BlackRock's Liz Koehler on Financial Advice, Using Models, and Raising the Bar

Stay tuned for additional important disclosure information at the end of this episode.

Jonathan Linstra: We operate in such a fascinating time. Behaviorally, we also have a lot to absorb with the landscape we haven't witnessed in 15 years. And financial advisors are playing a pivotal role in helping clients navigate this change. So, what does BlackRock, the world's largest asset manager, have to say about this? What might we expect from here? Hello and welcome to Simple But Not Easy, a podcast from Morningstar Wealth where we turn complicated financial developments into actionable ideas. I'm Jonathan Linstra, Managing Director of the Americas for Morningstar Wealth, and today I'm delighted to be joined by Liz Koehler, Managing Director and Head of Advisor Engagement for BlackRock's US Wealth Advisory business. Together, we'll dig into the latest advisor insights covering the use of models, behavioral application and evolving investor needs. If you'd like to know more about how we can support advisors and portfolio ideas and application, we welcome you to email us at simple@morningstar.com.

Now, let's get started. Liz, it's so good to have you on Simple But Not Easy today. Thanks so much again for joining us.

Liz Koehler: Great. Thank you for having me. I'm excited to be here.

Linstra: Yeah. It's going to be a great conversation. I'm really looking forward to it. But I got to ask right off the top. We just introduced you as the Head of Advisor Engagement. Can you just take a moment or two and just tell us a little bit about what that really means? How do you and your team impact the lives of advisors and investors every day? What are you guys doing?

Koehler: Yeah, of course. So, yes, I lead a team called Advisor Engagement at BlackRock, and it really is dedicated to supporting financial advisors when it comes to growing their businesses and serving their clients. So, what does that mean? That includes things like business consulting, study groups, events, educational content, digital tools. We have various subject matter experts on the team on topics like practice management, behavioral finance, Social Security, women in investing, health and wealth and so much more. And we also have the privilege of working with some of the best advisor teams across the country to be able to hear and also to share some of their best practices. So, it's incredibly meaningful work. It's been really rewarding. I'm very fortunate to do it.

Linstra: It sounds amazing. I must ask right now in real time is there any segment of that that's getting an abundance of interest right now from an advisor perspective?

Koehler: Yes. I would say many of the top teams that we work with think a lot about people, leadership teams. So, whether that is leading the most effective team, tapping into what gives the individuals on their team the most energy, the best way to serve their clients and also thinking about succession, right, what's next. Those are topics that come up a lot.

Linstra: Fantastic. You haven't mentioned it yet, but I must. I believe it was just a few years ago now, you actually pursued a degree in applied psychology. Can you tell us a little bit about that and how you implement and utilize that education in your current every day?

Koehler: Yes, thanks for asking. So, I did. I pursued a master's degree in applied positive psychology at the University of Pennsylvania. Really, I've always just been fascinated with the power of our mindsets, and I wanted to bring some of this research and this insight back to our clients and also back to my own team. There's so much science and research out there that shows how our thoughts and our emotions hold so much power, and there are really interesting and intentional strategies that help us to bolster that and bolster ourselves, and that really contributes to our well-being and our financial well-being. So, there's just an area of passion for me that I wanted to bring back to my work.

Linstra: It's fantastic. Well, the book Mindset by Carol Dweck is a common read around our walls inside of Morningstar here. So, fantastic work that you're doing there, and I can only imagine how that's empowering the work at an advisor level in your team. So, that's really fascinating. So, again, before we get there, we've got so much to unpack here, but you tell us a little bit about your path to financial services. Did you set out knowing that you'd be in this industry? Or how did that come about?

Koehler: Yes. So, I've been in financial services now for about 20-plus years and I've held a number of different roles throughout that time. I started out in marketing, again, back to the power of our mindsets and how clients, how they think what they need. But then I went into product, I went into strategy, I pursued the CFA charter and then, a few years ago had this opportunity to really – the same way that I think advisors are needing to serve their clients in unique and deeper ways, I feel the same should be said for asset management partners, the way we serve advisors. So, I had this opportunity to build this new team that I just described and really think about putting ourselves in the seats of our clients and helping them to grow their businesses and serve their clients even more effectively.

Linstra: You certainly have the helper mindset, if I may. We need more of that, I agree, in helping to navigate advisors and investors in behavior. I know we're going to get into that in a bit on their behavior and their practices and what they find most relevant. But again, full stop too, I want to just pause for a moment and just express our excitement around the new partnership that we have with you as well. Obviously, we have now opened up the architecture on our own U.S. Wealth Platform to include BlackRock models. So, we're really excited about that, and I know you are as well. Any thoughts on that as far as early days here?

Koehler: Yes, we're thrilled. We're thrilled to be one of the new managers in the Morningstar Wealth Platform with the launch of the BlackRock model strategies. And we just believe, like I know you do, in the power and the benefit that models can bring on a lot of different levels, whether it's helping free up time to spend with clients and helping advisors differentiate their value proposition, including during volatile market environments, helping to be able to communicate with more consistency and reach out to clients. There's some real tangible and important benefits. I will just say we're thrilled. We are the number one model manager in the industry with over $100 billion in assets globally. But the last thing I'll just say near and dear to my team's heart in particular is we think that advisors entrust us with their portfolios, yes of course from an investment perspective, but also because we aim to give them additional support and resources to help their practices and to align the models that we have to help clients realize their goals. So, we do have a dedicated team of people in technology and resources to help support advisors and then when it comes to practice management, that's where my team comes in.

Linstra: Yeah, that's a really good point to make, right. It's not just about investment selection or choosing the best model. It's really how they can complement one another. But as importantly, the service model that's built around the investment offerings that's so critical in truly empowering investor success and advisor success for that matter. Because the demands on advisors are increasing daily and they're navigating so much. And I think you bring out a really good point, especially and particularly in times of volatile markets that we've seen. The phone doesn't stop ringing, right – that volume picks up and they need to be spending more time engaging clients, holding their hands through that and truly building that and deepening that relationship. And outsourcing the investment decision or a portion of therein is often what we see the largest teams doing. Do you see the same?

Koehler: Yeah. Advisors play such an important role in this, and we see it. We work with thousands of top advisors across the country every single year and we talked about how thoughts and emotions can turn even the most well-intentioned client into their own worst enemy. And so, whether it's getting out of the market too quickly, waiting too long to invest, following that (hot dot) investment, it's inspiring to see how advisers are truly those coaches and those accountability partners to clients just to help them be more aware of those behavioral biases. There's a quote by Warren Buffett that I love, which is, we don't have to be smarter than the rest. We have to be more disciplined than the rest. And this is an area too my team offers a full program on this called the psychology of investing at blackrock.com/psychology, but it's designed to help empower advisors to have these coaching conversations and help their clients stay calm, stay invested, stay the course.

Linstra: That's fantastic. And Buffett has quoted – well, it's the title of our podcast – Simple But Not Easy. But nonetheless, well put and well said. Thank you for that. So, maybe we'll just pivot for a moment here now, Liz and I'd like to dig into a little bit of your current findings and insights into that investor behavior, even advisor behavior. We live in such an interesting time right now. What are you seeing behaviorally maybe from an advisor perspective and/or an end client perspective?

Koehler: Well, you said it right. Client expectations are certainly changing and rightfully so, and this is driving, we see, a change in the role of the financial advisor. Like you said, whether a client's needs themselves are getting more complex through ageing, through intergenerational wealth transfer, through wealth concentration, and just at the same time, the bar for this "plain vanilla advice" is just moving higher and higher. Clients are wanting more. So, I think in addition to the behavioral coach that we just described, which is so important, we also know that clients today want more outcome-based planning tailored to their convictions and their goals. They want new approaches to retirement and financial protection, and they definitely want a deeper understanding of who they are. And I think that's in all facets of their lives.

So, what we're seeing then from an advisory perspective is a lot of the advisor teams we work with are taking the time to step back and reinvest and take a fresh look at their own practices, yes, to help them grow organically, but also outsource certain elements of their business to scale and spend more of that time with clients on what it is that they value the most. I would say this requires a more well-defined client segmentation model and are focused on where advisors' time is best spent and what gives them energy. Some are creating more specialized roles within their teams. Cerulli just had a research that on average advisors are offering seven different services on average to clients just to be on par with their peers – seven.

And then, the last thing maybe I'll say is, clients are certainly expecting more transparency when it comes to pricing. So that fee awareness also pushes advisors to evolve and improve their value proposition and how they meet financial and nonfinancial goals of their clients' wealth. And so, they're considering more nuanced services, more concierge services. And finally, clients want to know the person behind the brand. I'm sure you're seeing this too. So, a lot of the advisors we're working with are developing their own personal brand or story because people don't just buy what you do, they buy why you do it. And so, that authenticness is what a lot of clients are looking for today.

Linstra: Great. Really interesting work that you're finding and the insights you're able to provide. Curious if you were to stepping back and having seen hundreds if not thousands of practices and advisors, if you had to, what are one or two of the most common challenges and/or obstacles and how are you and your team meeting those needs?

Koehler: Well, I think one thing that we see is this notion of two major trends that are occurring in the marketplace, and it's not necessarily a challenge, but it creates a need to re-envision and reimagine what you're doing, which is this increasing concentration of wealth with high-net-worth clients. It's grown over 13% in the last decade, over 60% of total U.S. assets. At the same time, this massive intergenerational wealth transfer. We have millennials set to inherit more than the top three GDPs combined in terms of assets. And so, knowing then that the average advisory…

Linstra: Sounds like a great opportunity, Liz.

Koehler: Yeah, it is. Of course, it is. So, you have the average advisory client 62 years old, a baby boomer on the brink of retirement, and then you have this whole new generation of new clients and those set to inherit 70-plus trillion in assets. And they're just different in terms of who they are and what they want. So, I think to answer your question, it is more of an opportunity, but it does require a deeper understanding of who these clients are, what they want, how to differentiate and reimagine the offering, and there are a number of ways to do that, yeah.

Linstra: And what do they want? You mentioned concierge services earlier. Can you explain a little bit more what you mean by that? And is that what they want?

Koehler: Well, I think what they want – to boil down what they want is, the clients of tomorrow want a few things. They want more outcome-based planning based on their needs. They want a trusted relationship with an advisor who speaks their language, someone who can build that trust but understand them both at a group and an individual level. They want more digital integration, so whether that's virtual engagement, whether that's omni channel support, whether that's instant payments. Clients want their financial lives to keep pace with everything else they have in their world. They do want new approaches to retirement planning and financial protection. That is true. We think about more and more younger clients are with employers for less time and they're joining the gig economy. And those who are retiring are thinking now about income, they're thinking about drawdown strategies, but they're also thinking more and more about what does well-being look like in retirement, what do I want my retirement to actually look like and involving the family in those decisions. And they definitely want more education on how to navigate their life journey beyond just their investments. So, those are some high-level themes that we see.

Linstra: And so, as an advisor sitting there listening to us and listening to you right now unpack that, what's the next best action for them? What should they be pursuing right now? How can they better prepare themselves for this to engage that wealth transfer and that concentrated high-net-worth wealth?

Koehler: Of course. So, I think embracing clients' current retirement needs is one, so shifting that focus, like we said, to income, to having deeper conversations with clients around the impact of their health on their wealth to their families, I think recognizing where the wealth is heading, so starting now, the point being, if you haven't yet figured out exactly how you're going to accommodate some of these smaller clients today, they're going to grow alongside you, whether that's through models, whether that's through robo advice. Start now, because they're growing, the income is coming and so is the great wealth transfer. They're preparing for success, whether it's demonstrating their value as a financial coach, embracing technology, fortifying that network of experts. And then, I think they're thinking differently too about the portfolio solutions that they offer, taxes being one. How do we meet the increasing need of advisors' portfolios being powered by taxes and personalization? And I think this idea of pre-tax returns is going to become increasingly irrelevant. So, those are some of the ways, certainly more, but some ideas that come to mind.

Linstra: Yeah, that's really helpful. You mentioned a number of things in there that I'd love to spend a few hours with you that we have here today. But really, just the role of technology and equipping advisors to really scale and address these evolving needs of their client base, can you talk a little bit about what you see there as far as the role of technology?

Koehler: So, back to this idea of personalization and customization that we talked about and the fact that clients are expecting it in all aspects of their lives, all we have to do is look at things like Amazon and Spotify to know that this is true, and advisors know it too. They're seeing it everywhere. So, I think that digital adoption is being fueled certainly by consumer demands, but COVID absolutely accelerated this. You think about online account opening, complementing both advised clients and self-directed. I think this digital adoption is also really impacting how advisors think about marketing and lead generation. The top practices we work with are looking at all of their tech, whether it's CRM, how they engage clients, financial planning software. One stat that I thought was interesting was pre-COVID about 70% of clients wanted to be within driving distance of their financial advisor. Post-COVID that numbers 30%. It's not an either or. This is an industry that's committed to that hybrid model. But the point being, those advisors who are investing in scale, whether it's through technology, whether it's through models, are the ones that are able to go deeper with their clients, broaden their reach, and continue to innovate. And I think that covers a whole spectrum of different tech solutions today, but the ones that are taking the time to learn, to try, to test, I think are seeing that growth and that scale.

Linstra: Fantastic. Yeah. I don't want to misquote Cerulli, but I believe it's well documented. I think it was 17% of the ultimate end client experience and/or their appreciation for what their advisor does in their lives, 17% of it was tied to the actual investment returns. Everything else was surrounded that, that ecosystem that you were speaking about earlier, everything else that they're doing with their client base. So, the role of technology to really bring that to scale and to be able to service more clients in a deeper fashion – and I think obviously you hit on it too with personal. You said it well. Wanting our financial lives to be kept pace with our normal lives, if you will. But honestly, if we're to go pull on the street right now, I think most people would say our industry has done a very poor job of that. Would you agree?

Koehler: We are behind. We are behind. But I think we realize it, and I think there's a lot of wonderful minds thinking through how we continue to innovate, evolve and change our approach. And the good news is, the next set of clients is demanding it. So, ready or not, here they come and so do we.

Linstra: Amen to that. Amen to that. And I give a harsh word just because I think we've earned it, but nonetheless, what we've seen just in recent years, in two or three years even has been transformational when it comes to direct indexing even and offerings like that that really provide a real benefit. I think once again our industry can be – some naysayers may say, well, how is it really improving investor outcomes? I think when we talk about things like direct indexing, which I know you're passionate about as well, there's a real quantitative impact there that can be measured.

Koehler: 100%.

Linstra: Great. Well, what are we not talking about? What are you seeing in your team across the industry that maybe we're not paying enough attention to? Is there anything out there that any keen insight that you have that can share with us?

Koehler: Yes. I don't know if we're not paying attention to it, but I think that it's something that advisors are asking us about quite a bit. And I think there are some things we can do a bit more intentionally to help, and this is this idea of teaming in succession planning that we touched on earlier. According to the Journal of Financial Planning, about 73% of advisors don't have a formal succession plan today, and 25% of those retiring in the next 10 years are unsure who their successor is going to be. I think this is driven by a number of things.

One, an ageing advisor population, more are looking to retire. A little bit of management fatigue. I think next generation talent which I think is very important and if we have time to touch on that, I think there are really important strategies for all of us to bring more great talent into the industry, and then competition. But the good news is – and we also have more resources on this topic. I think that with some intentional questions and planning and thought, this can become easier. So, for example, what are some of the questions that advisors and teams can ask themselves as they think about teaming or succession planning? I think some of those include what is our personal story? Everyone has a value proposition, or you wouldn't be in business. But what we're seeing more advisors evolve to is, why they're in the business, why they serve the clients that they do and linking it to real stories to bring it to life which resonates with clients. Who is your ideal client and why? How do you differentiate your firm? What roles do each member of the team play? That really matters more than ever today, getting clear on that. To your point about technology – how do your clients interact with your technology? How will you communicate a transition and how will clients be cared for going forward? So, I think again, as with anything, common sense is just not always common practice. How do we create more intention around our planning, not just with portfolios but with our business and with our people?

Linstra: That's really well said. Fascinating, Liz. I would just say too, I think you would agree, but if you don't, let me know. But when we're talking about the ageing demographic of an advisory even who, let's face it, there may still be some more transaction-based practices. When they're merely thinking about this, obviously their ultimate care and concern for their clients, obviously. But secondarily too, from a financial aspect, the greater adoption of model-based practices or outsourced-based practices makes that succession planning all the easier and all the more attractive, frankly, from a financial component. Would you agree, and is that what you see as well?

Koehler: Absolutely, absolutely. To your point, just being clear on the process, the scale, the regulatory, the time that it frees up – and look, I don't mean to underestimate. It can take a little time upfront to transition to a models-based practice. But over time, we find that it creates such benefits, better retention of clients, more growth and exactly to your point, the transition becomes easier.

Linstra: Yeah, back to that ultimate client experience that you're able to deliver with the use of a models-based practice is more consistent and durable, I would say, and easily replicated for those that are already doing so. So, really good work there. And you mentioned talent strategies. Can you tell us a little bit more about that?

Koehler: Yes. So, I am passionate about this as I know we all are, which is this idea of how can we continue. We have such great and amazing dedicated people and talent in this industry which has given me personally so much and I know all of us. So, how do we keep bringing in more great talent to the industry? And I think this is something we all need to lock arms and do together. So, just a few ideas from firms, both at the more individualized level and then more broadly that I've seen. This idea of internships. I think internships can be quite successful, especially when recruiting firms are more committed to providing a more structured experience that allows students to do actual work. We've seen the firms or the teams establish a strong relationship with universities or other internship organizations and focus their efforts rather than trying to expand too broadly. Firms with accredited programs, CFP board. But then, I just think there's simply a big opportunity for all of us for more education and brand building about the industry in general, career fairs, university visits within the community, giving presentations on financial literacy. I just think if we can all be a bit more creative, proactive, you just never know what can come from it and telling our story is really important. So, that's one other thought.

Linstra: I think it's such a salient point. Yeah. No, it's great. And I've been in a number of conversations even recently with some other third-party organizations like the CFA Institute, like the Money Management Institute that we're all circling around these same themes. And I think you put it well, like what is our story. And I think perhaps with maybe a younger demographic that's looking at our industry as mahogany wall offices and leather-bound books, it's just not the case. And the industry has evolved, but are we really bringing light to that and are we really telling our story well? So, I think there's a lot to be learned there. And I think the goal there is just to open the aperture of understanding of all the roles that are available, and I think there's a strong perception out there perhaps, but it's maybe just misinformed. So, shame on us if we don't do everything we can to change that.

Well, fantastic. Well, listen, this has been wonderful time chatting with you, Liz. A couple of quick questions that I'm going to ask you now just as a last pivot and then I'll pre-warn you now. I'm going to ask you for your 10-second takeaway. In case anybody's tuned us out so far, I'm going to ask you just for the recap in 10 seconds what they can't live without. But we always like to ask too – what are you reading right now? Or maybe not right now. What's the most influential book that you've had, either in your personal life or professional life?

Koehler: Yes. So, one I would highly recommend – and I'm biased because I had the pleasure of interviewing him at an event that we had recently. But Morgan Housel's book on The Psychology of Money, I think it's incredibly related to the conversation that we were just having. It's thought provoking. I think it really helps advisors to coach their clients and it's very story-based and just understand how much of our behavior impacts our results. But one other book, Designing Your Work Life by Burnett and Evans, I think is quite good. And the reason I bring it up is, it's a really actionable way to think about how to invest in your own career, where you are and ultimately uncover the things that give you the most energy so you can focus your time there, and I think that's really relevant for all the incredible work that advisors do for clients and focusing, A, what gives them energy and B, where they can best serve their clients. So, those are a couple of suggestions I might offer.

Linstra: Fantastic. Morgan's is on the shelf and well-marked, but I did not have Designing Your Life. Thank you for that. I'm sure our guests will appreciate your recommendations. OK, Liz, anybody that's in their car driving down the freeway has tuned out, tuned back in, Liz's 10-second take away. What is it? What should we not forget?

Koehler: One, just take a minute to appreciate the incredible work that you're doing each and every day for clients as a coach, as a life coach, helping them understand how their behaviors and emotions can impact their goals. Thank you from the bottom of my heart. I see what you do each and every day. And I would say just continuing to be open minded to look at where the industry is headed, where our clients are headed and the unique and different ways that we can truly serve them. And don't be afraid to work with partners who are invested in this journey with you. So, that was much more than 10 seconds, but those are some thoughts.

Linstra: It's only self-imposed, Liz. We really appreciate it. Well listen, this has been fantastic. We're going to have to have you back in some time too to update us on all the keen insights you provide. Thank you for the work you're doing. We look forward to this partnership and certainly to working with you alongside you and others and attracting great talent to this industry that's given us all so much opportunity. So, Liz, thanks again so much for being here.

Koehler: Thank you for having me. Great to see you.

Linstra: And there you have it. Another episode of simple but not easy. As always, we thank Liz for her time and engagement. A great conversation. Once again, if you'd like to know more about how Morningstar can support you, please drop us a note at simple@morningstar.com. Until next time, thanks again from the team at Morningstar Wealth.

(Disclaimer: This podcast is produced and issued by Morningstar Investment Management LLC, a registered investment advisor and subsidiary of Morningstar, Inc. The content is intended for U.S. audiences only. Individuals featured in this podcast are employed by Morningstar, Inc. and its subsidiaries. This includes, but is not limited to, Morningstar Investment Management LLC and Morningstar Research Services LLC. Morningstar Investment Management and Morningstar Research Services are registered with and governed by the U.S. Securities and Exchange Commission. This podcast is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of publication. Such opinions are subject to change. No Morningstar entity, including Morningstar Investment Management and Morningstar Research Services, shall be responsible for any trading decisions, damages or other losses resulting from or related to the content presented. Morningstar makes no representation as of the completeness or accuracy of the information presented. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives, and risk profile before making any investment decision.)