Sign up today and take advantage of member-only content — the kind of timely, cutting edge industry insight that only Money Management Executive can deliver.
  • Exclusive Online Only Content
  • Free Daily Email News Alerts
  • Asset Management Blogs

Firms Urged to Meet Clients' Individuality

How likely is it that three investors, one with $35,000, another with $100,000, and the third with $400,000, at different ages, in different situations, will all want the same types of online investment advice and traditional guidance? Not very, according to consultants who spoke last week at a forum presented by Cerulli Associates. That's why firms are being pressured to develop and offer what Cerulli calls, "scalable advice."

By scalable advice, Cerulli means multiple levels of advice, integrating online and high-touch human guidance, within one investment manager. That encompasses everything from automated, free research and online tools to customized accounts with reps acting as portfolio managers.

The advantage, or necessity, of providing the multiple levels of advice is that firms can then offer more choices to increasingly demanding clients, as well as the fact that the clients can move from one type of advice to another while remaining with the firm, said Kelly O'Donnell, a senior consultant at Cerulli, who spoke at the forum.

There are four trends that are driving firms to develop scalable advice models, she said. The first is the commoditization of information and execution. Advice is now the core component of an intermediary's "value proposition." If firms want to capture intermediary assets, they have to offer, at a minimum, those things that the adviser looks for to grow his or her own business, or else that adviser will find a firm that does.

Expanded Financial Planning

A second reason is that financial planning and fee-based pricing has expanded enormously (See Planning, page 2). As intermediaries move "upstream" to high-net-worth clients, an advice gap for investors between self-directed and affluent is widening, according to O'Donnell.

Another trend driving firms is the acceptance of the Internet as a distribution and servicing channel. From the beginning, it was clear that the Internet would be an efficient means to communicate to and serve clients. Now that it has been generally accepted, firms are able to reduce costs, in some cases, by servicing clients via the Web.

Finally, increased investor demand for choice is forcing firms to adopt multiple levels of advice. "Investors don't just want a choice of products anymore," said O'Donnell. "It's the way it's delivered, the pricing structure, the investment vehicles."

As a result of the increased investor demand, providing multiple levels of advice is equally important for direct mutual fund firms, said Jim Folwell, a consultant with Cerulli, who also spoke at the forum.

Building Scope

"Many [direct] firms are building out multi-channel distribution capabilities to increase market scope, and experimenting with advice programs to respond to client inquiries," Folwell said.

The lowest level of guidance on the scale is the same for all investors, usually involves some proprietary research, is considered a value-added resource primarily for self-directed investors, and is either free or has a nominal cost. One good example of that type of tool is Charles Schwab & Co.'s Select List, according to Cerulli, and the firm expects to see many firms who haven't yet adopted this type of guidance to do so.

"However, even automated advice must have a human side to it," O'Donnell said. Firms need to support their online research and tools with call centers and preferably Series 7 reps, she said.

The next step up would be mass-customized guidance, such as Fidelity Investments' Asset Allocation Planner. That type of guidance is still automated, but is based on limited investor information. Still, it offers the same type of advice to investors with the same basic criteria.

The next type of guidance firms can offer is "limited advice", according to Cerulli. This is where specific product recommendations are based on an investor profile, and where the product set is fixed. This is the segment in which there is the most interest right now, according to O'Donnell. The Vanguard Group's partnership with Financial Engines and Merrill Lynch's Financial Advisory Center are successful examples of "limited advice", according to Cerulli. The next level, mutual fund wrap programs, is in the middle between the technology and the human side, according to O'Donnell.

The top level of guidance is holistic advice, according to Cerulli. This encompasses personalized financial planning and is reserved for the wealthiest clients, O'Donnell said. It is the most customized form of advice and, consequently, requires the most human-based guidance.

While the lower levels of guidance often involve limited, or even one-time contacts between investors and firms, this level of guidance involves a long-term, recurring relationship. And the advice given encompasses every financial need that the client might have, including tax implications, trusts, estate planning, etc., O'Donnell said.