Evolution of Advisors: Trends, Challenges in the Advice Industry

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.

The 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.”