, in some detail, as to why you don't think this will succeed or could be helpful to consumers looking for an advisor? Wouldn't it be similar to checking reviews on C-Net for tech gear? Consumer reviews are popular on Amazon and other consumer oriented websites where people are looking for insight before making a purchase. Would appreciate your thoughts.
The fundamental problems to the “advisor review site” model are very straightforward:
1) “Review” sites of all types rely on a relatively smaller percentage of actual customers/users to leave reviews. For instance, successful restaurants on Yelp may gather dozens of reviews, but that’s based on THOUSANDS of patrons. I’ve never seen the official industry statistics (though I’m sure they’re out there someplace), but I doubt more than 1% to 2% of all customers ever take the time to go online and leave a review. In truth, the percentage is probably even smaller than that for most. (An average restaurant might seat 150 people with 3 seatings per night is 450 people per night, at 300 open nights per year is 135,000 patrons, so even 1% of customers should be 1,350 reviews PER YEAR and virtually no restaurants even see those numbers.
2) A typical comprehensive financial planner at capacity often has no more than about 100 clients. Even if we generously assume that 1% to 2% of clients will leave a review and that the advisor has a “big” client base of 150, that means most advisors will never have more than 1-3 client reviews, which isn’t enough review quantity to be credible. And of course, advisors already at 100+ clients don’t necessarily have much capacity for more clients. Those who are still taking on clients, who might only have 25, 50, or 75 clients, will mostly likely only have one review AT BEST in such scenarios.
3) The problem is exacerbated by the fact that for most review sites, a relatively small number of users leave a rather high percentage of all the reviews (e.g., the frequent Yelp reviews who review EVERY restaurant they go to). In the context of advisors, this too is problematic, because once a client finds a good advisor they tend to stick with that advisor, which means even “power reviewers” are still only likely to leave one review (the one for the good advisor that they’re now sticking with indefinitely). If review sites like Yelp or Angie’s List (or an advisor review site) were practically limited such that each user could/would only ever leave a maximum of one review, those sites would be dead, too.
4) The statistics above assume, as in the case of restaurants, that they are actively promoting the review site and encouraging their clients to post their reviews (as many restaurants do). However, advisors would not be permitted to direct clients to review sites, as soliciting and referencing testimonials is a violation of industry regulations. The reviews might be out there, but we as advisors cannot direct clients to them. Accordingly, the only way a review site gains traction is if it independently manages to reach most of an advisor’s clients in sufficient volume that 1% to 2% of them leave a review. Realistically, the review site will not reach nearly that many people (which would require an unbelievable amount of capital for marketing and brand awareness), which means it’s unlikely that even advisors with 100+ clients will ever have a single review (and no one really trusts just one review anyway) and certainly won’t have the multiple reviews necessary for real credibility and usefulness.
5) Even if the review site manages to get a decent volume of reviews for a subset of advisors, the advisors STILL cannot direct prospective clients to the review site to look them up, as that would again violate the rule on testimonials. Accordingly, the crucial synergy that makes other review sites work – the businesses that are profiled drive traffic to the review site, which helps to promote its visibility, which helps to encourage reviews, which creates a greater volume of credible reviews, which encourages more businesses to drive traffic to the review site – simply cannot work in the advisory world context. The review site can only gain traction with standalone direct-to-consumer marketing to drive visibility, which is not a realistic business model, and that’s assuming the site could ever get a high enough volume of reviews to make it useful when people show up (which also isn’t realistic).
6) Given the rules against testimonials and the fact that advisors can’t directly solicit them or use them means it would be almost impossible for an advisor to ever pay for a review site profile without being a violation of the testimonial rules. This undercuts the potential for a business model itself, as most of this businesses seem intent on soliciting advisors to pay for their profile pages and the leads they generate to make the business work, except the advisor would have to terminate the relationship as soon as they actually GOT a review that would make it worthwhile (a problem that even the aforementioned article acknowledges).
The bottom line is that the “advisor review site” is simply not a feasible business model in today's environment (and likely ever). Advisors don’t have the volume of clients to reach a critical mass of reviews, and advisors cannot participate in the process in any way due to the industry regulations prohibiting testimonials, which makes it even more impossible for an advisor review site to ever gain critical mass (much less establish a thriving business). And advisors certainly can’t pay for a profile that highlights their reviews and testimonials, which destroys the business’ best actual monetization channel.
Simply put, until the regulators change the rules on testimonials, these advisor review sites are all Dead On Arrival. And even without the testimonials issue, it’s still unclear whether such a review site could gain traction in the foreseeable future, as it’s still almost impossible to get enough reviews-per-advisor to make the review site credible, and to the extent that advisors ever COULD solicit testimonials from their clients they would almost certainly direct those testimonials towards/onto their OWN websites, not out to third-party websites.
The concept of a review site for advisors is noble, but the advisory business just doesn't have the high-volume transaction business necessary to make it viable. Ironically, the review site model isn't feasible for advisors because we are a relationship-oriented business.