What will next-generation financial advice look like?

Bob Veres, who produces the well-regarded “Inside Information” newsletter, looks 20 years out and envisions a time when stocks might well be considered “quaint” and a hologram — rather than Veres himself — posts for him at a meeting with his advisor.

As for the advisor-client engagement, advances in social media and other technologies will no doubt result in astonishing new ways in which advisors and clients interact. As Chris Allen, principal of Evanston, Ill.-based Investius, an online financial video services firm, puts it: “The client is all about ‘You are there for me and you are there for me in a way I need you to be there for me.’ It’s a huge opportunity for advisors to take advantage of technology that permits them to have these points of contact. It’s relationship management on steroids.”

And, gazing across that 20-year divide, the stature of the advisor will change in ways we can barely conceive of today. With the evolving complexity of specialties and services, some industry observers foresee an enhanced role for advisors. Others believe that a lot of next-gen advice will be delivered electronically — just as it is now in the 401(k) space with online retirement planning companies such as Financial Engines, among others.

“I’m not sure how much growth there will be in the real roll-up-your-sleeves person-to-person advice model,” notes Skip Schweiss, president of TD Ameritrade Trust Co. and managing director of advisor advocacy for TD Ameritrade. “I’m not forecasting the demise of the professional advisor; there’s always room for that. But I see online or electronic advice as where the industry is going.”

Connect these two demographic dots — young investors who are technologically adept and who prefer to connect via technology in their online networks — and Schweiss predicts high demand from a generation that will want to get its financial advice electronically.

“The industry hasn’t cracked this code yet — but it will,” he adds. “How can we more efficiently distribute our services to a wider audience? That’s a lot of what the Internet is about. How can I take that model that I provide to my 150 clients today and provide it to 15,000 clients? If the next generation of advisors can take that high-quality advice to the masses, it will be great for consumers.”
In a post-fiduciary reform world, many analysts look for some of today’s advisory channels to blur, if not disappear. “Where the regulatory lines get drawn will define a number of business models that will or will not exist period,” observes Michael Kitces, director of financial planning for Pinnacle Advisory Group in Columbia, Md. Still, Kitces anticipates an expanded version of business models that already exist with a big bump in what he calls a “fee-for-service style:” hourly rates, project-based rates and, possibly, a more fiduciary-based product delivery system.

And while the importance of retirement income distribution planning, huge today, will still be in play, Kitces expects to see iterations of accumulation planning that are far more sophisticated than their predecessors. “Accumulation planning 2.0,” he has tagged it.

“Accumulation planning for baby boomers was pretty easy: Buy, hold, buy more on the dips and hold for 20 years from the early 1980s to the late 1990s and you would have a big pot of money. Who knows? Maybe you’ll get another raging secular bull market that lines up with the next generation but I wouldn’t necessarily count on it,” Kitces says. “2.0 is bouncing around a little now. The research is emerging.”

What else is top of mind for the industry’s thought leaders as they contemplate the future of financial advice? We asked — and here is their expert commentary.

The way Americans hold assets — whether it’s a pension, a 401(k) or an IRA — is changing. What is that slice of pie going to look like 20 years from now and what does that mean for the advisor?

It’s out with the old and in with the new, as Elvin Turner, managing director of Bloomfield, Conn.-based Turner Consulting, puts it. As an example, employer-sponsored pension plans won’t exist in today’s form and defined contribution plans will fade in prominence as IRAs take their place.

While clients two decades hence will still hold individual investments, it will be the cash balance plans, health savings-type accounts and IRAs that assume center stage.

In many ways, according to Turner, the next-gen corporate employee will look a lot like today’s independent contractor.

“Twenty years from now the model is radically different — a fundamental change that will reverberate throughout all the industry and will have implications for everyone and every kind of firm,” he says. The challenge: how to manage different pools of assets that require different areas of expertise.

Already, he notes, sophisticated advisors are beginning to step up with new strategies. For example, they’re telling clients to fully fund their health savings account but not to use it, allowing the money to grow tax-free.

“It’s good news for the informed consumer and wonderful for the consumer who has an astute advisor,” adds Turner. “The bottom line is that given the coming framework, people will need an advisor. The self-help mentality of the ’90s will not be there 20 years from now. Sure, there are expert technological systems in place now that give you great insight and they will be even more powerful in 20 years, but would you trust one with this? I think most investors will go with the human touch.”

How will technology impact the advisor-client relationship?

Looking ahead, technology will have a powerful effect on three key fronts, according to Spenser Segal, CEO of ActiFi, a software and solutions company in Plymouth, Minn.

  1. Collaboration technology, which exists today, builds conferences where two people in different cities appear to be sitting at the same table. “I predict the price will come down from $1 million to something extremely affordable where the advisor is able to conduct what completely feels like an in-person meeting remotely,” says Segal, “It’s video conferencing gone to a whole different level.”
  2. Technology will allow advisors to empower their clients to dynamically manipulate their financial plans “on the fly.” “It’s not like the advisor comes in and shows them a report or this static information,” Segal adds. “Everything is happening in real time. That’s a big change.”
  3. Thanks to advances in technology, the economics of an advisor’s back office will change dramatically for the positive. How so? Activities that cost a lot of time and money today, such as reconciling portfolio data, will become fully automated.

It’s important to note, too, that automation will put downward pressure on what advisors are paid to do today, such as preparing a balance sheet or updating a financial plan. As Segal frames it: “Where the advisor will increasingly add value is in helping you navigate the emotional. What won’t change is human nature. There’s going to be more visceral advice — conversations more about their clients’ lives than their buys. From the client side, that means a big change in expectations of human value-added service.”

Will the advisor continue to thrive as a professional?

First, a glance back. Thirty years ago, it was all about the firm, not the advisor. Twenty years ago, that equation started to flip. “The last 20 years put a lot of focus and power at the fingertips of one person: the advisor,” according to Philip Palaveev, president of Fusion Advisor Network. But look for that to change.

In 20 years, the power will shift away from the individual advisor to a network of professionals, says Palaveev. “You don’t expect your doctor to operate on you and make every single decision. There are so many specialists, particularly in the delivery of health care. Currently, there is not a lot of specialization in the advisor world. Too many are general practitioners,” he adds. “Given the complexity of global investing, global economics and different asset classes, I would expect to see more specialists going forward. We may experience some shift backwards — back from the advisor to the firm.”

Palaveev also said he hopes that the next-gen advisor will have earned an elevated status. “Every time I hear ‘distribution’ or ‘production’ or ‘producer,’ my heart sinks. That’s essentially saying these people are running around delivering a product,” he observes. “My hope is that advisors are seen by their community and society 20 years from now in the same way as doctors, accountants and lawyers. That’s a hope, not a forecast.”

What about client segmentation?

Advisors will continue to chase high-net-worth clients but Lou Harvey, who heads the Boston financial services consulting firm Dalbar, believes the “real revolution” will occur in the mass affluent market.

Taking their cue from the 401(k) world where advisors have an automated method of engaging the client, advisors in the future will use software to service the 100 million-plus mass affluent that today are defined as having $100,000 or more in investable assets.

“You’re going to see mammoth change in this market,” Harvey says. “Middle market folks won’t be able to afford a personal advisor sitting down with them. But the advisor who has an automated method of dealing with them, that’s the guy. It’s wonderful from a consumer perspective, because they will finally be served. They will have a solution that produces some net growth for them. From an advisor perspective, it’s a case of get on board or get left behind.”

What will the big headline in recruitment be 20 years out?

The boutique firms, a relatively new entrant, will gain traction, attracting breakaway brokers and expanding their footprint, according to Mark Elzweig, president of Mark Elzweig Co., the New York City-based search firm.

With the success of HighTower, SeaCrest and, most recently, Dynasty Financial Partners, Elzweig believes the business model will be imitated by others going forward.

“We’re just at the beginning of the curve,” he said. “What you’re going to see and we’re starting to see already is the emergence of both new independent and regional firms that will be very successful in attracting the advisor who is looking for upfront money and/or stock and true open architecture.”

As a recruiter, Elzweig also expects one day to include in his packages something that isn’t disclosed right now: an advisor’s performance data. “In addition to providing gross assets under management, the type and number of accounts, I will have to provide performance information,” he added. “People who are making the hiring decisions aren’t just looking at gross, they’re looking at profitability: How big are the accounts? What’s the average client age? Is the advisor doing a lot of small tickets? At some point the firms will figure out a more sophisticated means of assessing the profitability of an advisor’s book. And that will represent a change.”

Will the independent sector continue to gain market share at the expense of the wirehouses?

Absolutely, according to Chip Roame, managing principal of Northern California-based Tiburon Strategic Advisors, who believes wirehouses will have jettisoned their advisor forces by 2021.
In his view, brokerage firms will look more like Goldman Sachs and less like Merrill Lynch. Discount brokers will do “exceptionally” well. And most retail advisors will work in an independent model with clients who have their eyes wide open.

“There’s no more hidden fees. There’s no more: ‘I don’t know what my broker does. He’s so smart.’ Advice is going to be a piecemeal job. Maybe I pay you to rebalance my portfolio or to get a financial check-up. It’s more like the doctor model. And advisors won’t be riding the one percent (of AUM) gravy train, which is what they are doing today,” Roame says. “We are headed for a place of: ‘I pay you when you do well for me and I pay you when you give me advice.’ I sell you 10 hours of my time and I intellect with you. I spend time thinking and helping you, solving real business and financial problems.”
And, at its essence, the value of the advisor won’t be in selecting an investment but in giving personalized advice.

“The investment is obvious but the advice might involve: ‘I’m thinking of getting remarried, I’ve got three kids, I hate my ex-wife, my second kid is a dope dealer. What do I do?’ You pay for stuff like that — not for picking 10 mutual funds you think are going to do well,” Roame adds. “The consumer wins in the next 20 years; that’s what’s going to happen.”

Up next in our March pages: What are today’s advisors doing to replace themselves?