As we begin another new year, a fresh set of challenges and opportunities await the world of financial advisors. The themes remain the same as years past—technology, regulation and practice management—but the landscape is shifting.
In terms of technology, 2014 seems to have been the year of the “robo-advisor,” but I anticipate that 2015 will be the year of “robo-advisors for advisors,” with a looming explosion of financial technology (or “FinTech”) for advisors. While the robo trend has not actually picked up much in the way of client assets, it has clearly highlighted the lack of competitive technology solutions for advisors, and that’s a business opportunity a number of new businesses are aiming to solve. After years of having few and poor choices for technology, 2015 may be the first year of a new trend, where instead the challenge for advisors is making a decision in a sea of overwhelming (though not necessarily all good) choices.
With respect to regulation, we face yet another year of potential proposals on a new fiduciary rule, but with the Department of Labor set to announce their fiduciary redraft as early as this month, we may finally be about to move on to the next stage of the debate. In the meantime, regulators are poised to make mandatory succession planning (or at least, business continuity planning in the event of death, disability or retirement of the advisor) as the surprise “hot” issue of the year, and the first half of 2015 will also witness an outcome to the case of Camarda vs CFP Board which, win or lose, will have significant ramifications for the role of the CFP Board and its marks in the future of the financial planning profession.
The third big trend for advisors in 2015 is the ongoing slow-motion “crisis of differentiation” unfolding among advisors. As organic growth rates slow for the entire industry, there simply aren’t as many “unattached” clients as there once were, and as more and more advisors step up to deliver financial planning and wealth management, being an experienced and credentialed advisor just isn’t the differentiator it once was. I
n the coming year, I anticipate we’ll see a lot of advisory firm taking a hard look at their current marketing approach, sowing the seeds of a future niche or specialization to reignite their growth in the future, and/or making a commitment that it’s no longer enough for the average firm to spend a mere 2% of revenues on marketing anymore.
Trend 1: An Explosion of Advisor FinTech
As predicted in last year’s Top Issues article, the robo-advisors vs (human) advisors discussion dominated the industry news cycle in 2014, even though the reality is that the true robo-advisor platforms have little more than about $3 billion of AUM collectively, in what’s estimated to be a $33.5 trillion marketplace for investable assets. Notwithstanding their paltry assets and 0.01% market share, though, the real impact of the robo-advisor trend on advisors is not taking clients from human advisors but casting a bright light on the poor quality of technology solutions available to advisors, especially on what’s being used as a “front office” interface with clients. From an entirely digital onboarding process, to a nice web portal and app for clients, the robo-advisors built from scratch what many of today’s (human) advisors haven’t been able to buy even if they wanted to. Expect that to change in 2015.
In the coming year—starting with next month’s T3 Advisor Technology conference—I anticipate that we will witness an onslaught of new companies seeking to serve advisors, providing them tools that allow them to “compete” with robo-advisors (though in truth it’s more about serving their own clients better than any actual head-to-head competition).
The emerging trend actually began in late 2014,with some early robo-advisor incumbents that have had slow revenue growth in the direct-to-consumer market pivoting towards advisors, including the launch of Betterment Institutional, Jemstep Advisor Pro and Motif Advisor. In 2015, expect to see even more new startups that attract (modest) venture capital funding to pursue advisors right out of the gate and try to turn them into “cyborg” (or “bionic” tech-augmented) advisors; Upside Advisor started down this road in late 2014, and more will follow.
Some of the large-firm incumbents (custodians and/or broker-dealers) will build their own solutions as well, like Schwab Intelligent Portfolios, while the rest feel significant pressure to either create their own, too, or partner with new providers to bring similar solutions to their advisors.
What will change as these robo-advisor-for-advisors platforms come forth is a recognition that robo-advisors were really just nice technology for a paperless onboarding process and ongoing interfacing with clients, built on top of a relatively simple passive TAMP solution with automated rebalancing software. In the first stage, robo-advisors began the process of turning passive strategic asset allocation into a commodity at a low price point of 0.25%, justifying their value with a technology-augmented superior client experience. In the next stage, human advisors will get access to the same “robo” technology, offer it to clients as a free giveaway while they layer additional value-added (e.g., financial planning) services from (human) advisors on top. That will raise the question of why consumers should pay a robo-advisor anything at all.
The caveat to the prospective explosion of Advisor FinTech in 2015, though, is that it may create more confusion than solve problems, at least for now. A plethora of choices will actually make it difficult for advisors to decide which vendors to adopt (or even find the time to analyze and compare them all), further complicated by the fact that many will be startups that don’t survive (forcing the advisor to vet the company’s management and business model for survivability, or risk being forced to change software again in a year or two).
The lack of clear industry data standards will require software integrations to be an ever-expanding and unmanageable (for most vendors) volume of point-to-point integrations, making it a struggle for advisors to patch together which software and tools will work with which other software and platforms. And many custodians and broker-dealers may use this technology fractionalization as an opportunity to launch a fresh wave of proprietary solutions for “their” advisors, creating a new form of “technology handcuffs” that will make it harder for advisors to change platforms in the future (after what had been a trend towards greater advisor flexibility across platforms in the past few years).
Notably, the coming wave of new advisor FinTech may also finally solve some of the biggest gaps in the advisor technology stack: the lack of a centralized Personal Financial Management (PFM) portal for clients and a centralized practice management dashboard for advisors.
Expect to see some new FinTech categories emerge as well, such as the next generation of trading and rebalancing software to create “Indexing 2.0” solutions that threaten to make mutual funds and ETFs irrelevant (the robo trend’s biggest true disruptive threat to the existing financial services industry).
Trend 2: Camarda vs CFP Board; DOL on Fiduciary; Succession Planning for RIAs
While the CFP Board is not technically a regulator, its enforcement actions as a quasi-regulator for financial planners have landed the CFP Board in a lawsuit with CFP certificants Jeff and Kim Camarda, who have sued the CFP Board to block it from publicly disciplining them over their use of the “fee-only” term in their compensation disclosures. The stakes in the Camarda case are significant for the CFP Board financially and as a validation (or repudiation) of the Board’s legitimacy to be an enforcer of professional standards for financial planners.
With depositions done and still no settlement in sight, the case will likely go to trial and come to a conclusion in the first half of 2015. Win or lose, the outcome will have significant ramifications for the future role of the CFP marks,and the CFP Board itself in the regulation of financial planning as a profession.
In the meantime, the second (and final?) draft of the Department of Labor’s proposed fiduciary rule (including, most controversially, the potential expansion of the fiduciary duty to advisors who recommend rollover IRAs) is still scheduled for release to the Office of Management and Budget (OMB) in January. Assuming the rule really does come forth, expect to see a great deal of debate in the first quarter of 2015 as OMB has 90 days to review the rule for potential adoption.