Futureproofing Your Firm

If you are more than a few decades old, you probably remember the firm Kodak, the leader in film and cameras for most of the 20th century. In its heyday, Kodak made extraordinary profits on its photographic film business, but something happened in the 1990s that would lead to its downfall: the emergence of the digital camera. The irony is that Kodak itself developed the first handheld digital camera in 1975 but discontinued it because the company didn’t think consumers would prefer digital over film — and Kodak depended on its film-manufacturing revenues.

After years of delay, Kodak launched its own digital camera, which rose to the No. 1 spot in digital camera sales by 2005. Competitors followed suit, pushing Kodak’s market share down to 7% until the iPhone, released in 2007 with its own digital camera, signaled the beginning of the end. With the rise of smartphones, the digital camera, for the most part, became a commodity. Over the next five years, Kodak struggled to change its business model, but its cash flow declined to a point where the company had to declare bankruptcy in 2012.

For financial services firms, the lessons here are many, but they begin with a firm realizing the critical need to develop a dedicated strategy that futureproofs its business.

What does this have to do with financial planning and advice? Like Kodak, many financial services firms fail to futureproof their businesses, exhibiting the same behaviors as the embattled camera company did on its road to irrelevance. They cling to existing business models and assume the future will look mostly the same as the present, only a little better. They ignore or dismiss upstarts with innovative products or business models, and they don’t understand what their customers really want. In Kodak’s case, its customers were not interested in just buying film and printing photos, but rather in taking lots of pictures cheaply and storing them so they can easily view and share them. For financial services firms, the lessons here are many, but they begin with a firm realizing the critical need to develop a dedicated strategy that futureproofs its business.

A FUTUREPROOFING FRAMEWORK

Seeing the future is hard, as we wrote in an earlier post about scenario planning. It requires business leaders to make bets on incomplete information: what consumers will want, what competitors are doing, and whether the timing is right to make changes. Add to that the fact that consumer tastes are always changing, new regulations are regularly enacted, and competitors are always innovating and it becomes clear why planning for the future becomes increasingly difficult and fraught with uncertainty.

But uncertainty isn’t going away any time soon. For firms to succeed, they will need to expand their thought processes in two ways. First, they need to overcome what behavioral scientists call the fallacy of extrapolation, a bias that causes us to assume a current trend will continue in the future. Second, firms need to understand and be open to the idea that staying the course may not be sustainable. Doing nothing is easy, but inaction itself is also a decision. And as Kodak discovered, it’s a decision that can have consequences.

Given the cost of inaction, how should firms approach futureproofing their planning and advice businesses? We suggest a framework that focuses on four areas: consumers, technology, advisors and advice. These areas have and will likely continue to be the battleground for competitive threats to firms. They have also been areas of significant disruption during the last six years. We’ll explore each of these four areas in more detail to unpack the components that seem ripe for change and could pose disruption for the typical financial planning business model.

THE CONTINUOUS RISE OF CONSUMER EXPECTATIONS

Firms preparing for the future need to view change through the lens of the customer and should assume that the standards for their financial advisors will grow. A recent report by Ernst & Young (EY) on the “Future of Advice” predicts that the future will bring “high levels of transparency and trust, underpinned by an overt duty of care.” As such, firms need to start to prepare so that their systems, processes and training remove or mitigate all possible conflicts of interest. This will benefit firms by providing “high levels of transparency and trust,” according to EY.

Firms should assume that expectations for the client experience will continue to rise.

As part of this increased transparency and trust, firms should assume that regulators and consumers in the future will require more information on an advisor’s background and qualifications to deliver holistic advice (which consumers are increasingly seeking). This means advisors who have a broad, but also deep, knowledge of all the domains of financial planning including, at a minimum, having the CFP® certification. It could also include some specialty designations if an advisor is focusing on a particular segment of the market.

Employing competent and ethical advisors will be critical, but it may not be enough. Firms should assume that expectations for the client experience will continue to rise. While firms have made great strides in improving their technology offerings and encouraging consumer adoption, they will be in a never-ending race to improve how the client first learns about the company’s services, engages with an advisor and then participates in the financial planning process through implementation. Advisors will need to find the right balance with each client. Automating more functions — data gathering, analysis, recommendations, implementation, monitoring — will create more quality time between human advisor and client, leading to more focus on the client’s outcomes and a higher level of client satisfaction. In a world where food and groceries can be delivered, rides can be requested and portfolio performance can be reviewed all by tapping a few keystrokes, consumers will increasingly seek out providers that can provide the same level of immediate, frictionless service for their financial advice.

TECHNOLOGY, THE HUMAN ADVISOR AND ADVICE

While some clients may choose a do-it-yourself approach and subscribe to a roboadvisor that functions without human support, many will not. According to EY, clients of the future will choose human advisors who are empowered and supported by great digital technology tools using “forward-looking, data-powered, automated insights.” Clients with simpler situations will work with virtual advisors based in call centers who use technology to show clients their financial plan in real time and simulate certain options to aid in their financial decision-making. Firms that invest in these capabilities will benefit by broadening their reach into more mass-market and mass-affluent segments, capturing younger clients who may want a one-stop-shop to handle all their financial needs.

In a recent survey by Accenture, 83% of advisors believe AI will have a “direct, measurable and consistent impact on the client-advisor relationship within the next 18 months.”

Competing in the future will mean incorporating more sophisticated technology, specifically artificial intelligence (AI), into the client-advisor experience. In a recent survey by Accenture, 83% of advisors believe AI will have a “direct, measurable and consistent impact on the client-advisor relationship within the next 18 months.” AI will not only automate many routine functions formerly performed by advisors, but it will also mine client information and transactions to uncover planning opportunities and suggest interventions by the advisor. For example, if the client is racking up credit card balances or borrowing from their 401(k), AI may message the advisor to schedule a call with the client to discuss whether liquidity issues need to be addressed. With this technology, advisors can be proactive while also spending their valuable time on the most urgent and impactful financial planning engagements.

Beyond technology, firms will need to recruit, develop and retain their advisors. The first step is creating a robust pipeline of diverse talent. Because this diverse pool of recruits will have many options from which to choose, the successful firm of the future will need to show candidates a compelling career path that:

• Incorporates a strong mission.
• Demonstrates a culture dedicated to client-centric service.
• Delivers a value proposition that leads with advice and planning.

To develop and retain these advisors, firms will need to continuously provide higher levels of support and automation. With less mundane tasks on their plate, advisors can spend more time on more value-add activities, such as coaching and counseling clients through life stages, loss of loved ones, money conflicts, windfalls, the transition to retirement and the eventual transfer of their wealth. The firms that excel at futureproofing will recognize that, as technology automates more and more tasks, their human advisors will need to focus on aspects of their job that computers can’t do to stay relevant, such as behavioral coaching. Firms will need to implement extensive training on coaching communication skills so they can better understand the client’s biases and build trusting, productive and sustainable relationships.

The scope and scale of advice will increase in the future. As such, firms should begin to equip advisors and support staff with the training to have deeper conversations with clients by asking better questions and providing more intelligent solutions. As part of this transition, advisors and firms may need to update their business models (e.g., how clients pay for advice) beyond just products such as investments and/or insurance, and broaden planning to include areas not previously covered (e.g., taxes or estate planning).

Getting all your advisors to think and engage clients in a holistic way will not happen overnight. They will need to learn to think and act differently when working with clients, reviewing all the areas of a client’s financial life so they can synthesize and integrate the elements of the plan to achieve their overall goals. This process will require comprehensive initial training, beginning with the CFP® certification, but will also require continuing education and training that reinforces coaching and communication strategies and explains new tax laws, and new, innovative advanced planning strategies.

GRADUALLY THEN SUDDENLY

So why aren’t we seeing more firms preparing themselves for the uncertainty of the future? Many are falling into the same trap Kodak did by expecting future consumers to prefer the same business model as they did in the past. Today, many financial services firms also cling to business strategies that pay their bills, moving slowly to adapt to changes in the market. Similarly, Kodak’s size allowed it to hold on to an aging model for many years until the demise of its film business came, to use the words of Ernest Hemmingway, “gradually then suddenly.”

Most firms understand the need to be forward-looking and to take steps to adapt to an unforeseeable future. For those without a robust system for futureproofing, the first step is creating the right structure and processes to be keenly aware of changing consumer expectations as well as innovation by competitors in the areas of advisor training, technology and advice. Firms must fight the urge to focus only on execution, instead concentrating more on how their firm’s business model adapts to fast and continuous changes in the marketplace. The decisions you make or don’t make now will have a big impact on your future success. Futureproofing is the only way to ensure your firm is still around in that future.

1. EY: How will you reframe the future of advice if today’s client is changing? 2022.
2. EY: How will you reframe the future of advice if today’s client is changing? 2022.
3. “AI Isn’t about Man or Machine, It’s About Ready or Not.” Financial Planning, September 13, 2022.
4. As an important first step, CFP Board in 2022 published “The Psychology of Financial Planning” which has already been incorporated into the education, exam and CE for financial planners.

Interested in discussing how CFP Board can support your firm’s certification efforts? Contact [email protected].