What are advisors’ goals today? Improving business practices and investment knowledge, connecting with clients in a more challenging market, and making more tactical/opportunistic investments were the three top areas of focus for most of the investment advisors who participated in a recent supplement to the 2005 Rydex AdvisorBenchmarking Survey.
This year’s survey measured advisor views on a broad range of issues–from technology investments to the direction of interest rates, from down-market strategies to definitions of business success. As usual, advisors operating in the increasingly competitive financial services industry environment are not content to rest with the status quo.
It should come as no surprise that, as a group, advisors are keenly focused on improving business plans, processes, and investment skills in order to raise assets and retain their more profitable clients.
All advisors surveyed indicated that they had some clearly identified goals for self-improvement. Thirty-eight percent of registered investment advisors (RIAs) rate technology reports/data access as their top self-improvement goal for 2006 (see “Areas to Improve” chart below).
Advisors highly rank the need for improved access to product information, reporting capabilities, and associated data storage and retrieval systems. Although paper proliferation exists in every industry, relatively few advisors have decided to go paperless so far. Those who have taken this step reportedly realize significant savings in staff time, file cabinets, and office space. For many advisory firms, investments in online research databases, scanning technologies, and secure networks have helped create much more efficient investment processes.
Focus on high-net-worth clients. Thirty-one percent of advisors rate increasing their knowledge of issues unique to high-net-worth (HNW) investors as a top goal. Advisors are sensitive to clients’ needs for comprehensive estate, tax, and business succession planning, as well as exposure to absolute return investing, alternative asset classes, downside risk protection and charitable giving vehicles. Forming partnerships and alliances with other professionals who have specialized expertise in these areas has become critical to managing the growth in financial advisory practices.
Harness more investment products. Despite years of predictions that the financial services industry would undergo significant consolidation due to its maturity, advisors must contend with an ever-increasing array of products. Some advisors seem eager to deploy the best of these new offerings in their portfolios. In fact, offering clients a wider, better range of products ranked as a number three goal, cited by 23% of the survey respondents.
Choices available to individual investors have moved far beyond traditional long-only stock, bond, and mutual fund portfolios to encompass annuities, exchange-traded funds (ETFs), indexed equity and fixed-income products, hedge funds, “pure” currency plays, and sophisticated tactical asset allocation programs, and inverse strategies. Advisors are increasingly interested in gaining a better understanding of how these products can be integrated into portfolios.
Less interest in educating clients. Somewhat paradoxically, a scant 8% of advisors want to improve their skills in investor education, by offering effective seminars or one-on-one sessions focused on themes of particular interest to clients, which typically are understood to include specialized investment products, income distribution options, wealth protection strategies, and portfolio diversification using non-correlated asset classes.
It’s clear from other recent research that advisors need to play an educational role for clients, particularly in the area of specialized investments. In a June 2005 Rydex investor survey, 42% of the respondents had never heard of inverse mutual funds and 29% didn’t know what ETFs were. Twenty-six percent had never heard of sector funds. The most consistent reason investors gave for not investing in specialized products was that they didn’t know enough about them.
Checking vitals for a healthy business. When it’s time to review financial performance, most advisors look at assets under management growth (39%), client retention (34%), and revenue growth (29%) to assess the state of their businesses (see “Evaluating Their Businesses” chart, below).
A Growing Disconnect
Operating in an increasingly complex and challenging investment climate, advisors expressed a need to be more in sync with clients in terms of shared views about markets and investment strategies. When AdvisorBenchmarking compared the results of similarly constructed and tracked advisor and investor surveys, we uncovered a number of instances in which advisors and their clients have surprisingly divergent views–interest rates in a post-Greenspan world and asset allocation strategies. These gaps could have a significant effect on the long-term health of advisor-client relationships.
The post-Greenspan world. When advisors and their clients speculated on interest rate policy in a post-Greenspan world, there was a marked difference in expectations. While nearly half (44%) of clients somewhat or strongly agreed that the departure of Federal Reserve Chairman Alan Greenspan will cause a dramatic increase of interest rates (see “Clients’ Expectations on Rates” chart, above), a near majority of advisors surveyed (46%) neither agreed nor disagreed that interest rates will increase dramatically (see “Advisors’ Expectations on Rates” chart, below).
Only 23% of the advisors surveyed somewhat or strongly agreed that interest rates will increase dramatically. Advisors may find it beneficial to communicate their reasoning behind their views on this topic with their clients, as evidently many clients have a decidedly different take on a fundamental threshold issue affecting their portfolios.
Use of traditional asset allocation strategies. The majority of RIAs surveyed (63%) said that allocating among the three main asset classes–equities, fixed income, and cash–can provide adequate diversification for their clients. Nevertheless, our investor survey showed that only one in four (23%) has a formal asset allocation strategy in place. The remaining respondents (57%) use an informal strategy or no asset allocation strategy at all. This suggests a wide chasm between advisors and investors on why asset allocation strategies are important.