Misaligned advisor incentives leave clients with less expertise

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 5:28

   And then the third piece is, I felt very, very strongly that the industry was built on a flawed structure. And I'll explain to you what I mean by that. So effectively, regardless of the firm, regardless of the market, almost all advisory businesses are built the same way, wealth advisory businesses. Advisors are independent contractors sharing somebody's brand, somebody's technology, and somebody's office space.

2. 5:55

   Those advisors not only compete with one another for next new client, but they can literally take clients from one another inside of the same firm, which creates a tremendous amount of isolation, not collaboration. So if I'm a customer of JP, I'm just using an example, JP Morgan Wealth Management, I'm tied to one person, right? But I'm actually a customer of that person, not JP, because they're not working as a team, correct?

3. 6:20

   Correct, in the sense that depending upon the firm, the advisor, the client's experience is tied to the advisor that originates the relationship with them. So think of it as most wealth businesses are built to serve advisors. We wanted to build a wealth business that was built to serve clients. And the advisors in the firm and the resources support those underlying, support the underlying clients.

4. 6:44

   Yeah, and there's all this like incentive misalignment. When we were talking in Miami, you were saying, like, you know, let's say you need an expert to come to a meeting. And that expert, one hour of that expert's time is $10,000. Can you tell that story? Yeah, so that was the first. So the first piece is you have this advisor-to-advisor tension, which creates silos or isolation. So that starts to limit the expertise that can be delivered to the end client just due to the structure of the business.

5. 7:08

   The second piece is the advisors and how the other front office capabilities or services work with those advisors. So that could be tax professionals, it could be financial planning, it could be wealth transfer, it can be family office. And in most instances, those services act as a cost center to the advisor. So where ideally the client would benefit from the full expertise, there's a limit. limitation around the advisor sitting there saying, do I need to bring this person because it's going to have a negative impact on me personally to bring them to the conversation, or can I work around that conversation, right? So there's tension, in my opinion, between the advisors and the front office staff that ultimately supports him. And then the third area of tension is effectively you have advisors who are paid effectively for doing two things,

6. 7:56

   generating as much revenue as they can or commissions as they can from clients, That's the first step. The second step then is how much of that you can hoard and not share with other people. Because when you're paid under those structures, you're incented to not only aggregate, but the more that you share, the less that you ultimately earn. So that creates, obviously, the tension, as I mentioned, between advisors.

7. 8:17

   But everybody that supports the advisors typically gets paid on the financial success of the business. And often those two things don't converge, and it creates a lot of underlying tension. So my whole view was if you step back and say, your advisors have tension, your advisors in front office have tension, and your advisors in middle and back office have tension, the big loser is the client. The client doesn't get access to the full benefits of the firm.

8. 8:43

   The client is marginalized down to the individual person or team that originated the relationship with them. The second big loser, in my opinion, is actually the firm, because these businesses don't end up becoming companies, they become platforms. where individuals plug into the businesses for some sort of period of time. But you're not really building a team, a culture. You're not collaborating and problem-solving together across the firm.

9. 9:08

   That's limited based upon the silo that you ultimately work in. So when I step back and look at those three things, tremendous amount of tailwinds, an industry with a barbell-like structure that's ripe for disruption, and an operating model, call it, which I believe to be fundamentally flawed. It just creates an opportunity.