Financial advisors overwhelmed with too many products must take concrete steps to get out from under
According to a recent survey by Russell Investments, the average financial advisor holds hundreds of investment products, with each mutual fund taking six to eight hours of product due diligence each year. Julie Zhang, director of strategic initiatives at Russell Investments, talks about how advisors can make their books leaner and devote more time to the services that really matter.
Your firm found that the average advisor's book of business includes 482 products, with 314 stocks and 154 mutual funds. What do you think has caused their positions to bloat this much?
I think it comes down to the nature of the business. When advisors start out, they’re mainly trying to get more accounts and clients. Aside from building their own books, they may also buy assets from other advisors or get some from retiring FAs. This means taking on a lot of different product positions or getting clients’ assets transferred in kinds. The business wasn’t originally built for efficiency. After at least 10 years of growing their business that way, advisors are now focusing on transitioning to more efficient models so they can manage other facets of their practice.
These days, newer advisors tend to know from the outset that they need models and efficient portfolio design, and their product proliferation isn’t as swift. Advisors who are now seeing the importance of book efficiency also need to consider plenty of taxable issues when doing in-kind transfers and the cumbersome nature of moving account by account, in which case a discretionary PM licence can help. The good news is that over the past five years, the number of products held by an average advisor has come down (from 520 to now 482 products)—this may not seem very significant, but it’s trending the right way. And in our discussions with advisors, they are recognizing more and more the importance of trimming down their product line.
What are some ways and factors for advisors to consider in making their books leaner and more manageable?
We believe at Russell Investments that advisors eventually should realize that their value is really in servicing their clients and offering a rich wealth-management experience—customized portfolios for every client distract from that. If you’re an advisor at that realization point, you’re already ahead of the competition, and we recommend a three-step process from there.
First, fall in love with your data. Analyze what’s in your book and don’t be afraid of the reality of your business. Once you confront the black-and-white-data in front of you, you’ll know where to start.
Second, get rid of your investment FOMO — the Fear Of Missing Out on the next big investment. Advisors always ask if there’s any winning strategy they should be adding to their clients’ portfolios. The issue is never them missing out on an amazing fund, ETF, or whatever else is out there; it’s that they have hundreds of amazing strategies. So, the critical question is whether you need all of these products and how good your due diligence is.
Third, have a personal mandate of transitioning a certain number of accounts per week or per month. Having a specific goal—like three accounts a month—really helps, and we have a lot of tools to help advisors track their progress. The most successful advisors we’ve worked with make a commitment and stick to it; it takes time, but they’re ultimately much happier.
The report also noted that the average advisor owns products from at least 23 mutual-fund firms. How do you think advisors can go about streamlining their partnerships?
We recognize that this is still a relationship-driven business; if you have innate relationships that have served you and your clients well, there’s no reason to cut those out. People tend to gravitate towards four or five mutual-fund or ETF partnerships, and when we show them a list that tallies 23 different firms, they’re often shocked to realize how many firms they haven’t talked to in years.
Just as end investors expect more from their advisors than simply accessing a product, advisors should also expect their partners to provide more than just access to a fund profile. The only way for wholesalers to succeed is to ensure the success of advisors, and firms such as ours accomplish that by doing three things.
First, we offer advisors data driven insights on our industry to help advisors understand where their business has the potential to go. Second, we provide holistic portfolio investment strategies that are outcome oriented. At Russell Investments, when we recommend a product, we do so by first helping advisors determine what their portfolio looks like today, if and how we can improve upon that, whether we have a product that fits, and ultimately ensure the end solution on a total portfolio level improves their client’s outcomes. Thirdly, we emphasize communication and support. I know several of our associates present with advisor to their end-clients, exploring subjects such as the true value of an advisor. Advisors are often surprised at how much their clients and prospects don’t know about what advisors do and what their fees cover. This is one of the many ways we partner with advisors.
Despite advisors holding a large number of investment products, there's still a lack of exposure to markets outside of Canada. What has caused this and what options can advisors explore to improve their diversification?
Advisors are constantly surprised at how much Canadian exposure they have. Over the past five years, we’ve seen around a 5% reduction in overall exposure to Canadian equities. Part of the lack of diversification outside of Canada is a strong undertone from clients saying they’re more comfortable investing in Canadian stocks.
There’s this false bias that we know more about companies we live near than we do about foreign ones. Clients just feel easy being invested in Canada, which traditionally has been a safe market. To get over that bias, clients and advisors must focus on the stats: Canada is only 4% of the global market cap and there are simply always more opportunities outside of Canada.
One way to move away from this bias is to reframe the client conversation on what risk means: is risk investing outside of Canada or is risk not being able to afford the lifestyle in retirement that you want? Because of our outcome-oriented investing ethos, our associates always prioritize the latter. When our wholesalers help train advisors to have those types of conversations, clients become more open to external opportunities that will help grow their wealth sustainably over time.