Close Close

Practice Management > Building Your Business

Evolution of Advisors: Trends, Challenges in the Advice Industry

Your article was successfully shared with the contacts you provided.

As advisors begin preparing for the new year, AdvisorOne spoke with Jeff Montgomery, CEO of AFAM/Innealta Capital, to see how the advisory industry has evolved and what changes advisors can expect in the future.

Jeff Montgomery, CEO, AFAM/Innealta CapitalThe biggest trend in the advisory industry is the increased interest in risk management, Montgomery (left) said, especially from clients. “If you have lunch with any financial planner, they’ll say, ‘I’m getting asked by my clients about risk management.’ That wasn’t coming from clients 10 years ago.”

Montgomery acknowledged that this isn’t the first time people have said, “This time is different,” but he was confident that this time it’s true. “Boomers were in the decumulation phase during the crash,” he said. “People underestimate volatility and they overestimate the noncorrelation of traditional asset classes.”

As a result, Montgomery said, advisors are taking a “keen look” and keeping a minimum of their portfolio in alternatives. They’re also looking closely at black swans. “They’re one in a thousand, but these events seem to be more common,” he said. To be prepared for those unpredictable events, advisors are looking at tactical asset management, Montgomery said.

“Tactical means adaptive to risk in the markets,” he said. “Instead of using long-term buy-and-hold strategies, tactical lets us seek alpha and keep growth funds, and value funds, and buy-and-hold, because we’ve immunized the portfolio.”

In addition to risk management, advisors are also evolving the way they address their practice structure. “Practice structure is not just succession,” Montgomery said. “Many practices haven’t cracked the code on succession, but they’re thinking about it in a more sophisticated way.”

Montgomery pointed to people like Philip Palaveev, CEO of The Ensemble Practice, and Mark Tibergien, CEO of Pershing Advisor Solutions, who aren’t just thinking about selling a practice or adding a junior partner as a succession plan, but who are looking at margins and staff for solutions.

Advisors are also changing the way to perform due diligence. “A lot of advisors take a much more sophisticated due diligence process,” Montgomery said, that includes full risk questionnaires and interviews with their affiliates. Additionally, “there’s a new school of thought in daily operations on roles and responsibilities.” Some firms have established due diligence committees or a chief investment officer to meet these responsibilities, he said.

“Staying nimble is its own strategy,” Montgomery said. “These advisors are so much quicker to deal with issues and assess risk and weaknesses at money managers.”

Finally, the client service model itself is changing, Montgomery said. “Advisors are reinventing the client service model by offering self-service technology and becoming specialists.” Ten years ago, he noted, advisors were presenting themselves as “generalists” who could help clients with a variety of planning issues. Today, advisors are focusing on one aspect of planning, he said.

Looking ahead, another change advisors should be prepared for is the rise of exchange-traded funds. “There’s going to be an absolute sea change with regard to ETFs,” Montgomery said. Various providers are driving the price of the products down, so advisors should expect “more money in the ETF marketplace.”

Furthermore, the managed ETF space is the fastest growing segment, Montgomery said, citing research from Morningstar and BlackRock that predicts a 30% increase over the next three years. “We’ll be hearing a whole bunch more about managed ETFs. They’re growing faster than alternatives or fixed income as an asset class.”

Along with change in the advice industry come challenges. One of those, Montgomery said, and it should be no surprise to anyone, is market uncertainty. “Markets are so interconnected and correlated,” he said. “You didn’t have that scenario 20 years ago.”

Another challenge is in declining margins, Montgomery said. He anticipates a new wave of mergers coming.

One challenge that has gotten a lot of attention is the war for talent, Montgomery said. “It’s really hard to get good young talent into a firm,” he said. “There’s a decline in young people coming out of school into the industry.”

Finally, advisors are looking at more competition from nontraditional sources, including, in some instances, their own clients. Online brokerages have made it easier for investors to self-direct. “It won’t put a big dent in advisors’ businesses, but it will be a speed bump.”

Other nontraditional sources of competition include foreign competitors, investment managers and banks. “Banks are migrating back to asset management,” Montgomery said. “Spreads on loan business are not favorable, so they’re getting back in the asset management business.”

CORRECTION: An earlier version of this story gave Mark Tibergien’s title as CEO of Pershing. He is CEO of Pershing Advisor Solutions, an affiliate of Pershing LLC.


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.