Back in the day when individual investors bought stocks and bonds instead of packaged solutions like mutual funds and ETFs, I knew an investment analyst in Seattle who looked at things in a different way. He looked at companies currently out of favor with the investing public, assessed their management, culture and market, then took a long view to make investing decisions.
The reps who worked for this particular broker-dealer adored the man because he always made them look good with their clients. I dubbed this talented strategist “Conan.” Now when I hear an industry pundit spout conventional wisdom, I channel Conan the Contrarian. I ask myself, “What would Conan do (WWCD)?”
Let's examine some common assumptions in the advisory industry in light of the facts. Among the beliefs in circulation:
Advisors are reducing their fees.
Young employees lack a work ethic.
Robos will make it difficult for advisors to compete.
The industry will benefit from a huge generational transfer of wealth.
WWCD? Let's challenge conventional wisdom, then act with the insight gained from analysis.
Advisors Are Reducing Their Fees
While a number of advisors claim to be experiencing fee compression, the top performing advisory firms have increased their fees by five to 10 basis points in each client bracket.
Firms experiencing the most pressure are those that tie their value proposition to investment performance. Some wealth management firms have had difficult conversations in the past year with clients experiencing sub-5% returns.
Firms that have raised their fees claim they have had little attrition because they have been able to demonstrate value beyond the investing relationship and even beyond the basics of financial planning. They may be giving their clients unique access to private banking or alternative investments, or they may have created a community of clients others want to be a part of.
As we know from other industries that have been commoditized (think coffee, retail grocery, medicine, tax accounting), those who command a premium are those who deliver a premium experience and are perceived as offering more value. Creating this value rests on your firm.
Young Employees Lack Work Ethic
Industry elders claim that young people do not work as hard as they do. Advisors born in the baby boom era tend to value motion over movement and to equate time in the office with hard work.
Gen X and Y employees reject the illusion of industriousness created by their forerunners in a quest for a work-life balance that allows time to pursue other interests and to devote to important relationships. They ask bosses to evaluate them on output, not input — a difficult mindset for firm founders whose blood, sweat and tears created the advisory business we know today.
Over the past couple of years, a number of advisory firms have transferred to the next generation with little fanfare and minimal disruption. Firms that seem to be growing the fastest, according to surveys done by InvestmentNews and FA Insight, have invested in better hiring, retention and development programs to ensure business continuity and strengthen growth.
A systematic approach requires disciplined management, not the role that most advisors aspired to when they formed their own practices. The truth is, creating opportunities for personal growth, recognizing the desire for employees to have a life outside work, investing in career development and rewarding them fairly does pay off.
Robos Will Make it Difficult to Compete
Every decade presents new obstacles and new challenges. I started in this business in the 1970s, just before the disappearance of fixed-rate commissions. Since then we’ve seen countless other changes in the financial services industry.
Consider the RIA custody model, self-directed platforms, the emergence of ETFs and index mutual funds, rebalancing software and account aggregation — all disruptions to different segments of the business. At Pershing, a BNY Mellon company, the largest securities clearing firm in the U.S., according to InvestmentNews, and a division of the largest custodian in the world, as ranked by Institutional Investor, advisory assets have grown from 5% of our total in 2007 to 50% today. Internationally, new economic models have altered the landscape as fund companies are not allowed to pay cost reimbursements to platforms that support advisors.
Robo-platforms are just another change that automates what was a manual and labor-intensive experience. Using algorithms, their model portfolios may be able to outperform the strategies that human advisors deploy — but individual clients choose to work with financial professionals for many other reasons.
The complexity of a person's life — especially the wealthy — requires judgment and insight. Clients want an easier way to access expert points of view along with a simpler way to conduct business. Successful firms will leverage technology to deliver the best of robos combined with the best of humans. Of course, the pure technology plays will get their share of business, just as the self-directed platforms at Schwab, TD Ameritrade and Fidelity have. Advisors face the challenge and the opportunity to partner with providers who can enhance the client experience while at the same time keeping the advisor at the core of the relationship.
Industry Will Benefit From Pending Wealth Transfer
Depending on what you read, upwards of $30 trillion in the U.S. alone is supposed to move from the baby boomer generation to their children and grandchildren. As a result, pundits are urging advisory firms to capture this asset movement by positioning themselves properly in the minds of the inheritors and their benefactors.
While money in motion can present an opportunity, the reality is that most of this wealth will be distributed in fractions, and not all of the beneficiaries will be the offspring of the rich. Wealth creators donate large sums to charities and other causes they hold dear. Bill Gates (Microsoft) and Mark Zuckerberg (Facebook) provide leading examples of people who want to make an impact with their legacy. Their kids will inherit some money, but it will be distributed in smaller chunks. Not to mention, clients find the suggestion that advisors are waiting for their baby boomer clients to croak insulting.
The opportunity for growth from inheritance is a dark strategy compared with the opportunity for growth from betting on the next generation of accumulators. The greatest amount of wealth creation will come from the efforts of Gen X, Y and Z directly. The current explosion of innovation and technology, and consequent wealth accumulation, has little to do with being born with a silver spoon.
Many other examples of conventional wisdom deserve to be challenged as we experience a profession going through one of its most profound changes in decades. Advisory firms of the future will not replicate each other's business strategies, but rather challenge convention, find cracks in the market and make decisions based on facts.
--- Read Are You Zooming In or Zooming Out? Challenging Conventional Strategic Planning on ThinkAdvisor.