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The Flatter World of Financial Services

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During the previous decade we have often heard allusions to the world getting flatter, as a reference to advances in technology shortening the distance—virtually—between people and cities. The world is also getting flatter in the financial services industry as the lines between various professionals can blur, such that they all offer similar services: investment management, insurance products, financial planning and estate planning, among other services.

This blurred distinction means that the typical RIA is no longer competing with just wirehouse and brokerage representatives but now also an army of insurance agents looking to generate revenue as wealth managers. Further evidence that the lines are blurring continually comes from news that brokerage house financial consultants may soon bear the burden of acting as a fiduciary for retirement accounts (see “SEC’s White Supports Fiduciary Rule for Brokers, Third-Party Audits”), which would take away an advantage that currently resides exclusively within the advisor community.

Of course, this doesn’t even begin to address the robo-advisors who are targeting a younger, and growing, generation of clients. While the all-ETF, passively managed portfolios that robo-advisors create based on their clients’ self-assessment of goals and risk tolerances can get the job done, the nature of the self-assessment process and the complete reliance on automated rebalancing removes discretion and ignores behavioral flaws that are so often the biggest impediment to long-term investing success. Financial professionals should take the time to understand this emerging technology and its drawbacks, which will increasingly become competition for their services.

Registered investment advisors still maintain competitive advantages that include not being beholden to using a limited number of in-house, proprietary products and having restricted access to the innovation that exists in the ETF marketplace. It is still the case that many insurance agents can only use traditional mutual funds with loads from their parent company.

The advantages and benefits of ETFs have been reviewed many times in this column, but the reality remains that more innovation is occurring within the ETF market. Investors, both institutional and individual, and advisors on behalf of their clients are voting with their investment dollars. With markets evolving at a seemingly exponential rate—and as central banks purchase assets to stimulate growth, with at least five European countries having negative yields on five-year sovereign debt—the advantage that RIAs possess is unfettered and non-conflicted. They can access transparent, operational-efficient and tax-efficient ETFs covering all asset classes to best meet the needs of their clients.

Transaction-based representatives limited by restrictions and access only to proprietary products, which can be quota-driven, do not have to meet a fiduciary standard for clients, but the uniqueness of the ETF structure has allowed RIAs greater flexibility and transparency to use their expertise solely on behalf of their clients’ best interests.

We have previously used an analogy that the proliferation of the ETF industry has allowed advisors to serve as either a player or a coach for a client’s portfolio. As the player, an advisor can be the risk-taker by using beta, passive investment vehicles to make active investment decisions and seek alpha for clients’ portfolios. As the coach, advisors can better focus on other areas of their practice while overseeing different managers for their client portfolios. Thanks to the advent of actively managed ETFs and ETF managed portfolios that already seek alpha, advisors have the option to make a manager change when a need arises.

The RIA model has proved itself to be continuously forward-thinking, striving to provide the best service for clients—not just for managing an investment portfolio, but also comprehensively managing clients’ wealth and financial well-being. Consequently, it is logical to expect other parts of the financial services industry to move congruously. The advantage of staying ahead for clients relies on innovation, which is not a coincidental correlation to the ETF industry’s progression.

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