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PODCAST: A Look at the Changing Value of Financial Advisors and Growing Interest in Model Portfolios

Mike O’Brien, Workplace Solutions Marketing Director, RA & Solutions Marketing, speaks with David Lyon, founder and CEO of Oranj, a wealth management platform for financial professionals, to talk about the changing value of financial advisors over the next decade. They discuss how technology has helped the further adoption of model portfolios due to the rising demand of individualized service. Check out our latest “Talking Markets” podcast.

Some Highlights:

  • Companies large and small within financial services are really looking at themselves as technology companies today.
  • The financial services industry needs to strike the balance between technology and customized service; there’s nothing that can replace a relationship between an advisor and an investor.
  • There’s a lot of really smart thinking and intellectual property that can be created in model portfolios, which ultimately means an advisor can spend less time constructing models and more time servicing clients.

Podcast Transcript

Host/Kristine Hurley: Hello and welcome to Talking Markets: exclusive and unique insights from Franklin Templeton.

I’m your host, Kristine Hurley.

Ahead on this episode: a look at the changing value of financial advisors over the last decade, and the opportunities for them ahead in the 2020s. Plus, how model portfolios are becoming more popular solutions as demand grows for individualized service.

David Lyon, founder and CEO of Oranj, a wealth management platform for financial professionals, joins Franklin Templeton’s Mike O’Brien for this conversation. Mike, take it away.

Mike O’Brien: As we move from 2019 to 2020, I would like to start by looking back 10 years. That, the last time we changed a decade from 2009 to 2010, there was a lot going on then. The great recession was in full force. Many investors and their advisors were in a state of shock, almost. So as we look back, David, I’m interested to get your thoughts on what are your big takeaways over the past 10 years?

David Lyon: We really, we try to not look in the rearview mirror. We try to look forward. But I think, really, over the last 10 years, my biggest takeaway is really looking at how advisors—and really, everyone—within wealth management, financial services are running their businesses. And I think some of my big takeaways are that companies, large and small, within financial services are really looking at themselves as technology companies today. I think that that’s something that has really evolved over the past 10 years and really rethinking how they’re going to continue to grow their business moving forward.

We’ve had a really nice run in the market. I think sometimes that can breed complacency. But, I think with everything else that’s changing around financial services has really ignited a lot of innovation within the financial services industry in wealth management. There’s been innovators with Betterment and Wealthfront and many others. It’s about really ease of use. There are so many investors in the United States that really aren’t doing anything, or they’re doing it themselves and they’re dramatically underperforming because of the emotional aspects of investing and seeing how fintech can help bridge that gap, I think, is probably one of my biggest takeaways over the past 10 years.

Mike O’Brien: So David, I want to build off a word that you just said, and that was the word complacency. Franklin Templeton recently conducted a survey1 and discovered that nine out of 10 investors are happy with their advisors. But according to some additional research, nearly one third of clients plan to switch their wealth management providers in the coming three years. And so, if you think about it, this relationship between advisors and their clients, do you see gaps starting to form between what clients expect and this perception of what advisors think their clients expect? What are your thoughts on complacency due to the extended bull market and what can be done to minimize those gaps between clients’ expectations and advisors’ perceptions of those expectations?

David Lyon: Yeah, that’s really interesting research, right? There’s research out there that the average investor—and I’m actually referencing some research that’s been done particularly around the baby boomer generation—but, they don’t really understand the value that advisors provide. And then, you look at other research where, the vast majority of baby boomers don’t believe they’re going to have enough money to retire on. And so, there’s a lot of, kind of, conflicting research out there.

I think across the entire spectrum, whether it’s advisors or investors, I think the expectations from a client perspective, clients’ expectations are kind of really wildly all over the board. But I think you can, kind of, easily point to a couple of different things and one is, what are their expectations of how the advisor can help them reach their goals.

And then, I think that there’s also the experience expectation that I think is becoming more prevalent in the industry and that’s not really due to performance in the market. It’s largely due to all the innovation that’s happening outside of our industry with companies like Uber and Amazon and Netflix, where largely we’re living in an on-demand world.

We’re living in a world that is constantly trying to reduce friction in everyone’s lives which make experiences better. Something that we like to say, kind of internally in Oranj, is, our industry really needs to find and strike the balance between technology and customized service and solutions. And I think, largely, where we’ve landed on is human-driven, technology-assisted, and there’s nothing that can replace a relationship between an advisor and an investor. There are plenty of places that investors can go to not get the personal attention, but technology has emerged in such a way that it can really support and enhance the relationships that they have with their trusted advisors.

And I think our industry is somewhat lagging other industries. Today, you would be hard pressed to find people standing on the side of a road in a city hailing a cab, let alone go meet with a financial advisor, for 90 minutes to decide whether or not there’s actually some value that they can provide. So, I think technology is really enhancing that and I think our industry—being financial services and wealth management—is starting to catch up to other industries.

Mike O’Brien: Yeah. There’s this concept of delivering what the client wants almost before the client expects it. And you’re right, this personalization, everybody has their own unique, curated delivery system by these technology companies. Can we explore a little bit of perhaps this intersection in the financial services world of how advisors can leverage technology and not be replaced by it, but leverage technology to optimize that client experience and to personalize it for each of their individual clients in a way that they haven’t done previously? What are your thoughts on how advisors can use technology to really enhance their relationships and better meet their client expectations?

David Lyon: Yeah. I think that technology can be used to enhance that. And I think that the back office of an advisor’s business is directly tied to the front office. You know, relationship management, business development, client service activities that are really the core of their business. So, any technology that can help an advisor spend less time in the back office and more time in the front office is going to enhance that experience. And I think what’s so great about our industry, is that every advisor has a slightly different business model and they have slightly different value propositions. And the reason why I think that that’s great, is because investors are the same way, right? Investors have different sets of goals and objectives and they all want to have different levels of service and relationships with their trusted advisors.

And I think technology can enhance that for the advisor because they can really leverage the technology and adopt their processes and workflows and model their back office activities to conform to the technology that can help provide them those efficiencies to ultimately spend more time servicing their clients and more time growing their business.

Really good software should be designed for an advisor to be able to get in, do the work that they need and move on with the rest of their day. But then, you get to the front office aspect which is, “How do I identify which clients need my attention? What are the areas of opportunity? How easily can I identify those areas of opportunities? So, when I do reach out to a client, I have something meaningful to talk to them about.”

What’s transpired over the last 10 years is that the advisor has typically serviced their clients when it was convenient for their business, not necessarily when a client has a particular need. The ability to be more proactive is, is really, really critical and technology today can help them do that, right? Being able to identify when a client maybe has a change in how they were tracking to their retirement goal or a change in their liquidity levels or a change in their household. Maybe they just had a child, or they experienced some other type of life event. Technology can deliver that information to advisors in real time and instead of waiting until the quarterly performance review or the annual review, right? Advisors can actually start to service their clients as their needs arise, which is how people live their lives.

Mike O’Brien: So David you mentioned friction, which I think is really a good description of the elements that financial services have to overcome. And so, if you think about the friction for adopting new technology, is it the friction from the investor’s point of view? Is it friction from the financial advisor’s point of view? Or is it friction from the broker-dealer or the custodian’s point of view that is the greatest deterrent to adopting new technology?

David Lyon: There is friction within almost every one of the players that you called out. But the institutions, like custodians of broker- dealers, are starting to really adopt technology and thinking about how they can be more supportive of advisors who really want to leverage technology in their business. But at the end of the day, it takes the advisors to drive the technology that’s out there and new technologies that are being brought to market.

I think we’re in a place today that where advisors are still trying to figure out what technologies they want to use without kind of over-complicating the software that they use in their business. Advisors can easily license a lot of software to reduce that friction. But, they can’t license it to a point to where they’re logging into 15 things on a daily or weekly basis, that that’s creating friction for them.

But, identifying the software that’s going to really help them, ultimately spending less time in the back office managing and more time in the front office advising and servicing, that’s largely having advisors change their thinking about how they run their business, right? Less quarterly reviews, more intermittent touches. Less 90-minute meetings, actually means a better experience for the investor and the service that they provide to their clients.

Mike O’Brien: David, I think that just reinforces the theme that we’ve been having through this discussion that financial advisors need to focus on efficiency that frees up the time to deepen those relationships, so they are addressing their client expectations, which are going to be so important, especially as they move forward and developing those personalized individual strategies for each client. We were just talking about efficiency from a technology standpoint. Love to get your thoughts on gaining efficiency through the use of turning to new products and new solutions in the investment world and using model portfolios to work more effectively with their clients.

David Lyon: There’s a lot of really smart thinking and intellectual property that can be created in these model portfolios, which ultimately means to the advisor that they can spend less time constructing models and more time actually servicing their clients and identifying what their needs are and what are the most suitable investment solutions to help them accomplish those goals.

I think we’ve actually started to see a lot of asset management firms, I think very intuitively, identify this very same kind of opportunity and how the asset management firms can actually utilize their own IP [investment platform] and investment expertise to deliver very turnkey investment solutions for advisors. I think we’ve just seen a lot of advisors that are still really stuck in their ways of wanting to be the portfolio manager, wanting to on top of that be the relationship manager, as well as a business owner. Very, very difficult business to run that way and you can be pretty average, at trying to be good at multiple things or you can be really good at one thing, right?

It’s kind of a golden rule. And, I think that the emergence of model portfolios is starting to gain a lot more traction because technology is really aiding in that last mile delivery and truly making it a turnkey solution. I think, particularly in the RIA [registered investment advisor] space, I think RIAs have really been slow to adopt, call them third-party solutions, right? And I think up until a couple of years ago model portfolios, I think were largely delivered through third-party managed solutions that increase the cost of investing. Right? And there were a lot of overlay fees and advisors in the RIA space are very, very fee conscious, right? So the idea of adding another 15 to 25 basis points2 on top of the cost, the underlying mutual funds, ETFs [exchange-traded funds] or SMA [separately managed account] is, I think, was a hard value proposition for RIAs to buy into.

And today, advisors can actually utilize model portfolios without those overlay fees and gain those efficiencies in the back office. And so, I think that we’re just in the early stages of that adoption cycle. But it’s not just about efficiency, it’s also about doing the right things for your clients at the right times.

Mike O’Brien: So David, we started this conversation by looking back 10 years and now what I’d love to do is look forward 10 years. What will the 2020s look like given the tremendous wealth transfer that’s about to take place? This uncertain investment marketplace that affects us at every decade. And what’s your take, if you could clear off that crystal ball over the next 10 years look like?

David Lyon: I think there’s going to continue to be a lot of innovation. I think there’s going to continue to be a lot of change. When you look at fintech as a whole, I think that fintech investments are rounding the corner away from things like payments and lending to, really, more technologies that are helping advisors run better businesses, technologies that are providing advisors with the ability to really do more in terms of how they service and really being more virtual and scalable.

I think that there are tremendous opportunities for advisors to become more independent and kind of control their own destiny. I think that ultimately will result in, really, more investors working with advisors. Right? Historically, a lot of in-person meetings, lengthy meetings, stacks of paperwork, all the things that we kind of talked about earlier as it relates to friction. I think that’s one of the greatest attributes of technology is to reduce friction and make the service and expertise of financial advisors more accessible and convenient.

Mike O’Brien: Thank you, David. Greatly appreciate your time today and wish you and Oranj much success in the decade ahead.

Host/Kristine Hurley: Thank you for listening to this episode of Talking Markets with Franklin Templeton.

If you’d like to hear more, visit our archive of previous episodes and subscribe on iTunes, Google Play, or just about any other major podcast provider. And we hope you’ll join us next time, when we uncover more insights from our on the ground investment professionals.

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All financial decisions and investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. While an asset allocation plan can be a valuable tool to help reduce overall volatility, all investments involve risks, including possible loss of principal.

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1. Source: Franklin Templeton Retirement Income Strategies and Expectations (RISE) survey.The RISE survey was conducted online among a sample of 2,002 adults comprising 1,000 men and 1,002 women 18 years of age or older. The survey was administered between January 17 and 28, 2019, by Engine’s Online CARAVAN®, which is not affiliated with Franklin Templeton. Data is weighted to gender, age, geographic region, education and race. The custom-designed weighting program assigns a weighting factor to the data based on current population statistics from the US Census Bureau.

2. A basis point is a unit of measurement. One basis point is equal to 0.01%.