Determining client goals and risk tolerance, then allocating portfolios between asset classes (additional financial planning is optional), is a high-margin business in which the advisors in a firm typically take home 60% or more of their substantial revenues.
But what happens if the “Golden Age” is coming to an end? The Federal deficit that exploded under Bush and seems to be spiraling out of control under Obama has the potential to choke off our economic recovery for the foreseeable future. If that happens, creating volatile “trading range” markets with little or no overall gains, investment success will shift away from allocated buy-and-hold portfolios that take what the market gives, to stock picking, market timing, commodities, and dare I say, speculation.
Where will that leave the business of independent financial advice? It seems to me advisors will have two options. The first is to bring in-house the necessary economic and financial expertise to actively manage future-looking, high-turnover portfolios. But these folks are expensive: Putting them on staff, or even adding them as partners, will undermine the current favorable economics of independent firms.
The other option is to continue the trend to outsource investment management altogether. While the cost of this route can be considerable, many firms today find that the savings in overhead from not managing client portfolios or dealing with backoffice trading, confirming, reconciling, reporting, etc. more than offsets the additional expense.
What’s more, the advisor moves further into their clients’ corner, helping them to sort out potential managers, and distancing themselves from portfolio performance.
This option is better for the clients, better for advisors, and if it results in better portfolios even in challenging markets, may truly be a sliver lining.