Should the RIA business ever hold a sale? Why not.

November 26, 2010 — 4:37 AM UTC by Elizabeth MacBride

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Black Friday has rolled around again. I’m celebrating retailers’ annual customer appreciation day by watching it, as usual, from the relative peace and quiet of home.

This year, after more than a year of covering the battle over how and when to extend the fiduciary standard for broker-dealers, my mind is wandering to the question of trust, how it greases the wheels in the retail business and how, at the moment, the lack of it is gumming up the works in the financial services industry.

As I’m scanning the newspaper flyers and watching the television ads for the Harry Potter Hogwart’s Lego sets and the LCD TV’s for under $200 at Wal-Mart, and latest Apple iPod Touch at Target … I’m thinking about how a system of regulations, information and transparency combines to create trust between retailers and their customers.

Americans generally take for granted how well this system works and how. On this Black Friday, shoppers them have a reasonable certainty the products they are buying will be of quality, that they can return them if they are not – and for the particular case of Black Friday, that the advertised price will be what they pay.

The system works so well that when it fails – as in the case of more and more products made in China — the headlines kick in.
To a certain extent, retailers are self-governing and cooperate even in the midst of intense competition – witness Black Friday itself, which is basically an enormous jointly held sale. Retailers also cooperate to support the U.S. Census, which is a treasure trove of data that the industry uses to site stores and design promotions.

We don’t usually think about the regulators with power in the retail world, but it exists, and it’s not a simple scheme: Retailers are overseen by the Consumer Product Safety Commission, the Food and Drug Administration, the U.S. Department of Agriculture, and the US National Highway Traffic Safety Administration.

Why transparency matters

Private organizations underpin the government regulators. The work of media outlets like Consumer Reports and consumer advocacy groups is enabled by a high degree of transparency in the retail sector.

Financial services, meanwhile, is way behind when viewed in a retail framework. In fact, one of the biggest changes in America over the past 25 years is that financial services has become a mass consumer business – one in which most RIAs are on the front lines.

Mutual funds aren’t a perfect proxy for investing, but these stats from the Investment Company Insitute tell us something. Less than 6% of Americans were invested in mutual funds in 1980; today, more than 51% are. The booms and busts that have always defined Wall Street now play out in Main Street.

Just in the past few weeks, RIABiz has found executives alluding to retail successes in talking about where they’re headed — Starbucks and Zappos in recent articles. One size doesn’t fit all, or how advisors ought to adapt their strategies for their clients’ behaviors and Advisors in the airport shuttle make suggestions for taking the MarketCounsel Member Summit to the next level.

But when compared to those retailers, RIAs and the organizations that support them lack almost all of the elements of the infrastructure that enable their success. The data on clients and sales is in its infancy, for instance. There’s little cooperation in the industry – though in Washington, D.C., where organizations are just beginning to shift from defensive mode into considering how to support consumers, and in the process benefit advisors. The marketing legwork necessary to figure out to communicate well with clients has not yet happened.

Could the concept of a Black Friday ever work in the advisory business? Maybe advisors, on a pro-rata basis should take the day off their management fees for the quarter.

Maybe most importantly, if consumers are going to make educated decisions about financial services, marketers need to figure out how to translate the services and products into concepts that consumers can understand. Transparency is a concept that is only JUST arriving in financial services – with fee-based RIAs again, being on the front lines of the movement.

People in financial services tend to think that American consumers aren’t sophisticated enough to be able to navigate the financial services marketplace. I’d say a populace capable of navigating Black Friday – the sales, the returns and the comparative qualities of everything from the Nintendo DS Lite to the iPod touch and the project Runway Showing Machine, has a decent shot.

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