The independent sector is poised for change as never before—but are advisors ready for it? In this shifting landscape, threats loom and so does opportunity. And, at this point, only one thing is certain: Same-old same-old is not a winning formula.
As Tom Nally, president of TD Ameritrade Institutional, frames it: “What advisors did to become successful in the past won’t get them to the next place. It’s a little scary. If you don’t embrace the changes and make changes to your firm, advisors will have a rude awakening. It’s a huge thing taking place right now. There’s no shortage of work to do.”
Signs of a seismic shift are everywhere—among them: a talent shortage, unthinkable price compression and a technological revolution that has legs. “We are at a tipping point right now,” Fairfax, Va.-based Edelman Financial Services Chairman and CEO Ric Edelman says about the technological advances he believes will sweep the industry. “We are at the knee of the curve. The next five years are going to be startling to most people. It’s not merely that change is coming, it’s the speed with which it is coming.”
After years of baby boomer-this and baby boomer-that, one other notable signal is the almost urgent attention that is now being directed at next-generation wealth accumulators—and how best to serve their needs. Post-boomers, aged 20 to 40, now control $2 trillion in investable assets, a figure that is expected to grow to $28 trillion by 2020. As Nally, a post-boomer himself, observes: “It’s amazing what a few trillion dollars will do.”
By any measure, independent advisory businesses have had a good run in the last decade, growing at an annual rate of 15%. Between 2002 and 2012, the average size of an advisory firm tripled in terms of revenue. The reason: advisors’ ability to manage and systematize growth.
“Looking at that track record, I’m optimistic that over the next five years, they will continue to grow fast and find opportunities with clients,” says Philip Palaveev, CEO of The Ensemble Practice in Seattle. “But it is also a time of change. I believe advisors know that. They sense that.”
Innovation will come from the firms that think 10 or more years out, according to Rebecca Pomering, CEO of Seattle-based Moss Adams Wealth Advisors.
“The only thing driving our business is our clients and I see their needs changing over the next 10, 20 and 30 years. Whether a firm’s clients are becoming more sophisticated or not, whether a firm is trying to move upmarket or not, the needs of those clients are changing. Just look at health care—and we feel that’s just the tip of the iceberg. But a lot of advisors are not thinking about how to address this,” she adds. “We’re constantly thinking about what’s ahead and how do we position ourselves but even in a larger organization there’s only so much you can do so fast. I’m enthused about the opportunities and cool things we can be doing, but we need to move at a pace that is digestible.”
Consultant Mitch Anthony, who heads Advisor Insights in Rochester, Minn., says he’s concerned about what lies ahead. “People are always caught up in the trend that is and not the one that’s coming. But you can stick your finger in the air and feel this one,” he says. “There are a lot of worries I have right now for this industry and the people in this industry.”
In recent weeks Research interviewed more than a dozen thought leaders in the independent space—asking them what they are planning for and obsessing about. What, we wanted to know, keeps them up at night? Here are the four categories they identified as top of mind.
The Next Generation Client
There is tremendous excitement about the post-boomer client—and also trepidation. As Chip Roame, managing partner of Tiburon Strategic Advisors in northern California, puts it: “The consumer has fundamentally changed.”
Most importantly, Gen X and Gen Y have not seen the stock market soar as it did for baby boomers for a decade. Roame says that experience may create a “lost generation” that invests in other ways such as real estate. Post-boomers, he adds, are also self-reliant, which accounts in part for the growth in discount brokers and newly emerging business-to-consumer models like Betterment and Personal Capital. They are also more conservative when it comes to investing.
“If I were an FA, I’d worry that the next generation will not invest; that the next generation will invest on their own; and that the next generation will invest more conservatively,” says Roame. “Three big worries.”
The next generation client will also be more demanding and more participative in any advisory relationship. “They are going to listen to a different peer group when selecting an advisor,” notes Bernie Clark, who heads Schwab Advisor Services. “They are going to use social media and they may listen to strangers because of the volume of information that’s out there. They’re going to pick more than one advisor and they’re likely to bifurcate their money as a hedge. This generation hasn’t seen prosperity. They haven’t seen growth.”
Notably, according to research from Cerulli Associates, 86% of younger investors today fire their parents’ advisors.
Elliot Weissbluth, CEO of HighTower Advisors, says next generation clients will also demand full transparency on what things cost and a technological delivery system that puts it all out there.
“Think about it. A millennial has never used a travel agent. They are digital natives as opposed to digital immigrants. I grew up using a Smith Corona typewriter. I booked travel through a travel agent. But I learned quickly that you go to Kayak, pop in New York or L.A., and you get immediate transparency as to what the market is,” Weissbluth adds.
“If they want to buy an investment product, they expect to have a Kayak level of transparency. That’s what they are accustomed to. Actual products will have to change. I think as more millennials come to understand the value of good advice, coupled with a better understanding of product choice, you will have another sea change inside the industry.”
The Next Generation Advisor
The thing that worries industry experts most: With just 6% of advisors under the age of 30, where are next generation advisors coming from?
“The issue is these firms can’t hire and train fast enough to keep up with their growth. Talent shortages are at crisis levels. It was bad before … and now it’s absolutely horrible,” says consultant Angie Herbers, who heads Angie Herbers, Inc. in Manhattan, Kan. “I have yet to see a true training program. I have yet to see advisors really seeing what I’m seeing. A lot of firms are hiring behind the curve. I like to project out 10 years in advance.”
Moreover, established advisors who want to attract post-boomer clients along with younger advisors and support staff need to rewire their offering—or risk failing.
“It’s much more than being tech savvy. It’s understanding the difference in value systems and making sure your work environment is open to different types of dress codes, more flexible work hours and getting things done but maybe not in the office,” says Nally. “Research has shown people like to work with their peers. Advisors need to get on board with all this. You need to step outside the box and think about how you can give this market what they are looking for. If you continue doing what worked well in the baby boomer space, it’s going to be problematic.”
Young advisors and staff also put a high value on their personal lives—a factor that Herbers says business owners must recognize and accommodate.
“If you want to grow in this industry you have to change your mindset completely,” she adds. “People want to work with people who get them.” As evidence, Herbers points to two advisory firms she works with—both run by advisors in their 30s. “The two firms that are growing fastest of all my clients are these two firms. They are tapping into that next generation client and the reason they are getting them is not because of their age necessarily but because they have built companies with employees who have the same mentality that they do, that the client does.”
Advisors who don’t adapt risk leaving millions and millions of dollars on the table. “It’s a powerful shift,” says Herbers. “That shift is going to drive the future of the industry.”
Technological innovation will fundamentally change how the industry delivers and prices advice, according to Edelman, who foresees a “very disruptive environment” as things like artificial intelligence, robotics and three-dimensional printing become staples.
“What this means is that you are going to have in a relatively short time period the ability to obtain financial advice from a computer on the Internet,” says Edelman, who launched Edelman Online in January to position his firm at the forefront. Edelman Financial Services, started in 1986, has 20,000 clients, a rise of almost 200% since 2004. “Very few, if anyone, in the industry are paying attention to it in a meaningful way. We’re spending a huge amount of time on this. We are already offering investment management services online with no human intervention. We have several hundred accounts with hundreds of millions in assets under management. I don’t believe the industry is aware of how fast technology is going to change our profession.”
As for the here and now, technology is beginning to drive preferences in terms of what consumers want from their advisor and what advisors want from a corporate home.
“Technology is starting to matter in some pretty significant ways in terms of where people are going,” notes Michael Kitces, publisher of Kitces.com and a partner in Pinnacle Advisory Group in Columbia, Md. “You’re about to see the next edge of that over the next few years: consumers showing more preference for tech savvy advisors. As much as people are talking about that, it’s still the front edge. But it’s coming. At some point, the ability to use, adopt and implement technology is going to become a differentiator. Then it will become a minimum necessity.”
Also, he says, advances in software development and the ability of software to communicate with one another in a way that has never before been possible represent a “transformative” shift for the independent space.
“We’re clearly in a transition phase. Now independent software companies are often larger and better developed than proprietary solutions. It certainly increasingly means that working with a large firm is not about the integrated technology they bring to the table,” says Kitces. “It won’t blow up the wirehouse model but it will change a little bit of the value proposition of why you go there or why you stay there.”
Threats and Opportunities
What keeps Deena Katz up at night? A low-return environment she believes could last for the next 10 to 20 years, a hugely competitive landscape and the high cost of doing business.
“In this scenario, the advisor is going to make a lot less and have more issues with clients than we ever had. It was a lot easier for us in the ’90s when everything was popping. This will put pressure on fees and on commissions and on profitability,” says Katz, an associate professor at Texas Tech and chair of Coral Gables, Fla.-based Evensky & Katz, one of the nation’s first fee-only firms. “Today, there is a great deal of value in practices, but many people have an overblown idea of what that value is. With everything in play, many will have a hard time maintaining that equity value. A lot of practices will fade away.”
One of the things the independent sector lacks, according to Anthony, is a “creative roundtable,” a forum where industry observers could identify threats and how to prepare for them. Among Anthony’s concerns: a return on investment value proposition that, for advisors, is emotionally taxing and unsustainable; the failure of most independent advisors to offer “return on life” advice like a simple cash flow analysis; and an administrative overload that is just “killing” people.
When Anthony recently visited his own advisor for a fairly straightforward transaction, half of a conference table was filled with forms to fill out. “I asked how much time it took to put it together and he gave me the man hours,” says Anthony. “It was just absurd.”
Anthony has also begun researching what happens psychologically and emotionally around the cost of advice as baby boomers move into the distribution phase.
“It’s not an issue yet but I predict that within five years it will be huge. When you are in the distribution phase, you are clipping coupons. The price of everything matters,” he says. “And the industry is clueless about how to rearrange the furniture here. How long until the price of advice starts coming under the radar? Fees have been in the shadows for so long. What happens to this industry when people start asking? It ties back to value. If there’s no value provided beyond the management of a fund, you are in trouble.”
On a local level, Pershing Advisor Solutions CEO Mark Tibergien says he worries about the lack of business continuity that exists in the independent advisory world but he also has his eyes trained on the global stage. Currently 20% of Pershing’s advisory firm affiliates are located outside the U.S., a figure Tibergien would like to see grow to 40% or 50%.
“One issue I wrestle with is what industry trends portend for global growth. I’m pretty confident the U.S. market is going to be dynamic and there are signs the international market could be dynamic. Different regulatory regimes kind of change it up,” he says. “The uncertainty is how they will respond to a true independent advisory concept as opposed to a broker model.”
“Business is becoming global in so many ways where the U.S. is not an island and the U.K. is not an island. The whole transformation of the business is exciting and daunting,” Tibergien adds. “The question is: How will advisors serving wealthy individuals position themselves on the global stage? One thing we know is money is fluid and borders are porous. There are challenges. It’s a great business but it’s not without its heartburn.”