Changes ahead

By Ian Davidson

Emerging trends in the new millennium will change the ways in which financial-planning advisers do business

Illustration: Geneviève Côté

As the new millennium gathers momentum, we see a number of trends emerging in North American financial-planning and investment practices. These trends - which range from 24-hour trading to unbundled fees - affect all of us, regardless of whether we provide financial advice or receive it.

Recently, Michael Nairne, vice-chair of Assante Corporation, and Paul Bates, president of Schwab Canada, made a presentation to a breakfast meeting of the Canadian Association of Financial Planning. Their presentation outlined some of the developments that will affect the way we do business this century.

The first trend could be described as "Hi-Tech and Hi-Touch." Hi-Tech refers to technology that allows "one-to-one marketing." In other words, marketing can be targeted to an individual, allowing us to differentiate a specific individual's requirements. In my own practice, we segment our clients according to their financial and professional interests, as well as by age. In this way, we are able to ensure that our mail campaigns focus on our clients' particular needs.

We want to keep our clients with us forever, and so we treat them accordingly. Hi-Touch means that, in this day of voice- and electronic mail, your important clients want information delivered personally, not by some assistant to your assistant - particularly if the news is bad. Despite the many complex tasks technology can now perform, the professional is still required to deliver com-plicated information personally to the client, and to provide advice in a way that's easily understood.

The second important trend affecting the business of financial planning and investment is the advent of 24-hour trading. If you follow media reports on investing, you may have noticed articles that raise questions about the future of our various Canadian stock exchanges. Technology now allows the trading of stocks and bonds 24 hours a day, seven days a week, bypassing the stock exchanges. Trading and settlement can be instantaneous. In his presentation, Paul Bates amazed listeners when he reminded them that, during World War I, the stock markets were closed for eight months. Today, clients expect trades to take place within 90 seconds, and the one-hour shutdown of an exchange because of technology overload is regarded as a near catastrophe.

One of the hallmarks of our society is speed. People are doing more than ever, faster, and most people are working too many hours a day, too many days a week. In every business, employees are expected to return calls and reply to their e-mail the same day, but for those who get 100 messages a day and are already working 10 hours a day, this is an impossible feat.

How does one cope with being so busy? For starters, you can be more productive, which is what the Internet and the digital universe are all about. You can work more, and develop a team. If you have a team, keep it intact and make sure that team members actually meet your clients. In our practice, I tell my staff, "Everyone is a person." This seems obvious but, in this day and age, I don't encounter that attitude very often.

If I require service, I do not want to navigate a telephone touch-pad through five choices and then wait 15 to 20 minutes to queue for a service representative who says, "My name is Bob. How may I help you?" I want to say, "Bob, if you were set up to serve clients properly, you would know that this is the 15th time my Internet service has gone down in three months. You would fix it the first time and credit me for wasting my time on the next 14 calls."

Another trend in this new millennium is the segmentation of markets, which requires every practitioner to find the appropriate niche. How often have you been asked, "What do you charge for a personal tax return?" You quote a price, only to be told, "My brother-in-law is a pharmacist and does my tax return for $40." Technology has reduced costs and increased competition. You want to compete where you can be paid, so, clearly, you do not want the pharmacist's tax-preparation business.

The market for financial advice can be divided into three groups: 21% of clients who are fully dependent and want counselling; 50% who are opinion-seekers; and 29% who are self-directed. Today, different business entities meet the needs of these segments, but Schwab Canada's Paul Bates forecasts that all investors will eventually be on-line and only two categories will remain: the self-adviser, and the investor who seeks the professional adviser for full service.

We need your help!

Ian Davidson, CAmagazine's Technical Editor for personal financial planning,
is working on a case study for our November issue about how the middle
class is coping with PFP issues. He would very much appreciate your answers, guaranteed confidential, to these questions by June 30th:

· What are the particulars of your financial situation?
· What is the amount of your financial assets?
· What has been your biggest financial success?
· What has been your biggest failure?
· What special PFP tips do you have?
Feel free to include any additional information. You can reach Ian Davidson at
(416) 216-6504, oridavidson@equion.com. Thank you for your co-operation.

Brokers and financial advisers are paid through commissions and fees based on assets under management. In the future, we can expect more fee-based advice. We can also expect fees to be spelled out or unbundled. Presently, mutual-fund management fees range from 1.5% to 2.5%, and investment counsel fees are about 1% on the first $1 million of capital invested, excluding brokerage and custodial fees. Eventually, technology will bring about a reduction in fees. Like Bates, I believe that we will start to see set-up fees for new accounts and some annual compensation, but no declining redemption fees. Fee-based accounts appeal both to American and Canadian securities regulators who believe fees reduce the potential conflict of interest between the commission-based adviser and the investor.

Another trend that we will see in the industry over the next few years is a move toward total solutions. Investors are jaded. Three-quarters of them want to be educated and only 25% believe that they are in the right investments. What do clients want? They want total solutions and optimized portfolios, and they want Internet access to their account so that they can look up rate of return. The booming markets of the '90s overshadowed the value of advice but, in the future, for the 21% of clients who are fully dependent, there will be a return to comprehensive financial planning. The rest of the clients, who are opinion-seekers or are self-directed, will, more frequently, use Internet technology and the media for advice.

My counsel to our clients is this: information is not advice, and market volatility makes it a challenge to be self-directed. Most clients have no idea whatsoever about risk and proper portfolio construction - they seldom even have any awareness of what basic tax planning involves. Although we see plenty of opinions and advice in the media, the media cannot provide proper context to those who wish to be self-directed.

Michael Nairne named "trust" as the final trend on his list. Everybody wants someone to trust, but it is difficult to place trust in people who neither know - nor, it seems, care - who we are. To them, we exist only as figures stored away in a computer.

I believe that there are four keys to developing our clients' trust in us. Dan Sullivan, a well-known consultant (the "Strategic Coach") based in Toronto and Chicago, lists them as: returning all calls; saying "please" and "thank you"; showing up on time; and doing what you say you are going to do.

These attributes were not evident in the '90s. Technology is forcing us to bring them into the new century.

Technical Editor: Ian Davidson, MBA, CFP, CA, Assante Capital Management Limited., Toronto.