In the first installment of the Beutel Goodman Advisor Speaker Series, Paul Hamilton, Vice President, Managed Assets sat down with Dan Richards, professor at the University of Toronto’s Rotman School of Management to discuss the evolution of the financial advisory business.

This recording took place on November 5, 2024. The transcript following the replay is edited for clarity.

 

The information in this recording, recorded on November 5, 2024,  is not intended, and should not be relied upon, to provide legal, financial, accounting, tax, investment or other advice.

 

Paul Hamilton: Hello, I’m Paul Hamilton, Vice President of Managed Assets at Beutel Goodman. And I’d like to welcome our guest today, Dan Richards, who’s an award-winning faculty member at the University of Toronto’s Rotman School of Management, and in fact, was voted favorite Prof by last year’s graduating MBA class at Rotman. Dan has built a reputation of one of Canada’s leading authorities on investor attitudes and how financial advisors and financial institutions need to position themselves for future success.

He wrote weekly articles for 25,000 investment advisors in Canada and 500,000 investment advisors in the United States and was a frequent guest on BNN. He also contributed regular columns to The Globe and Mail Report on Business and he continues today. Thanks for joining me today Dan for our discussion on the future of advice and client specialization.

Dan Richards: Thank you very much for the invitation.

Paul Hamilton: To start off. I’d like to hear what your thoughts are on some of the main challenges that financial advisors face today.

Dan Richards: So that’s perhaps the million-dollar question; we could probably spend the entire duration of this interview just on that. Because when you think about challenges, and when you think about what’s changed, the question is not what changed, it’s what hasn’t changed? Competition. Regulation. Technology. Client demands, how advisors should be communicating with clients. Everything’s changed, it feels like.

And the bottom line is as a result of all those changes, a big change, I believe, is that the model for advisors’ success has fundamentally altered. So, I worked closely with advisors from say 1985 to about 2010. And for most of that period, if you did a good job as an advisor, you could expect to be rewarded.

You’d have pretty good career, attract clients. And you know, life was pretty good. That’s changed. And by the way, it’s not just changed for advisors. It’s changed for other professionals, accountants and lawyers. Going forward, I believe that the only advisors and the only professionals that really are rewarded with substantial success in their careers are the ones not doing a good job but doing a great job, the ones who really excel in terms of how they perform.

Paul Hamilton: Well, you know, the rise of artificial intelligence has been a major theme this year in terms of driving the markets. And I know that there are certainly some concerns out there with respect to the risks of artificial intelligence. But I think there’s also a lot of excitement about how that could potentially help us in our work. And so with that in mind, I actually asked ChatGPT to provide some questions for our conversation here.

And here’s one that I thought was particularly insightful that I wanted to pose to you. In a world where I can potentially standardize some advisory practices, how important do you think it will be for advisors to develop a deep specialization in order to stand out?

Dan Richards: So that’s a great question. And my views on this have actually changed. So, 25 years ago I wrote a book for advisors, Getting Clients, Keeping Clients, that was I was very fortunate with, it was a global best-seller and won awards. And as a result, I spoke probably in about 50, 60, 70 conferences in the United States to talk to financial advisors. And those conversations with advisors informed my views, because what I heard top performing advisors saying is the only way to really build up a big practice, we’re talking about $10 billion, $15 billion, was to specialize. So specialization would be, for example, focusing on owners of Canadian Tire franchisees or Tim Hortons franchisees or tech startups or whatever. I still think that specialization gives you a competitive advantage. Absolutely. But I believe it’s actually less essential in Canada than it would be in the United States.

That’s because Canada is a smaller market, less competitive, less intensely competitive. And so I think specialization, having a narrow focus, certainly gives you a point of difference and an advantage, but I think you can actually run a successful practice without specializing, with one caveat. And that’s ensuring that you have deep knowledge of the hot buttons for the key target groups that you’re focusing on.

So, for example, entrepreneurs; if you’re focusing on a $1 million, $2 million, $5 million plus client, they tend to be heavily concentrated in a few sectors. If you’re targeting successful business owners, you better have a deep understanding and resources to access things like how to establish trusts and holdcos, those kinds of issues. If you aren’t up to speed on those, you’re going to really struggle to compete in that segment.

Paul Hamilton: Indeed, you have to demonstrate that you’ve got the specialized knowledge to have the privilege to enter that space and, and to be to be referable essentially within that ecosystem.

Dan Richards: Yes. So it’s about understanding what their hot buttons are and then aligning your practice to ensure that you really are able to address the most important hot button issues for whatever client group you’re targeting.

Paul Hamilton:  Interesting. Well, I know that advisors have faced competition for some time now from robo advisors. That’s not new. But how do you think that in and of itself has changed the role of a financial advisor?

Dan Richards: So that’s a great question. Roll back the clock to 2014, where Wealthsimple launched in Canada. In the U.S. you had Betterment and Wealthfront dominating the headlines. And you know, among some advisors there was this end of the world, oh my god, feeling. We’re going to lose our clients and we’ll never attract another client. It will all go to robo advisors.

That has actually proven to be a failed experiment. Wealthsimple is an outlier in terms of their success in Canada. The big players in the U.S., Betterment, Wealthfront, have really struggled. And if you look at valuations, they’re compressed. The big winners in the robo advice l advice space have been players like Vanguard and Schwab that had a very large client base.

And they were able to take a robo-advice platform at a very low cost, like 10 , 15 basis points and offer it to entrenched clients. But what we haven’t seen happen in a meaningful way is significant clients, clients with significant assets, choose to deal with robo advisors. Even 30-year-olds who made their money with a tech startup — when it comes to serious money, [they] still want that personal interaction. Now, they may want it virtually [too], but they still want that personal interaction.

Paul Hamilton: I believe that in the industry, trust is such an important factor. And trust is built between individuals. I think building trust between an individual and an algorithm, it’s something that that may be impossible to do. So, I definitely see a role for an investment advisor in the future because of the nature of the business and the importance of trust.

I know you have a lot of conversations with investment advisors, and I’m curious about what you hear are some of their current challenges and how you think the industry can improve to benefit both the client and the investment advisor?

Dan Richards: So let me preface this with a caveat. I was living, breathing the advisor ecosystem very much in depth until about ten years ago. The last ten years, I focused more of my efforts towards the teaching that I do at Rotman. So, I’m still involved, but less involved. But, you know, when I talk to advisors today about frustration and challenges. the number one issue that I hear from advisors is regulation and paperwork and the sheer amount and volume of that; that it consumes the advisors time, their staff’s time, the friction it creates when they’re signing up new clients.

And you mentioned artificial intelligence. There’s real promise. We started seeing this. We mentioned robo advisors. One of the things that I’ve had advisors say was when Wealthsimple arrived and they signed up just as an experiment, to see what happened they were astounded by how smooth and simple the onboarding process was compared to what they were putting clients through.

So, I think one of the real opportunities is to streamline the paperwork. There’s always going to be a compliance component. Absolutely. But to reduce the pain and the friction for both clients and advisors using technology. And artificial intelligence absolutely has a huge potential role to help do that.

Paul Hamilton: Right. Interesting. I have to agree with that. One of the other areas that completely changed the nature of the business in many respects was the impact of the pandemic. And in particular, I’m talking about the shift from being in the office all the time to working from home. Now, I know that after the pandemic, we’ve moved back into the offices to a certain degree.

But I’m curious, what do you see those effects are on advisors. And are these permanent effects or are they more temporary?

Dan Richards: So I could look at that question from a number of dimensions. Clearly, one of the residual legacies of the pandemic was the desire to work from home from many staff. It was already there before the pandemic. I had advisors say my staff was asking to work from home one day a week. Okay, maybe. Well, now that that has really got proven as possible, with not just advisor’s staff but employees generally, you can see that demand more broadly.

And there’s a real tension among many companies between employees and senior leadership. But, you know, when I talk to advisors, what I hear advisors say is that that I’m trying to do everything I can to get staff into my office, not necessarily five days a week, but call it three days a week.

There’s another dimension as well and that is face-to-face interaction with clients. And I think in many regards that’s more important, than staff issues, without trivializing staff issues. But fundamentally, for most people, I think the relationship happens in person. I think our conversation now would be different if it was on Zoom rather than in person.  But I’ve had advisors say, I really struggle now to get my clients to come down to the office for a meeting for review.

And so in some cases, I have advisors say I’m now having to go to a client that I want to meet. They have to go to clients more than they did before. And so that’s an investment of time. But I think it’s a critical one if it’s an important client. So changing that mindset, I think it’s going to be hard among many clients who kind of have gotten used to doing things remotely.

That worked okay from their point of view. But it’s kind of advisors now saying, okay, I now invite clients down for lunch in my office. So it’s creating a motivation for them to come.

Paul Hamilton: Right. And again, you know, it’s hard to convey all the things that you need to in a relationship and build that trust through Zoom, through Teams, through Webex, and so as you’re saying, the advisor may need to travel more to get that facetime and to continue building that rapport and trust.

Dan Richards: So I think, you know, the transactional component, you can actually do by Zoom. How are you doing with your portfolio. And the changes and so on. But what you can’t do the same way is the informal conversation where you build a deeper relationship with clients and they with you. And it’s maybe harder to do face to face, but for an important client, minimum, minimum, minimum, once a year, should be face to face.

And you always have to do whatever it takes within reason to do that, to make that happen as an advisor.

Paul Hamilton: So Dan, we talked a lot about technology changing the job, in particular artificial intelligence. But what other factors do you see changing the role of advice in the future?

Dan Richards: So how much time do we have?

Paul Hamilton: As much time as you need.

Dan Richards: Let’s start with … I think maybe one of the biggest changes, that has changed almost every profession, and that is how knowledgeable clients are. So, it’s not just advisors, you talk to doctors and doctors will say that a patient will come in and they’ve got a problem and they’ve already been online, they’ve already done a diagnosis.

So I tell students that in 1995, so 30 years ago, roughly, if you ran a business, if you were a financial advisor, if you were a business owner, one of your biggest problems was getting enough information. This was the cusp of the internet. 1995 is considered the year that the internet, as we know it emerged.

Who here today has struggles with finding information? Nobody. We’re all drowning in the volume of information. So I think there are a couple of things that emerge from that. One of them is becoming that credible, objective, trusted voice. So, Paul, I don’t know about you, but when I have a question, any medical issue, I go to a website, I go to the Mayo Clinic website, because I trust the Mayo Clinic. They’re objective, they’re knowledgeable, they’re trustworthy. When I’m looking to buy any kind of electronic device, I go to the New York Times Wirecutter review site because, again, knowledgeable, objective, trustworthy. So, I think the challenge for advisors is how do you do this? How do you become that knowledgeable, trustworthy, credible voice?

The answer is by demonstrating that you’ve done your due diligence and by also demonstrating that your interests are aligned with your client. You know, to be honest, if you go back in time, there were lots and lots and lots of conflicts of interest. I think that is going to be the kiss of death going forward. I think it’s going to be harder and harder to run a successful practice if you’re conflicted as an advisor.

Paul Hamilton: So recognizing that the role of a financial advisor is changing. And I also understand that the average age of an investment advisor across Canada is something like mid 50s. And so succession planning is in order. As a professor at U of T Rotman School of Management, you’re interfacing with young students all the time. I’m curious about your experience and your conversations with students and the potential career of investment advice.

Dan Richards: Great question. And I don’t think I have very good news here on that, because when I talk to my MBA students, just to be clear here, these are not, 21-year-olds. They’ve got all got years of experience. Many of them are international students. So, 60% roughly of our students are from Latin America, from, Asia, from around the world, who are here in Canada because it’s one of the few countries that you can come to, unlike the U.S. or Britain or Australia, and after your graduate degree you have the ability to stay on here to create new life.

What do they want to do? Well, they want to go into consulting or investment banking or maybe commercial banking, or maybe they want to go into product management with a tech firm. Or maybe they want to go for consumer marketing. Financial advice almost never comes up. Why? Well, I don’t think it’s top of mind. It’s not been a route historically.

And I think, frankly, many of the financial advisory firms don’t seek to recruit these students. There is a huge opportunity. A requirement to graduate, where if you do your full time MBA, is to do an internship of three or four months. That internship is an opportunity for you to evaluate students and for students to evaluate you. And so I think there is a great opportunity for financial advisors who are looking to bring bright, motivated, hardworking talent to seek out that opportunity. But I think it’s just an awareness issue for many of them.

And there’s also been a critical mass issue to pursue that route in the past. It’s not viewed as an option. So I think there is for sure a real opportunity to inject some real energy, bright talent and hard work into many advisory practices.

Paul Hamilton: And this might be an opportunity for firms to partner with schools like Rotman to talk about the opportunities of the investment advisory practice and just, you know, what the what the future looks like and create that compelling image, in order to attract people along that career path.

Dan Richards: Yeah. I didn’t want to make this completely about technology, and by the way, I have no tech background. I would consider myself reasonably conversant, but I had an interesting experience in some of my courses that I think is pertinent to financial advisors.

So one of the courses that I teach is Introduction to Marketing and that’s to 350 art students. This is part of a program that the University of Toronto has where art students can take four courses and earn a Business Certificate And so I said, let’s run an experiment. Let’s create an online tutorial that students could enter questions and get an answer.

And so I had my teaching assistants, load all of the readings and the lectures and so on. And we used an open platform, which means that it picked up my content, but it also picked up content outside. And so I would say as an experiment, it was maybe a B-minus. It got reasonable utilization but the problem was when we looked at the quality of responses, it was erratic.

There was what you called hallucinations. So because it’s an open system some of the answers that leaked in I looked at and said like, where the heck did this come from? So okay, that was the starting point. I’m doing the same again this year. Except it’s not an open system. It’s a closed system. So the only information that students can access is what my teaching assistants have loaded into.

And so now we’ve seen a significant pickup in terms of the number of questions. So students are asking questions that they wouldn’t ask teaching assistants because there’s an awkwardness and there’s a little bit of a friction there. But if you make it that simple, we’ve seen a real spike in terms of questions. And by the way, that now lets me identify where there are gaps, because if I see a pattern of questions, obviously I need to elaborate on that.

Let’s think about the financial advisor world. Let’s think about saying to clients, look, we’re always there to answer your questions. But if you have questions at any point relating to your portfolio, to your financial plan, to what’s happened in the market, we’ve created this resource that lets you tap into that, get your questions answered, and so that does a couple things.

One, I think it builds your trust as a financial advisor. But the other thing now, and you can make it clear to clients I will be able to know which question you ask. Now you’re able to identify if clients are asking questions you’re able to be proactive and reach out to those clients by saying something like:

So I wanted to kind of follow up on the question you asked. So just to be sure that we’re 100% comfortable about the risk in your portfolio, or will you have enough when you retire? What happens if you buy a house?

So that’s an example of technology that exists today that is not broadly being utilized, but I think could have a big impact in terms of the level of trust that you build as an advisor and how well clients feel served.

Paul Hamilton: Dan, what are you seeing in terms of the composition of advisory teams these days?

Dan Richards: Paul that’s another area where we’ve seen very big changes. Not that long ago, there were lots of examples of successful advisors who were one solo advisor and that was it.

And there are a few cases of that still, but very few. What I’m seeing today is bigger teams, more specialization within teams. And really, it’s no different in many professions, whether it be lawyers and accountants, it’s hard to build a really successful practice on a small scale. So one of the big changes we’re seeing, and I think we’ll continue to see, is the growth of teams.

And by the way, there’s been a change in head office level as well, where in some cases head offices have gone from discouraging large teams. I can remember in the 1990s, having a conversation with somebody at a very senior level at one of the brokerage firms, who said, yeah, you know, you build teams it creates overhead., it becomes ugly if you have to lay people off

Now, firms are really encouraging larger teams to the point that the entry point to join the business is less and less starting your business from scratch. There are a few cases like that happening but the failure rate is so high, it is so hard to get to scale as a new advisor coming in.

If you come in and you’ve got connections, that’s a different story. But if you’re starting from scratch it’s really hard. Much more commonly now, firms are encouraging successful advisors to bring in associates to deal with the day-to-day communication for all but the very biggest clients in the hope that advisors will then use that additional time not to sit on a beach, but actually be proactive, to bring in more clients.

Paul Hamilton: You know the unique skill set that many successful advisors have. Beyond creating a deep relationship with the top clients, is creating bonds with potential new clients. Being able to create that impetus to make a potential client who’s got a significant amount of assets to want to join their team.

So, given these changes that you’ve been speaking about with us today, and with technology dictating the changes across a whole bunch of different industries, not just the financial industry, are there certain skills or training that you would recommend for advisors to prepare themselves for the investment industry of the future?

Dan Richards: So, there are many, many answers to that question, but let’s talk about artificial intelligence. It clearly is changing already how advisory practices are working. So let me give you an example. I talked to somebody at a large institution, and for smaller clients they have a group of salaried financial advisors who operate remotely.

At one time, they would, after those calls, send a client satisfaction survey to those clients. They no longer do that because they now get a sentiment analysis score after every call based on what the client said, the tone of voice, the questions they answered, and that technology is not somewhere in the distant future. It’s there today. So that’s something that an advisor could do today if the firm has the platform to do that. That’s a trivial example of what’s possible.

I had lunch last week with someone I’ve known for a very long time running a successful business that’s not tech related. And so I said to him, how comfortable are you with your understanding of artificial intelligence and the extent to which your firm has adopted that?

And he said, not in the slightest, not at all. So I shared with him the advice from a prof at Wharton, Ethan Mollick, who would be considered to be one of the leaders in the artificial intelligence space. And so Mollick says you should do two things, and I think every advisor should do these two things. First of all, sign up for the premium version of one of the large language models. You can pick whichever one you want. It could be Gemini, most people would say ChatGPT, but pick one. But Mollick says just signing up is not enough. It’s like an advisor who says, so I made a resolution this year that I’m going to learn more, so I bought ten books and those books are sitting beside my bed and somehow the knowledge is going to enter my brain by osmosis. So, the first thing you do is you sign up for that premium service, it’s not expensive $20, $25 a month, but then you make the commitment to use that.

Pick a number five, six, eight, ten, twelve times a day. You have an open browser and you get into the habit of looking at that. By the way, you can use that as a search engine rather than Google. I’ve done that myself. And what I found is that within three or four weeks it became a new habit. It became instinctive I no longer had to think about it. Over a period, three or four weeks I no longer had to consciously do it because it had been integrated in my routine.

So what I advise advisors to do, is to recognize that artificial intelligence, it’s going to change all of our careers. Now, if you plan to retire in the next year or two, maybe less important, but if you’ve got a longer term horizon, it’s imperative that you get up to speed understanding how it works and you marshal the potential of artificial intelligence for your practice.

Paul Hamilton: I think that’s great practical advice. Thank you. Dan, I could spend hours speaking with you about this topic and other things that you’re an expert in but maybe we’ll have to defer that to the next time. But I want to thank you very much for your time today, and I look forward to the opportunity to sit down with you again in the future.

Dan Richards: Paul, delighted to talk today.

 

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