First Trust ROI Podcast
On the ROI podcast, we discuss some of the most important questions facing investment professionals today, ranging from macroeconomic views, to perspectives on the equity and fixed income markets, to insights on practice management. We aim to cut through the noise, examine the data, and provide fresh insights to investment professionals as they help their clients find better ways to invest…seeking to generate attractive returns on their investments.
First Trust ROI Podcast
ROI Podcast | Episode 26 | Should Financial Professionals Feel Threatened or Empowered by AI? | Chris Jeppesen | July 29, 2024
In this episode, Ryan talks to Chris Jeppesen, Chief of the Advisor Practice group at First Trust Chief of Advisor Consulting about what sets financial professionals apart from their peers.
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Hi, welcome to this episode of the First Trust ROI podcast. I'm Ryan Isakainen, etf strategist at First Trust. Well, our target audience for the podcast has always been financial professionals, and so we've hosted economists and strategists and portfolio managers. Well, today, I'm excited to be joined by Chris Jepson. Chris is the chief of advisor consulting group at First Trust, and his job is to advise financial professionals on what makes their business more productive, more efficient. He has spent the last couple decades studying success, and so that's what we're going to talk about today what are some of the attributes that make a successful financial practice?
Ryan:Thanks for joining us on this episode of the podcast. All right, chris. Well, thank you for making it in for the podcast. Glad to have you on for the first time. Hopefully it won't be your last time. No, it's a pleasure. Thanks for having me on, ryan. So you are the chief of advisor consulting group, the First Trust Advisor Consulting Group. What I understand that to mean is that you consult with financial professionals. You've done so for the last couple of decades, and your goal is basically to help them become more efficient, more productive. How to win new clients, keep old clients. Is that a good summary of what you do?
Chris:It's a fair summary. I don't know that I would say that I'm helping them as much as other advisors are helping them, so I kind of see myself over. I guess it's been like 27 years now of just learning from the best in the industry and how they've tackled particular issues Retaining clients, getting new clients and running their practices, learning what they're doing that's successful and then just sharing it with others. I wouldn't say there's too much original thought coming from my side.
Ryan:You've also written some of this down in a couple books that you've published along with Duncan McPherson. There's the Blue Square Method is your most recent, and then there's the Advisor Playbook, which I just learned was an international bestseller. Can you tell me what it takes to become an international bestseller?
Chris:Well, probably many of our listeners know Duncan. Duncan lives in Canada, so apparently someone in Canada so apparently someone in Canada bought the book and made it an international bestseller. But it's been a tremendous success and gratitude to all the advisors who have found it useful in their business. I love to get the feedback.
Ryan:Yeah, so our target audience is really those financial professionals that watch the podcast. Obviously, it's out on all the platforms, so there are some non-professionals that will watch this podcast, but it's mainly geared for those people, so those of you listening, if you're a financial professional, you'll probably find this more useful than those that aren't. But as you think about that target audience, there's a whole range of success. Some people are really successful and it seems like they're not even trying. Some people are trying really hard and they're not successful. So let me start off with a really broad question. As you observe, as you study these advisors, what are some of the traits, some of the things that they're doing that make them more successful?
Chris:You know, I don't know that it would be that different in any industry to identify those that tend to excel, whether it's dentists, doctors, attorneys, cpas the best in class typically carry similar attributes In financial services. I don't know that it's any different. I would say that it boils down to probably three things, and I talk about this in the advisor playbook. The first thing that I found for an advisor to be consistently at the top of the game is to put their client first is to have integrity. You know the adage. They say if you have integrity, nothing else matters, and if you don't have integrity, nothing else matters. And so always having a client-first mentality is, I would say, the primary, first characteristic of an elite advisor team. The second would be you know they're competent, they're technically proficient. They don't take it lightly what they do. They're always on the lookout for whether it's solutions that they could bring to the client that are better, or kind of staying up to date on what's working on the solution side of things for their clients.
Chris:Right now we hear a lot about that right On the direct indexing side. You hear about it on private equity exposures and things like that. They're just, I would say they are, they're technically proficient in that capacity. That'd probably be the second characteristic and the final one and this is, I guess, if you were to say this is what closes the loop. This is what makes them unique from the advisors that do the first two really well is they have an ability to communicate their value in a unique way. They can verbalize it really well. But if you can't communicate what it is that you're doing in an effective way, you could sit off and be plateaued as an advisor for 20 years, all the while having great integrity and very technically competent, but just haven't quite figured out how to communicate what that value is that you bring to the marketplace right.
Ryan:So that's an interesting point, because it seems like if I were an advisor trying to communicate my value proposition and make sure everyone knows about it. You know I'm the sort of person that doesn't like to feel like they're bragging about. You know, this is what I'm really good at. So how do you do that without feeling like you're boasting about you know how great you are.
Chris:I think that's once again not just related to financial services. Any fee for service professional would probably feel a similar strain or stress, but there are techniques for doing that. I try to encourage advisors. When someone asks, so what makes you different, why should I choose you over any other advisor that I might be considering, Maybe just answer it in a storied way, Something like you know great question.
Chris:We as a team have asked our best clients what it is that we do that they have found of most value, and oftentimes it isn't what we might think it is. They've told us that it's our structured communication that we've lined out, that they can count on us touching base with them at least, that they can count on us touching base with them at least quarterly for a strategy or tactical call. That seems to be one of the biggest things. The second is they tell us that nobody understands what they're trying to accomplish as well as we do because of our in-depth discovery process for knowing our clients. So you see, kind of that format of I'm not just telling you what we do, I'm telling you what our clients value that we do and in a way, I'm showing you how we're unique without oh well, we do this better than somebody else.
Ryan:Sure. So I've listened to you speak to groups of advisors for you know we've worked together for 25 years or so, Chris, and one of the things that I've always taken away is the way that you encourage advisors to phrase things Like the specific words can have such a difference in nuance, and how much meaning you're sort of communicating to those folks.
Chris:Language is huge and there's great words that you can use to communicate, and there's also words that are detrimental or undermine maybe what you're trying to communicate, and even non-words, and you'll notice, even when you do podcasts, maybe when you're speaking with a guest, that people might have a tendency to say um or uh a lot right.
Chris:Have you ever sat through a presentation where you're listening to somebody and every three or four words they have to say um, and about five minutes in you can't even pay attention to what they're saying. You're counting how many times they're saying um. And so we spend a little bit of time with advisors and helping them be a little more self-aware, implementing some of the new tools today, too, that allow them to record themselves in a strategy meeting with the client. That can also give them feedback as to, maybe, words that resonate, non-words that might be undermining credibility.
Ryan:Sure, I can't tell you, especially early on in my career when I would do more public speaking that I you know I wasn't as familiar with it and hadn't done it as much and I'd watch myself recorded and I was shocked at how many of those you know. And I watch myself on podcasts and I still pick it up occasionally and it drives me crazy, but at least you're aware of it.
Chris:Well, it's not until you record yourself. I mean, I think everybody who's ever played golf and they're on the range, everybody knows they're swinging like Tiger, that's right. And then you watch the video and you're like I don't know who that is, but that's not my swing. So it's the same thing in speaking and I encourage people to record themselves and they can self-diagnose for the most part on where it's coming off the rails.
Ryan:One of the great things about this industry financial services, giving advice to people is the way that it evolves over time, and with that you've got new opportunities but also new challenges, and I'm curious, as you talk to advisors, what are some of the biggest challenges that you're hearing, that they're communicating to you? What are the challenges they're facing?
Chris:Well, we see some very serious headwinds coming, but those that foresee them will find them as tailwinds. Artificial intelligence would be the one that I'm speaking about most with the teams that I'm working with. It's going to be an incredible tailwind for the advisor that embraces its capabilities and those capabilities are wide-ranging. But the tools that are already available for financial advisors, financial professionals, to use are outstanding, incredibly helpful in scaling a business. But for the advisor that puts their head in the sand and says, look, I'm pretty successful at what I do. This has worked for me for the last 25 years. I'm good.
Chris:I saw this with the whole robo-advisor thing. I didn't get caught up in it and everything seemed to work out fine for me. It won't work out fine. This is completely different, and some of the capabilities, for example on scale that I won't mention the firm name, but one of the leading wire house firms on Wall Street right now have some of the capabilities to record their strategy and tactical meetings with clients and translate those to text, summarize the meeting, create next action items and bullet points and sample summary email follow-ups. It's all integrated within the calendar. Not only does it record the meeting and help them for the follow-up which you're saving.
Chris:My guesstimation would be this one AI tool for strategy and tactical summaries should save an advisor 15 hours a week. This is one AI application of thousands that are coming, and it's also one that, like what we were talking about earlier, it will give you feedback on how you do during the strategy meeting. It's watching the face of the client to see what words you're saying that are resonating or topics that they really are finding intriguing, and it'll also say what words you might be using or topics discussing that aren't resonating. It will tell you how many times you used um or uh or like right, so it'll give you a lot of that type of feedback. Can just whether this AI thing is some temporary fad, it will up in their business. There's no doubt in my mind. It's not that AI will replace a financial advisor maybe some advisors, but it will be the advisor that embraces AI that takes the place of another advisor.
Ryan:I think that's a good way to look at it. It's both a threat and a tool to actually boost your productivity, boost how well you do your job, how well you communicate. I was in South America I think it was last year and having a conversation with a pension fund and I'm speaking in English because I don't speak Spanish very well. I have maybe 11th grade Spanish and it's pretty rusty at that and we had an hour-long meeting and they asked beforehand can we record this? We said sure, and at the end I asked well, are you going to just play that? What are you going to do with this? And they said no, it's actually going to be translated into Spanish and put into notes and we're going to share it with the team. All that we talked about and I was just blown away. This was a year, maybe a year and a half ago.
Chris:Well, in a year and a half it's now transitioned where it's real time and as you speak, it's translated and it's spectacular the capability. Maybe I'm sure many of the audience has seen some of the demos of ChatGPT 4.0 with the translation capabilities. But I mean you think about what it does really well, like what is AI really really good at? And we hear about the language models, how you can have it write papers.
Chris:People talk a lot about that side of things and then people fooled around with the art capabilities of it, which is it's fantastic, what it's able to do there, what it's able to do there. But what it's really good at is taking massive amounts of metadata and looking at billions and trillions of algorithms, of different pieces of data and creating predictable outcomes from that data. And if you think about what, as financial professionals, we're going to be able to do, is let's look at every single input that we possibly can and create the most predictable of outputs. That's what it does really well. So it's coming, and that advisor that relies more on the technical capabilities of differentiating themselves more than the relational abilities will have a more difficult time.
Ryan:So, chris, do you think, from a competitive advantage standpoint, that the ability of an advisor to really be almost like a psychologist, to help people make good decisions, is one of the most important competitive advantages?
Chris:I think everybody listening would be the first to tell you that we're in a relationship business and if you look at the opportunities that lie in the industry for those that embrace that side of the business, how am I going to make the client feel as comfortable as possible, feel that I understand their needs of their family and their legacy goals and their life priorities, and know that I have their best interest at heart? It's gonna be very difficult for an AI, I believe, to do that, but that's why I think therein lies the opportunity for advisors to differentiate will be on the relationship side of things for sure.
Ryan:So as you think about those potential opportunities, you talk to a lot of advisors you have for years and I'm sure you come across advisors that have what seems obvious from an outside perspective. It's just an unrecognized opportunity, it's just staring them in the face. Can you talk about some of those that you've encountered over the years and maybe what you're seeing?
Chris:today. I think one of the things and this is what I tell people that ask me what do you do that aren't in our industry and what do you do for work? And I'm like I don't know. I do anything for work. It doesn't feel like work.
Chris:I think it is incredibly interesting and fun to find out how these advisors that subconsciously are doing things and they're at the top of the game. They're number one in net new assets, they're the top in Forbes and Barron's recognitions. And when you ask them, hey, what do you do that's different from everybody else, like, why are you at the top? They have a hard time verbalizing it because they think everybody thinks like they do. You only know your own life experiences, right, your own perspective is what you know and what all your decisions are based on. If you were to ask Michael Jordan, if you were to ask Michael Jordan, right, hey, so how do you dunk from the free throw line? He would say, well, it's simple. You just run pretty fast and then, when the line comes up, push off. I like to use my left foot and then dunk.
Chris:Sometimes talking to top teams is like that. They're describing it like oh, you mean you don't know or you can't, and what I see that they're doing incredibly well. Second nature is on the relationship side of thing. They, they know their clients and their clients their friends they're. They're not clients, their friends they are. They would hang out with them on the weekend if, given the opportunity, they truly do have the client's best interest at heart. And for those clients of theirs of these advisors that feel that their advisor still has capacity, they think that it's a favor that their advisor is doing. When they think that it's a favor that their advisor is doing when they'll talk to one of their friends, the advisor isn't asking a favor of them to introduce them to someone. They know who their advisor is best suited for and it is a value-added service for that advisor to meet with one of their friends and that's why they just don't have an issue with bringing in new assets, chris.
Ryan:We're recording this podcast in mid-July and the stock market is hitting, I think, the 35th new all-time high of the year. It's been a remarkably resilient market. One of the things that I was wondering the other day is is this environment better for our business? If you're a financial professional, if you're an advisor and you're trying to build a business, make it more resilient. Maybe bring in some new referrals. Is this environment better or is it better to be a risk-off environment when everyone's panicking and the market's dropping 20%?
Chris:I think if you were to ask advisors what market they'd rather have when the market's hitting an all-time high, most would tell you oh, we just need a strong correction. We really need this thing to correct hard enough where people begin to appreciate and value what it is that we bring to the table, because right now they can look at an SPY right over the last 10 years and look at how their advisor's done over the last 10 years and be like so hold on a second, what am I getting here? And for the advisor that communicates that their value is in some way related and they haven't future paced their value as something beyond just the return of the market, those advisors that haven't done that, I think, would say they would love a good market. For the advisor that's positioned to bring value beyond just shadowing the index's returns, they would like a correction because that's where they stand out.
Ryan:So, as you're meeting with teams, as you're meeting with individual advisors, they would like a correction because that's where they stand out. So, as you're meeting with teams, as you're meeting with individual advisors, do you ever find it difficult to be just brutally honest with people? Because I'm someone who doesn't generally like conflict. It's not that I'm afraid of conflict, but I feel bad saying look, this is what you're doing wrong. Do you ever find that to be a challenge?
Chris:I think there's tact to that, yeah Right. So I try to approach it as asking a question that brings them to the conclusion that they've been completely off the rails and whatever their tactics were up to that point. And it's not too difficult, advisors, if I'm sitting down with them, they contain the characteristic of having the clay soft. They're open to the possibility of improvement. I'm probably not there anyway, and so they're looking. If you go into the doctor and your back hurts, you're pretty open to the doctor telling you what you're doing. That's hurting your back. So I haven't found that to be so much of a case. In a larger audience, there might be somebody. If you're speaking to 500 people and you're telling them like, hey, you really need to not do this, there might be a couple. Oh well, I do that and it's fine. Sure, and that's fine too. If everybody employed all of the best practices that I talk about, I'd be out of a job. So I'm glad that there's those that don't still.
Ryan:You know, it reminds me of something that you were telling a story earlier and I want you to share it with the podcast about the importance of being brutally honest, and it was you had an opportunity to play some picked up basketball with some celebrities yeah, the Jonas Brothers. Can you tell me about that?
Chris:Yeah, I guess I don't know if this makes the cut or not, but it was back in the day when the boys were pretty popular and we had a little neighborhood three-on-three tournament and I was well like I was telling you they would. I guess I could pick on individual ones, but they would shoot these shots that were so outrageously bad, you know out 10, six feet outside of three-point lane and hit the top of the backboard and bounce out of bounds and their friends would all say, hey, good shot, Good shot, you got the next one. And they would just keep feeding them the ball. They wouldn't pass, they would shoot every time.
Chris:It was like a black hole. You throw the ball and it's gone, You're not going to get it back. And I was like, isn't that interesting how easy it can be to fall into that trap of just surrounding yourself with people that won't be brutally honest, to open you up to the possibility that maybe you could be doing it differently. Open you up to the possibility that maybe you could be doing it differently. Yeah, and for the most part, like I said, that characteristic of top teams they're pretty open to getting better.
Ryan:Yeah, they're willing to take some constructive criticism and willing to maybe put some of the things in.
Chris:I would guess they're not that great basketball players to this day because they haven't taken, but hey, maybe they have been enlightened.
Ryan:The other thing I wanted to ask you about we're in a demographic period where there's this huge baby boom generation who's getting older and over the next several years there's going to be a big transfer of wealth from one generation to another, and this isn't something new. Obviously, this happens with each generation as they pass, and one of the things I wanted to ask you about was, when that happens, the advisor who has the parent and the children inherit that wealth, wealth. What are some of the best advice that you can give to them to maybe help them make that transition and to hopefully retain those kids as clients?
Chris:I think, one thing that a lot of people don't talk about when it comes to that, if you just think about it right, so say you've got some parents, say they've got $5 million and three kids, right, so you have two clients husband and wife's got $5 million, they pass. They've got three kids and they've got spouses, so now you have six, that $5 million. When it passed it's not like they didn't know the money was coming and probably had ideas for that money before it even hit. There's boats, there's paying off houses, so that $5 million becomes probably $2 million really quick. Now you've got six people at 2 million instead of 1 at 5.
Chris:A lot of people are like, oh, we want to retain all of the assets In situations you do sure, but the reality is, do I want three times the work for half the assets, or do I want to find another person with 10? So yes, we always want to be delivering an experience and we want to be connected to that second generation. What I found is, in a lot of cases it can be there's reasons why they don't retain the assets, regardless of how good they are. The bigger opportunity, I don't believe, lies in the demographic of the investor. The biggest opportunity lies in the demographic of the advisor.
Chris:You look at right now, as we sit, over 10 trillion in assets. 40% of the assets that are managed today are managed by 37% of the advisors, and those advisors are retiring in the next eight years. So, yeah, there's a big demographic happening to the population, but the bigger ones the advisors, and when they retire. You're looking at 40% of the assets in play again and for that advisor that hasn't established how to competitor proof and provide a wealth plan, a transition for those clients, and hasn't communicated how to do that, there's going to be big opportunity there for the, I think, for those that are looking to grow, and if you're one of those advisors that's retiring in the next eight years, I would encourage you to have a rock solid transition plan where every member of the team can congruently communicate exactly what this value proposition entails, and that it not be built around a maverick talent. So that's where, I think, the opportunity lies demographically.
Ryan:Yeah, that's really good advice, you know, the other thing that I've heard you talk about through the years is helping advisors become more efficient in the way that they operate their practice. You talked a little bit about AI, but one of the things that I've found really interesting as I've listened to you talk has been really understanding what sorts of investments can make it into a portfolio. Can you talk a little bit about really having an inventory that's manageable, because I think that's a really powerful thing that you've talked about.
Chris:We talk about and it's constantly and it's an ongoing process. It's not a one-and-done event. Growing down is the term that we use. Growing down is about growing down the number of holdings that you're trying to follow. You know we hear always a lot about Warren Buffett and his investment prowess. If you think about how many holdings that Mr Buffett would hold, it's not vast. It's not near as much as a single mutual fund. So he's very focused in what he holds. He's yet diversified but is responsible and vigilant over those holdings. So we talk a lot with advisor teams. When we sit down with them and they're managing, say, $500 million in assets and we say, all right, so if this $500 million was in all cash today and you were to put it to work today, how many holdings would you be buying? And it's pretty refined. You know they're probably looking at 20, 25 holdings, but currently it's sitting in 500 holdings. What was it Mark Twain said Put all your eggs in one basket, but then watch the basket.
Chris:So we talk a lot about growing down and also growing down is about knowing and working with those clients, those friends that fully understand and appreciate what it is that you do and are willing to implement your advice. That's kind of the litmus test. Stop spinning your wheels with folks that aren't willing to follow your advice and I don't say that selfishly, I say that more altruistically that if a client isn't willing to follow your advice you mentioned earlier this is July. Now mid-July we're hitting all-time highs in the market.
Chris:We've got interest rates right now in flux. Nobody knows what the next move is going to be. We've got geopolitical tension, an assassination attempt on a president. We've got geopolitical tensions like we've never seen before. A lot of things in flux right now. To convince me that that means they don't need advice. They need advice, and if it's not yours that they'll follow, I would say care enough about them to help them find someone whose advice they will follow, because they're going to need it. And so we have those conversations. We refine down our number of households to those that fully appreciate and understand the value.
Ryan:Let me push back on that for a second, because there's some advisors that are listening to this and they're saying, well, that's easier said than done. This is a really difficult client, who's also my second biggest client, who's got a lot of wealth. Should they still be finding a better advisor for them that will listen to their advice, or is there a line at which maybe that's not as cut and dry?
Chris:The beauty of this business, one of my favorite things of this business, is that you can set the rules you live by. So an advisor has that discretion to be able to make that choice. But I think everybody would tell you if someone's not taking your advice, how are you helping them? Are you a means of execution? Then If you're a taking your advice, how are you helping them? Are you a means of execution? Then If you're a means of execution, then you are at the discretion of price.
Chris:You're a commodity. No advisor worth their salt wants to be considered a commodity, and so we would emphasize that you have a great talent, you're technically proficient, you have integrity in place, you're able to communicate your value, find those that appreciate it. We only go around once in this life, and why spend it with people that stress you out that won't follow what it is that you're asking them to do? Life's too short, and I haven't found an exception to that yet in 27 years of an advisor that did disassociate with somebody that was a troublesome type relationship and weren't grateful that they did and didn't replace them with a gold filling.
Ryan:So maybe a little bit of pain in the near term, but for long-term, for the long-term building of a business that you enjoy, that you feel rewarded, you've got your integrity intact. You think it's worth it.
Chris:Absolutely. Yeah, no question, and I do get that it would be difficult, but it's a matter of time anyway. If you are a means of execution, if they don't take your advice, they may be a good client now, they won't be tomorrow. It's a matter of time. They're not dumb. They didn't get to that point of having all of those assets without understanding that I'm not paying anyone if they're not bringing value to the table. Your advice is your value.
Ryan:So, chris, one of the questions that I like to ask guests of the podcast is what you're reading, whether it's an audio book, whether it's a paper book. I know you're on the road a lot. When I'm on the road, I tend to listen to audio books and then, when I'm sitting on an airplane, I open up my paper book. Is there anything you've read recently that you'd recommend I'll do two.
Chris:I'll recommend a podcast that I listen to that I really like. Is it the First Trust ROI podcast? Yes, that's a good one too. It's a good one, but Morgan Housel's I don't know if you listen to him. He has a wonderful podcast.
Ryan:He wrote the Psychology of Money.
Chris:Some good books, really good read. But right now I'm reading again Hillbilly Elegy. Ah, jd Vance's book, well-timed, yeah, and I really really like that read and I just want to kind of refresh my mind. I just remember reading it the first time thinking, wow, what an unbelievable life experience. Life experience what an incredible, you know American success story. That that is to come from where he was to what he was able to accomplish. This is before the most recent what a couple days ago, nominated for the Republican vice president, I was like, wow, I don't think there could be a better choice, and I guess that tells you kind of where I lean politically. But I just loved his story and so I'm actually reading it again.
Ryan:Just to stay with it. Yeah, story of overcoming obstacles and hope. That seems like a pretty good story. It's good. It's good, yeah, all right. Well, hey, chris, as I said when we opened up, thank you for taking the time to chat with us on the podcast your first appearance. Hopefully it won't be your last, and thank you again for joining us. And thanks to all of you for joining us as well on the First Trust ROI podcast. We'll see you next time.
