From the December 2013 issue of Investment Advisor • Subscribe!

4 Big Trends You Can’t Ignore

There are some ways that advisors can prepare for what’s coming to achieve their business goals and serve their clients well

The future always presents challenges, but also opportunities for those who are prepared. In the future, that is, today, four major trends are affecting your clients and your businesses.

Advisors always are dealing with uncertainties—from the markets, the regulators, the economy and your clients—and are always planning for an essentially unknowable future. Knowledge of these four trends and getting ahead of them will, I humbly suggest, allow you to achieve your business goals while successfully serving your current clients and, yes, getting more and more desirable clients.

To begin, allow me to stay in the first person for a minute. I first want to salute you for the work you do on behalf of your clients and their families, and for the kind of people you tend to be: as much interested in the psychology of how you communicate with clients as you are in the machinations of the markets; as much interested in how to build your businesses as you are in the environment in which you are building your businesses. It is that environment that I will explore in this article.

Second, I’d like to personally thank you for keeping me gainfully employed for the past 14 years in covering you as a journalist. That’s because you are, after all, my employers: If you don’t read the magazines and website I oversee, then I don’t have a job. As my employers, I’d like to thank you for allowing me to put one of my two children through college; my son received his bachelor’s in music education in May and is working in Chicago now. I’d like to thank you for allowing my wife of 27 years and I to pay off our mortgage this past summer. My daughter is slated to graduate from college this month, so thanks on her account as well. However, since my Social Security payout will be based on my last five years’ salary before I start drawing down benefits, I’d appreciate it if you’d continue to keep me employed for the next five to seven years.

The four big trends that I see affecting you and the environment in which you ply your craft, build your businesses and serve your clients are demographics, regulation, technology and a trend I lump together as CCVC: choice, consolidation, volatility and client expectations and behaviors.

Trend 1: Demographics

Please take a moment to view this image. Here are two boys who clearly live in the suburbs—and a newish development at that—notice the trees are pretty short, for instance. You can see autos in the photo, a sidewalk, a post-and-rail fence. These young fellows could very well be your clients now—or yourself. Or me, since I once had blonde hair, believe it or not.

But the white, male, suburban, comfortably middle-class, boomer America represented by this image is not the country we live in now. We’re a more diverse country, though you wouldn’t know it from the average advisor, who tends to look like me—white, male, in my 50s (OK, I turned 60 in late September).

Advisor Demographics

The advisor work force is aging, and there are fewer of you than there were even five years ago, especially in the broker-dealer rep world. A mid-September Cerulli report predicted a further drop of 25,000 “advisors” over the next five years, though the dually registered and the RIA advisor work force is bucking that trend, according to the research firm.

The client universe is changing, both here and abroad. Boomers might be your focus now, but the succeeding generations are larger than the boomer population, and they want to be treated differently. They also are more likely to take the opinions of their peers into account.

Client Demographics

I included the birth rates of the industrialized countries in the chart above because I think it’s important when considering where to invest and where to avoid, and to suggest where social strife might occur in the future. There’s good economic research supporting the proposition that a healthier birth rate is healthier for a nation’s economic growth. A strong birth rate is also necessary to sustain programs like Social Security. Countries with low birth rates and strict immigration policies find themselves in a particular bind.

As the son of an immigrant to the United States—my father arrived here as a teenager just in time for the stock market crash of 1928—I am in favor of a more open immigration policy, but regardless of where you stand on that issue, we already live in a diverse nation that will become even more diverse. If you think of the kinds of clients that advisors have and want—business owners, physicians, engineers—you’ll see the opportunities in what we could call non-white business owners and professionals.

That group doesn’t include the potential clients among the underserved higher-net-worth women population, the opportunity among which has been well-documented by a number of researchers and demographers studying your industry.

I think of your business, from a macro perspective, as being all about recruiting and retention—and money, of course. So how will the country’s changing demographics affect you and the companies with which you partner?

  • More succession planning initiatives from broker-dealers, custodians and other advisor partners, including a burgeoning number of consultants. Those initiatives are really matchmaking efforts to combine younger and older advisors, to allow more established, growth-oriented firms to either combine with like-minded and like-sized firms or acquire smaller firms where the principals are looking for an immediate succession plan or an exit.

  • “Getting Clients Through Social Media” initiatives, which encourage advisors to market to the younger-than-baby-boomer generations especially through compliant social media outreach efforts. In fact, I would argue that just as technology platforms for trading and portfolio management were differentiators for BDs and custodian firms, social media chops will be a big differentiator now and in the near future for those advisor partners.

  • “We’re the Home of the Younger Generation” of advisors initiatives, in which a more modern management style (e.g., flexibility, especially for women) and willingness to embrace social media are seen as differentiators for recruiting and business building.

  • “We Know Boomers” marketing strategies that remain focused on the wealthy, aging-but-with-higher-life expectancies baby boomers. They will be around for a long time, and they are redefining retirement, and geezer-hood, just as they did childhood, teenager-hood and middle age.

Trend 2: Regulation

I thought it would be fun to recap how comprehensive the Dodd-Frank Wall Street Reform and Consumer Protection Act has been on your industry, and how it has and will continue to affect the companies with which you partner. Those partners include not only custodians and broker-dealers, but also asset management firms and banks. The one undisputed winner emanating from Dodd-Frank (other than attorneys, of course) is an increased federal bureaucracy, even if Wall Street hasn’t been completely reformed and if consumer protection hasn’t been significantly strengthened.

When it comes to influence in Washington, money talks, and the people with money in Washington tend to be broker-dealers—the wirehouses, but also the independent BDs, notably through the FSI—while the RIA community can’t match those firms’ monetary heft. I’m not a conspiracy theorist, but money in Washington gives you access, and access to regulators and legislators allows you to influence the environment in which you operate.

One other related trend: advisors as politicians. At the first-ever FSI conference for financial advisors in September, a session on whether and how advisors should run for public office drew a standing-room-only crowd, and FPA leaders like Paul Auslander have for years suggested the value of advisors getting into politics.

Here’s what you can expect to see in terms of regulation:

  • Lobbying on fiduciary rulemakings at the Department of Labor and the SEC. Broker-dealers are lobbying hard to not have stricter fiduciary standards for their reps, and are spending much effort and money to diminish or delay any such rules. The “Main Street versus Wall Street” argument appears to have found responsive ears among congressmen and their staffs, while a strict fiduciary standard has faltered in the lobbying process.

If you believe that Republicans tend to favor less regulation in general and looser reins for Wall Street and advisors, please note that in 2014 there will be 33 Senate seats up for grabs, 19 of which are now held by Democrats.

  • However, if stricter fiduciary rules are implemented by both the DOL and the SEC (Mary Jo White may be feeling her oats after successfully getting big settlements from both JPMorgan and SAC Capital, while Phyllis Borzi still seems to be immune to political pressure), the RIA business model will have an advantage. In addition, top-flight BD reps—the big producers the BDs all want to keep or to recruit—will be more likely to go the RIA route, thus strengthening the Schwab, Fidelity, Pershing, TD Ameritrade and HighTowers of the world.

  • If stricter rules are implemented, at the very least there will be additional training, education and possibly certification required by broker-dealers. There’s a reason why a company like fi360 is flourishing. Expect the number of CFPs—now at 69,000—to grow as well.

  • The increased regulatory burden will result in larger internal compliance departments of all players, will increase the health and wealth of compliance consultants and securities attorneys and will help strengthen the technology companies that offer compliant software packages.

Trend 3: Technology

The importance of technology tools in running your business and serving your clients more efficiently and profitably are well-documented. But the changes in how we humans in the developed world communicate with each other, especially through social media, will have at least as large an impact on the independent advice model now and in the future.

Those of you with children in college may be familiar with RateMyProfessors.com, but I can guarantee you that if you have children in college, they know about this site. When kids register for courses, they look at these ratings—on display here are actual ratings of two professors my son had in his small, liberal arts college in the Northeast. Getting beyond the hip language (“This guy is chill.”) and the atrocious spelling, you can see that these students take their ratings seriously, both pro and con. Students will take or not take courses taught by these professors because of their peer ratings. I believe that will happen in your business as well. Just imagine a RateMyAdvisor.com with reviewers prescreened to keep out shills (similar to what TripAdvisor.com is doing in the travel space), with your peccadilloes on display for all from disgruntled clients. Yes, your happy clients will give you a good rating, but it’s always the unhappy people who are most motivated to post reviews.

I also would argue that improvements in technology, including better access to data for all—and changes in regulation—helped make the independent advice model possible and allowed it to thrive since 1975, which is when the SEC, prompted by Congress, eliminated fixed commissions on Wall Street. Chuck Schwab saw an opportunity and ran with it, and a number of other entrepreneurs at places like Morningstar and in the tech space ran with it as well.

There are 40-some “robo-advisors,” as noted advisor Michael Kitces calls them, that are in operation now or will be shortly. These are more sophisticated sites than the first round of online planning tools that we saw 10 to 12 years ago. These sites offer financial planning, portfolio construction and retirement planning. Some are free, some charge a fee, but many are backed with solid academic research and solid academics, including behavioral finance researchers. Some are backed by private equity and almost all have a social component, in which users can learn from their peers.

Are they a threat to the kind of personalized service you provide? Yes and no for the current generation of clients perhaps, but they definitely are in the longer run. Would you take investment advice from amateur investors? Of course not, but we are raising entire generations that listen first to their peers in every facet of their life, and groups of high-net-worth investors like Tiger 21 already do so.

Technology backed by academic chops is already having an impact. Look at Merrill Lynch’s success in Merrill Edge; the online service has attracted $80 billion in AUM in three short years, though Tim Welsh of Nexus Consulting suggests that some of that money is coming from smaller producers who have been encouraged by Merrill to put their smaller books of business into Merrill Edge. Look also at LPL’s NestWise, which is being shuttered after a brief life, perhaps because of LPL’s existing reps’ concerns that NestWise was cannibalizing, or would, their own practices.

Is it possible to serve the mass affluent profitably? It’s entirely possible, as Merrill Edge has demonstrated, and I believe adding social and mobile elements will make it more likely. There are also plenty of advisors making a decent living serving clients who are not in the high-net-worth cohorts, including folks like Sheryl Garrett’s Garrett Planning Network or Karen Ramsey’s efforts in the Northwest.

A strong website is table stakes now for advisors when it comes to attracting prospects; having a strong social media presence will be table stakes very soon.

  • The social media and client-direct communications capabilities built by or offered through custodians and BDs will be big differentiators when it comes to recruiting and retaining reps and advisors, and end clients.

  • Expect to see more partnerships between advisor partners like BDs and custodians with robo-advisors, especially when the internal-competition aspects of robo-advisors are dealt with from the beginning.

  • As the regulators provide more clarity on how broker-dealer reps can use social media compliantly, and as BDs get more comfortable with social media oversight, expect to see BDs sign more deals with firms like Erado. This is an area where the largest broker-dealers—wirehouses like Morgan Stanley, and IBDs like Raymond James, Commonwealth or LPL—are ahead.

  • The web as a communication and presentation vehicle allows services once only possible or profitable offline, to be done online with greater scale and cheaper costs, as the media-savvy planner Ron Carson has done with his Digital Fortress online coaching and website creation program, an outgrowth of his successful Peak Advisor Alliance.

  • I don’t mean to give short shrift to the topics of mobility, data integration and big data, which Spenser Segal of ActiFi has written about extensively. Each of these topics merits its own article, but I would argue that if you want to stay ahead of your competition, you should be planning now to figure out how to use these technology tools to grow your business and attract and retain clients.

Trend 4: Choice, Consolidation, Volatility, Clients

All four of these trends are inter-related.

Successful advisors, especially the top producers of the wirehouses and the independent broker-dealers, have more affiliation options than ever, and beyond the old wirehouse-IBD-RIA troika. You can not only be dually registered, for instance, but if you’re at Raymond James or LPL or Commonwealth or Securities America, you can use the corporate RIA or you can go completely RIA without moving assets or repapering your clients—that’s a retention move by the BDs, but also a recruiting move.

If you go to a hybrid like a HighTower Advisors, which is an RIA and broker-dealer, you can fly the fiduciary flag, use whatever products you choose and get a nice bonus for moving. Moreover, there are plenty of roll-up firms—Focus Financial and United Capital, for instance—who remain active. Many of these firms are backed by private equity owners, who see the dollar value of advisor practices, but who are also big fans of scale.

As the cost of compliance and recruiting goes up, and as the age of the average advisor advances, and with PE’s involvement, consolidation is likely to occur and M&A activity among advisors will pick up.

As market volatility continues—it seems to me that the markets are shakier than ever, if mostly in the short run—you’ll have to communicate regularly with clients and keep them from reacting to that short-term volatility. Managing risk is more important than ever, and one of the positive developments is the number of money managers who are coming up with ‘40 Act mutual funds that replicate the hedging and diversification strategies once found only in private vehicles, but with the transparency and liquidity of mutual funds or ETFs.

Here’s one sign of where institutions and smart individuals are sending their investing money. In mid-November, Rob Arnott’s Research Affiliates reported that investing vehicles based on its RAFI fundamental indexing strategy had crossed the $100 billion in assets mark. Tony Davidow of Schwab’s Research Center told me at the same time that his data showed more than $150 billion invested in fundamental indexing products.

Why the interest in liquid alternatives and ‘40 Act funds that mimic private investing vehicles? It’s not simply that those strategies may be valuable in a portfolio, but those vehicle manufacturers and distributors value you as distribution routes to your clients’ money, which is stickier than end-investor money.

In the broker-dealer space, expect more consolidation as the big get bigger, leveraging their scale. While the fiduciary rulemaking’s final shape is unknown, the lobbying power of the broker-dealers and the current atmosphere in Washington—mandating cost-benefit analyses (CBAs) of every major rulemaking—doesn’t bode well for imposing a strict fiduciary standard on all advice givers.

As for the broader concerns over the long-term viability of the retiree and disability trust funds of the Social Security Administration, I don’t expect any serious fixes, so that means more uncertainty for your clients and prospects, and a bigger opportunity for the robo-advisors.

You’ll Have to Get Personal

Finally, contrary to convention and personal preference, you’ll note that I’ve disclosed a fair amount about myself and my family in this article. I haven’t changed my style or gone through a late-middle-age personality crisis. Instead, my point was to suggest that “getting personal” is the wave of the present and the future when it comes to how you prospect and serve clients.

The generation that tells you online whether they are in a relationship or what party they’re attending, that rates their professors for their peers’ edification and that is comfortable getting financial planning advice online will want to know more about you before they entrust you with their financial lives or divulge their dreams to you.

There are drawbacks to being so personal for sure, and concerns about privacy and professionalism are legitimate. You may not like to divulge too much about yourself, but I think you’ll need to get over it. To succeed in attracting not just Gen X or Gen Y clients but increasingly the boomers as well, I think you’ll have to get more personal.

The good news is that you all have a unique story to tell clients and prospects, even if you haven’t yet formulated it for public consumption. I’m sure you’ll figure that out, perhaps with the help of your smart children or younger colleagues—most of them have figured out how to be personal while retaining some sense of privacy.

Good luck, and I’d be happy to continue this conversation via email (jgreen@summitpronets.com), LinkedIn or Twitter (@Think_JamieGreen).

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