Tuesady Email: Why Smart Advisors Play It Safe

Happy Tuesday!

Every Tuesday I'd like to offer strategies for the week ahead and a thought to fuel your action.

Every advisor I talk to says they want to innovate.

Most of them are lying, not to me but to themselves.

When you actually look at the math, the psychology, and the structure of firms around a successful independent advisor, playing it safe is not cowardice. It's the most rational move available to them.

Many believe that advisors resist change because they're stuck, afraid, or lack vision, and that simply isn't true.

They're running a rational analysis of what is best for them, and it actually makes sense. It just holds them back from the evolution that will progress them into the future.

We live in a cautious, risk-averse industry where we are rewarded more for taking less risk.

Just telling someone to work harder, try harder, do more, and think more innovatively isn't going to address the structural challenges that hold people back from innovative action.

This isn't a flaw in advisors. Advisors have built really great businesses and really successful books by doing the right thing and by doing what they have been doing, and the risk of change is very high. They've already accomplished so much.

But, if we want to continue to have success, we have to evolve a little bit. And in order to do that we must first understand what in our brains is holding us back from being able to do take this risk and innovate.

The concept of omission bias is really interesting. Our brain is more forgiving when we take no action, and there's a bad outcome, than when we take action, and there's a bad outcome. If we act and something ends up poorly, our brain sees that as much worse than if we take no action and something goes poorly anyway.

A wealth management example: if we go buy an individual stock that goes down, our brain sees that action very badly. If we don't buy a stock and it goes up and we miss those gains, our brain barely registers it as a loss.

It always feels a bit safer not to do something than it does to take the action.

In that risk-averse mindset, we tend to do nothing and stay invisible because visibility becomes a liability.

You also have cognitive entrenchment. Wealth management has historically been a kind game — predictable, stable, reliable feedback loops. Even though markets and the economy are unpredictable, the outcomes have had some predictable nature and the guardrails have all been the same.

What AI and technological advancements have done is transition wealth management from a kind game to a wicked game.

Wicked games, like technological disruption and structural regulatory change, have incomplete rules and unpredictable feedback. In wicked environments, cognitive entrenchment creates a fixation that renders highly successful specialists paradoxically less adaptable than amateurs, because we're stuck pattern-matching to a predictable game while the rules underneath us have completely changed.

Finally, there is client retention and the impact it has on our business. If it was hard to grow in the first place, seeing retention drop has a dramatic impact on future firm value and income. Sliding from 95% retention to 90% is not a small shift.

So we don't want to introduce anything that could potentially threaten that. What helps with retention is basically staying the same, not doing anything that could alter the trust, and that instills a deeply risk-averse mindset.

Here's the misalignment that makes this so hard: the cost of change is immediate and certain while the benefits are delayed, speculative, and uncertain. When you put those on a scale, the scale is broken — and this isn't a character flaw, it's just a feature of how advisory firms and humans are built.

Delegation is a good example of this. If I delegate today, I see a negative impact on my productivity right now, which could affect client servicing and growth. The future payoff is invisible, so I tend to just revert back to doing it myself. I can't stand dealing with those costs when I can't see the return.

This is why innovation feels like playing with fire, because at some level it is.

Any service friction, operational or technological, creates a potential threat to the trust clients have in you and your organization. If we set up a new onboarding process and there's friction, some prospects don't sign, which means we don't grow as much, which impacts income.

That math in our head leads us to just stay still.

A great example of breaking this pattern is Ropes & Gray, a law firm where everything runs on billable hours.

Using time to create operational efficiencies doesn't help when you're focused on maximizing revenue generated per hour. So they took that structural problem head-on. They said up to 20% of annual billable targets, 380 to 400 hours, could be spent on AI experimentation, and that time counted toward both comp and advancement.

What happened is that people started to innovate.

They started creating opportunities and efficiencies using AI in their operational infrastructure because the motivation and alignment were there. It wasn't just a vision statement handed down and left to people to figure out. There was intention, there was follow-through, there were structural changes, and what resulted was a genuinely innovative culture.

Think about what this means in wealth management. Advisors are still compensated on AUM, AUM is driven by clients and investment focus, and if we want advisors to invest time in innovation, we have to rethink the incentive structure the same way Ropes & Gray did. If we just say it's for the future benefit, we get right back to the misalignment of scales. They can see a potential negative impact on income today. They can't see the payoff down the road. You have to build the structure and intention around that to actually promote an innovative environment.

Within our own firm, I didn't have the full vision of what we have today with our transformation division when I started down this path. I wanted people to start thinking more innovatively, and instead of trying to build out an elaborate plan all at once, I started creating small structural pieces.

The Innovation Lab brought together six or seven people to talk about AI, brainstorm, and have sessions that felt different. It started with six people, then seven, then eight, and people started talking about it. That led to Rise Workshops, helping teams solve problems in a more innovative way. That led to building out a full transformation team, which led to hiring a CTO.

Looking back, this wasn't built with a clear, defined vision all at once. It was built by taking small, nimble, intentional actions that shifted a mentality and culture over time. We can do that both individually and at a firm level.

Intentionality is the key.

If you are a one-to-five person shop or a large organization, here's my encouragement: start individually and figure out how to get two hours a week focused on innovation. Set a goal and intention, then set a specific time to do it — Mondays from 9 to 11, Fridays from 9 to 11, whatever works. Put it on the calendar and protect it.

If you're a large organization, put together a team, give them guardrails and a goal, make it structured so they meet every two weeks to push things forward, and incentivize them to show up.

We have to get to a point where we are separating exploitation from exploration.

Exploitation is what we're doing today. Exploration is what we need to be doing to build for the future. If you don't create intention and structural alignment around that, we will revert right back to the risk-averse, cautious mentality we're trying to move past.

Innovation is not a human flaw.

Anybody can innovate.

Innovation is evolution, evolving how we work, and the difference between the ones who do it and the ones who don't comes down to intentionality.

If we say we want to innovate, we have to be intentional with how we spend our time. We have to be aware of our cognitive challenges, and then we have to protect the time to think about the future. Not instead of the present. Just alongside it, with enough structure to make the future an evolved reality.

The best is ahead!

-Matt