The last 30 years altered the retail investment business and its compensation practices. For the next 30 years, the journey is certain to take even more twists and turns.
A Quick Look BackFees were virtually unknown 30 years ago. 12b-1 was not the bread and butter of the business. 401(k) was an Internal Revenue Code. Mutual funds were a sideline for most practitioners. There was no full-service brokerage because there were no online or discount houses. Financial planning and managed accounts were new concepts. Alternative investments were still a long way off. In 1978, financial representative paychecks were simply sales commissions.
Forecasting the FutureOver the next three decades, retail investing will become even more important in supporting an aging population, as traditional pension plans become nostalgic, “remember when” musings.
The next 30 years will continue to be framed by innovation, technology, scandals and crises, with the predictable government reactions and overreactions. Balancing such change will be the inertia of bureaucracies that will slow, but cannot stop, progress.
Peering into the future is perhaps best accomplished by examining each decade separately. Disclosure will be the theme for the next 10 years, followed by taxing wealth, and the demise of government-sponsored social programs. Warning: It’s not exactly a pretty picture, but there is light at the end of the tunnel for the advisor who is prepared.
The Decade of Disclosure (2008-2017)The signs are everywhere for disclosure. Congress, regulators, press and consumer groups are demanding more clarity. The result will not be arcane fine print that explains how costs are calculated and compensation is paid. Neither will disclosures be the plain-English explanations that are currently proposed. The pursuit of disclosure will continue until there is overt price competition.
The exposure of “hidden fees” will erode the public trust in the investment industry. As the public gains experience with the economics of investing, the naivet? of belief in a free lunch will give way to a search for the best deal. This search will force unbundling and price competition. Elected officials and regulators will seek fame by exposing the “unfair” practice of bundling investment products.
Unbundling will shrink the compensation for retail brokers, and investors will be forced to use paid advisors for guidance.
The advisors who give up commissions and become true fiduciaries will be the beneficiaries in this decade. These advisors will win virtually all retail business and earn the majority of the compensation. The commission business will all but disappear in the rush of investors seeking trusted guidance.
The Decade of Taxing Wealth (2018-2027)The second decade of our journey will see the escalation in the cost of health care and other government services. Not surprisingly, our current tax structure will not be adequate to support these rising expenditures.
The government’s next best option is to tax financial assets in addition to taxing income and real estate.