The Future of Advice: The Bad News Looks Better Than the Good News

“Our research has found, conclusively, that while the type of advice and the delivery of these services to individuals has and will continue to change, the demand for personal financial advice and one-on-one advisory services has the potential to increase significantly over the next five years. […] In fact, the survey findings pointed clearly to a set of best practices for advisors and the industry.” That’s from “The Future of Advice” series of reports released by InvestmentNews Research (INResearch) in October 2014.

Apparently, 2014 was the year of over-hype for advisory industry surveys. Readers may remember my October Investment Advisor column, in which I called out FA Insight for over-emphasizing the “dramatic” growth in advisory firms from 2008 to 2013 without quantifying the impact of the 900 or so point jump (about 80%) in the stock market during that period. As the above quote illustrates, other industry researchers are not immune to market risk blindness, nor making rather exaggerated claims about their results. With that said, INResearch’s latest installment does offer some interesting insights into the impact (or lack of same) to date of robo-advisors and today’s investors’ attitudes toward financial advisors.

INResearch bases its “conclusive” findings about the future demand for financial advice on how nearly 1,000 investors across the U.S. (including 490 “do-it-yourself investors”) answered this question: “How do you believe your needs for financial advice will change over the next five years?” Only 2% said they will not need any “professional financial advice,” and only 10% felt that they will need “less direct, personalized and professional financial advice.” That left 32% who didn’t “expect their needs to change,” and a whopping 54% who felt they “will need more direct, personalized and professional advice” in the coming half-decade.

The finding that more than half of U.S. investors expect to need more professional advice in coming years is certainly great news for the advisory industry. Unfortunately, INResearch doesn’t provide more detail about who those 1,000 or so investors are (although they do refer to some age groupings in other responses). Without knowing the age ranges or portfolios sizes of these investors, or whether they currently work with an advisor, it’s hard to get too giddy about these results.

Then there’s that pesky stock market thing. If my fuzzy memory serves, investors tend to feel pretty good about their advisors when their portfolios have had a seven-year bull market injection, but often sour when the market inevitably goes south for a spell. Call me crazy, but at least the possibility of a market correction makes investor attitudes over the next five years a bit less than conclusive. (Don’t get me wrong: I’m not calling the market, merely suggesting that advisors might want to factor the possibility of a correction into their five-year business plans and data analysis.)

As for those “best practices for the industry,” the INResearch report offers a few areas in which its authors believe advisory firms of the future will have to excel. Yet, as you’ll see, in most cases, the data cited falls short of supporting many of these claims.

When analyzing this data, it’s important to keep in mind who the surveyed advisors are: Of the 552 advisor respondents, 74.1% were over 45 and 83% were male. Over 60% were affiliated with a brokerage firm, and 41.4% “described themselves as RIAs” (the total is higher than 100% because advisors could denote more than one affiliation). “Fees and commissions” was the largest compensation category with 47.2% participants, while fee-only comprised 36.6% and commissions made up the remaining 16.2%.

Here are those best practices:

1. Continue to evolve business and service models. The evolution in question here seems to be the 30-year transition from commission to fees, yet the survey fails to provide any historical data as to whether this trend is gaining momentum or slowing down. However, it does provide two informative insights about advisor compensation. The first concerns recent compensation developments: “Much has been written about newer forms of compensation, including hourly fees and retainers,” the authors wrote. Yet, at least among the participating advisors, this new wave appears to be going nowhere: 2.9% of advisors are charging hourly fees and “just 0.7%, are charging retainers and project fees.”

At the same time, the so-called robo-advisors don’t seem to be driving down advisory fees: 36.6% of the respondents don’t expect their fees to change significantly over the next five years. However, the authors added: “It is the youngest cohort of advisors, those under 35, who are most likely to say that their fee levels will increase. Perhaps this is purely optimism talking.” I would suspect that rather than the hubris of youth, the more likely explanation is that younger advisors, who are starting new firms, tend to price on the low side to attract more clients, with the intent of raising their fees to be more in line with other firms as their practices become more successful.

2. Advisors need to reach out to youth. The survey authors wrote, “Only 5.6% of respondents were under 30” and cited “a recent survey by Accenture, [which found that] only 5% of advisors working today are under 30.” The survey also found that “41% of advisors reported that they had no partners or staffers, other than administrative, under the age of 35; and only 26.6% said they had a formal plan in place to attract young talent.”