A winning equation: Become a life advisor; avoid phase locking

By Jason Lampa MBA

College Savings Bank


There are many ways that a financial advisor can build their book of business. The best financial advisors have a structure in place to provide first-class service for their existing clients. This new customer service model recognizes that providing excellent service leads to attracting the right client. The importance of customer service can easily be measured by the number of books that can be found on customer service at your local Barnes & Noble. Though this may seem like something that professionals would easily recognize, it is a new concept to the financial services industry.

The traditional model, encouraged by securities firms, is to have their advisors open as many accounts as possible. Surprisingly, there still firms that require their advisors to open a minimum number of accounts per month during the first couple years in the business. Though larger accounts are preferable, these companies still put a high value on the number of accounts an advisor opens, rather than focusing on the quality of those accounts.

You can find the roots of the second part of the traditional model in what has become known as the "Brinson Study," promoting the use of modern portfolio theory and the belief that 95 percent of portfolio returns are from asset allocation. This is the foundation that advisors have relied on when designing portfolios for their clients. I believe it a safe assumption, although I have faced much backlash, having said in the past that modern portfolio theory has failed advisors and their clients.

Finding a formula that affords you the time to attract affluent investors while also providing investment management services and building strong relationships with them is difficult. During the next couple of months, I will mention solutions that may be a fit for your business.

The business model

The best advisors understand the importance of providing first-class customer service. This model recognizes the desire for investors to have a personal relationship with their investment professional. As people live longer, their need for advice on critical life issues increases. They want a trusted source to which they can turn.

As competition has increased in the financial services industry, the model focusing on the number of accounts that advisors open has failed. While the intent was to increase revenues for the firm at which they worked, it seems to have resulted in an inefficient use of human capital. Those advisors that manage to survive spend the next couple of years devoting a majority of their time to unproductive accounts, leaving almost no time to build quality relationships with top clients. I have found that advisors who have built their business this way become extremely defensive when you casually mention that there may way to make a shift to a business model that frees them from the complexity of many accounts and little production.

Most recently, I cross paths with Rod Hagenbuch, co-author of Becoming a Life Advisor: A Guide to The Ultimate Client Service Model. Along with his business partner Richard Capalbo, he has developed a business model that has proved to be highly effective and is supported by significant research. One of the most startling statistics that these gentlemen uncovered during the development of this book was that the average financial advisor spends 60 percent of his time on accounts generating four percent of his business. In other words, the clients who bring in 96 percent of the business for that advisor receive 40 percent of their time. It is no wonder the success rate is low in our industry.

Becoming a life advisor

The financial advisors I speak with are increasingly finding that they cannot possibly spend enough time with each account to provide quality service. Moreover, at some point they come to the realization that they do not have the time to develop the expertise necessary to be all things to all people. As Hagenbuch and Capalbo mention in their book, advisors wake up one day realizing they have a book of ones: one retirement plan, one doctor, one lawyer, one plumber, etc. The book of one's is a direct result of the initial marketing activities put forth by the securities firms in which they began their career.

As I mentioned before, the life advisor model is built on quality: few clients, strong relationships, and then replication of those clients through a focused referral strategy. Becoming a life advisor is a great way to build your business and not be relegated to the endless hours of cold-calling.

There are five steps in the life advisor program:
    Step 1: Strategic networking
    Step 2: Niche marketing
    Step 3: Community marketing
    Step 4: Social prospecting
    Step 5: Reciprocity marketing
We will explore these options in greater detail in future articles.

The philosophy of the life advisor model may also resonate with pre-retirees and those who have recently retired. It allows for an advisor to come across as someone who is not just about making money, but someone who truly cares about their clients. It is a holistic approach that builds trust and provides an easy way to get more quality referrals.

Avoiding phase locking

The process of phase locking occurs whenever the chaotic actions of the individual shifts to the ordered actions of a collective system -- when individual behavior shifts to a collective behavior (Briggs and Peat, 1989). This concept applies well to asset classes and investment styles. During times of normal market behavior where returns are normal distributed, asset classes and investment styles behave differently, exhibiting semi-static correlations. However, during times of market turmoil, as we saw in 2008, these asset classes and investment styles begin to lock into the same downward spiral, exponentially increasing market risk. As I may have mentioned previously, what is the purpose of diversification if it fails to do the job when it is needed most?

The solution to providing true diversification is finding investments that have the ability to avoid the death spiral of phase locking.

Because of technological advances, the investment management platforms that are in the market today have multiple ways to provide investors with the diversification necessary to minimize downside risk. In the past, the naïve approach has been to move to cash. Now, it is possible to stay in the market during times of extreme volatility and provide your clients with solid returns, even when the traditional equity markets may be slumping.

In the coming months, I will provide in-depth examples of the phase locking concept and methods to avoid the death spiral.

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