Game-changer is an over-used phrase these days but when Nick Murray published his seminal text ‘The Excellent Investment Advisor’ in 1996, it was exactly that. It was a defining statement of the industry and one which continues to exert its impact some twenty-plus years later. Murray took a fresh look at the traditional approach to investment advice and offered his view on the direction in which the industry was going, predicting the key principles which would dominate and define the sector in the years to come. As the book approaches its 21st birthday, I’d like to look at how his predictions have panned out and compare them with the way we work at First Wealth.
The Six-Point Past/Future Analysis
Murray’s examination of the industry at the time identified six key elements of financial advisor practice, and redefined them to reflect where he felt the industry way going, a construct he called ‘The Ghost of Business Future and the Ghost of Business Past’.
|Velocity of assets
||Longevity of assets
||Face to face
Commission versus Fees
It was once all about the commission. When active management dominated, giving investment advice was based on selling products. But the commission model didn’t incentivise advisers to think about longer-term results and so could be seen to encourage short-termism and a lack of accountability. As a result, in a climate where demand for cheaper, passive management was growing and calls for greater transparency were increasing, it lost popularity as a fee-based model began to gain ground. As Murray pointed out, the benefit of the fee-based approach was that it brought financial advisers ‘as nearly alongside the client as we’re ever going to be, in that our compensation rises and falls with the value of his investments.’
The introduction of the Retail Distribution Review (RDR) in 2012 – with its objective to raise professional standards and bring greater clarity to charges and services in the investment industry – gave further impetus to the move away from the commission model and towards a fee-based system. The debate is constantly evolving and now discussion centres on the best type of fees-based system to offer.
Many of the top financial planning firms have realised that the real value for a client lies in the planning process itself (lifestyle planning, cash flow modelling, legacy planning etc), and have moved their advice model and fee structure accordingly. A significant number of planners will handle the financial planning piece alone, and then outsource the investment management to a third party. Various other models exist, from flat fees to timed fees (similar to the legal profession). In reality, the way fees are charged will vary from client to client, and successful financial planning businesses now offer client’s a choice as to how they pay for the services they require.
With increased access to information, the growth of robo-advisors and the proliferation of mass-market platforms like Nutmeg and Hargreaves Lansdown, investors have become better informed, technology has become more influential and competition to the traditional investment adviser role is everywhere. Years ahead of the RDR, First Wealth has always had a fee-based model (with a separate fee tariff for financial planning and wealth management services). Moreover, we believe that great financial planning and wealth management go hand in hand, so we feel it is important that we can provide both services to our clients.
Transactions versus Relationships
At First Wealth, building strong relationships with clients is a fundamental part of how we operate. We spend time getting to know our clients (everyone is completely different in terms of their aspirations, fears and values!), so we can give them the best possible service and help them identify, achieve and maintain their desired lifestyle. When relationships were based around transactional exchanges there was less time and energy devoted to getting to know clients. For me, the biggest part of being a successful financial planner is gaining client trust and being a good communicator with people, so you can build, retain and develop the relationship for years to come.
Murray stipulates that a good relationship is based on full disclosure between client and adviser, requesting: ‘full information as to all pertinent aspects of a family’s finances, total stewardship of the family’s entire investment portfolio and the time and effort necessary to arrive at a complete understanding of investment goals.’
It’s about really getting to know the client, what drives them, and what they want for their family. Truly understanding exactly where they’re coming from is a prerequisite to getting them fully engaged. For Murray, without genuine client engagement, it can be difficult for an adviser to help the client to the best of their ability.
And this works both ways. Building a strong, mutually-trusting relationship benefits both client and adviser over the long term.
Markets versus People’s Lives
Perhaps unsurprisingly, placing the markets at the centre of an investment strategy rather than people, doesn’t get the best results for clients. Murray’s view is that a market-oriented strategy can only ever lead to a short-termist approach and that it’s only when an adviser understands the person and their life that they can really make a difference:
‘A fee-based, relationship-oriented practice is focused on the real lives of real people, over decades if not generations.’
Additionally, focusing on the market is problematic as nobody knows what the markets will do. Not today, not tomorrow and not in ten years’ time. No one can predict market movement today any better than they could in 1996. The most sensible and fruitful approach is to plan around the short-term unpredictability of the markets, to let the markets do what they do; but have a robust and carefully formulated strategy in place for your investments over the long term. Obsessing daily over the market’s short-term ups and downs isn’t a strategy. A big part of my role as a financial adviser is to reassure clients that while we may see short-term volatility in the markets these are just blips in the broader context of a lifelong investment plan.
Knowledge versus Trust
We’ve already noted how trust is the basis of a good client-adviser relationship but how do we build it, and how do we explain the value of something which is so intangible in a profession like ours? It helps if we look at the old approach, where a professed knowledge of the market was seen as a vital attribute in impressing potential clients. The pitch was that their unique knowledge could help them to beat the market and get results for the client that no one else could offer. It was basically a euphemism for performance selling. But it’s likely that anyone who sells solely on performance will be proved wrong at some point. There needs to be more to the relationship than this, as Murray recognised: ‘In the future, people will have to believe that you will make it all work out (trust) before they will be able to apprehend how you’ll make it all work out (knowledge).’
At First Wealth, we take the time to work with a client to identify and plan for their long-term lifestyle goals. There will be gyrations in the market, so it’s important to have trust which allows the client to feel secure throughout those periods and to stick with the adviser for the longer-term gains. Alongside knowledge, trust is what adds real value over time and ultimately it allows the client to choose that holiday home, or put their children through private school or buy that sports car.
Velocity of Assets versus Longevity of Assets
When you’re not led by commission, or focusing completely on transactions or trying to second-guess the market, moving assets around at speed isn’t as important as it used to be. Nowadays, where gathering a portfolio of carefully selected assets for the long term is your guiding principle, the need or desire to react swiftly to the market is lessened. Choosing a basket of investment options for their longevity results in a different approach, which is less traditionally ‘active’ and not in instant knee-jerk reaction to the market, but driven by the long-term lifestyle goals of the client.
Achieving your goals is more important than chopping and changing to make a quick buck, as Murray notes: ‘In a commission/transaction/market-driven world, the emphasis may have been on trying to make a killing. But in a long-term plan for the creation and/or maintenance of real wealth, the essential thing is to make absolutely sure you don’t get killed.’
If you’re not in a position to invest over the long term or you’re looking for quick wins then you should think carefully about whether you should be investing at all. But if you’re looking for longevity and a way to achieve your lifestyle goals then strategic long-term wealth planning is for you.
Telephone versus Face-to-Face
It would have been astonishing if, in 1996, anyone had foreseen the communications revolution that was just around the corner and the multitude of options which would soon be available to us for connecting with each other. This technological great leap forward has opened up countless new platforms for conversation with mobile, email, social media and Skype and FaceTime all now in the mix. Despite this, it would seem that Murray still managed to call it right. A face-to-face meeting in person is still unbeatable for creating a connection with a client, whatever stage the relationship may be at: ‘Relationships… can only be created, nurtured and maintained face to face. No one is ever going to give you any serious money to invest without seeing you, much less entrust his entire family’s financial future to you.’
Of course, we’re always available for our clients on whatever format they prefer but for us, the important thing is that we are providing a unique and personal service and getting to the heart of a client’s financial aspirations. Meeting face-to-face, and seeing them eye-to-eye is the best way we have of getting to know and understand them and ultimately of providing them with the best value we can. New developments in technology can always offer new options and given the pace of technological change we await with interest to see how our industry develops in future. However, in whichever direction innovation takes us it’s certain that developing healthy, regular, engaging relationships with clients will remain paramount.
So twenty years on, it seems that Murray’s predictions hold firm and his reading of the direction of the industry was pretty accurate and there are many parallels between the First Wealth ethos and the thinking of Nick Murray. What inspired me so much and continues to inspire me is Murray’s recognition of the almost unique ability financial advisors have to make a positive difference and improve the quality of people’s lives.
If you’d like any help or advice with your financial lifestyle planning, please give us a call on 020 7467 2700 or email us at: email@example.com.
This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.