There are five forces of change affecting the advice industry over the next five to 10 years, Sanjiv Mirchandani, president of Fidelity Clearing and Custody, said in a webinar.
“Generally, things are pretty good for advisors,” Mirchandani said of the current situation. Growth has been strong since the crisis, and between 2009 and 2013, industry assets have grown 8%, advisor income has grown 9% and average book assets are up more than 11%.
However, “things are not as bright as they seem,” he added. About half of that growth is from improvements in the overall market. “When you look to the future, we see great opportunities but also great risks coming together to create a very different landscape for the future.”
He warned advisors not to rest on past success. “A comfortable position may not be one that puts you in the best position for the future.”
Here are the changes all advisors will need to grapple with:
1. Enormous consumer opportunity. As advisors’ oldest clients continue to age and pass away, there’s a huge intergenerational wealth transfer opportunity, Mirchandani said: 70% of heirs fire a financial advisor with 12 to 18 months of the client’s death.
With baby boomers, Mirchandani said, “what is vastly underestimated is I believe when boomers enter retirement, the opportunity for advisors is much richer than many believe, and the risks are greater, too.”
Gen X and Gen Y can’t be approached the same way advisors have approached their parents, he said, “and we certainly can’t afford to give them at this point the same level of service.” However, “advisors who have a significant proportion of clients under 45 grow at an average of 14.1% a year, compared to a 7.7% annual growth rate for advisors who serve older clients.”
Women have greater influence, too. “There’s an enormous shift of wealth underway to women in the United States as they increasingly come to earnings parity and outlive their partners. They are an ideal client, yet they are tremendously underserved,” Mirchandani said.
The result of those demographics is that there will be “an enormous amount of money in motion” over the next decade.
2. Looming advisor transformation. The advisor population is shrinking by about 2.9% a year and the next generation of advisors is not keeping up, Mirchandani said. Furthermore, advisors over 60 hold $2.3 trillion, and many don’t have a succession plan. By 2020, the industry will be short 10,000 advisors.
He suggested the No. 1 thing the industry needs to do to meet that demand for advisors is to make advisors more productive. He pointed to wirehouses as an example of a model that has the most productive advisory force. “They’ve accomplished this by cutting small producers and clients, retaining top producers with retention bonuses, targeting high-net-worth clients and deploying cost cutting measures,” he said. The problem, though, is that most of their growth “comes from market action, not flows” and they’re still faced with the problem of an aging client population.
The keys to productivity, he said, are being planning centric, working on advisory teams, segmenting clients, outsourcing investment management and maximizing technology.
3. Rise of digital-human interface. Now that established players like Schwab and Vanguard have entered the robo business, Mirchandani said, they’re a bigger threat to advisors’ businesses than the startup robo-advisors. “This is going to legitimize robo-advice, and this model is becoming more mainstream,” he said.
He added that robo-platforms aren’t just for millennials but all investors because “over time, it becomes about value for the money.”
4. Change in value creation. A lot of the services advisors used to provide for their clients — asset allocation, alpha generation — are being commoditized by robo-advisors and ETFs. Tax optimization strategies like tax loss harvesting and asset location, and behavior management can help advisors demonstrate their value beyond the investment management sphere. Regarding behavior management, Mirchandani said, “getting people to be consistent and stay invested and not get whipsawed by the market, this alone can add hundreds of basis points of value to the investor.”
5. Strategy in age of consolidation. The advisory industry is “highly fragmented,” Mirchandani said, and the economics of consolidation make sense for both the buyer and seller. Older advisors are looking to sell their firms, and younger firms are looking for ways to scale their operations and expand their geographic reach. Consequently, Fidelity sees no slowdown in consolidation among RIA firms.
Bank consolidation is slowing, but Mirchandani said that “many banks in recent years have turned to wealth management to be their growth engine.”
The independent broker-dealer space has been “hot,” he said, and retirement recordkeepers are also seeing consolidation.
“This kind of environment puts a premium on having a clear strategy. What we tell our clients is that one way to think about it is to consider it as if you have three stock choices: You can either be a consolidator, a seller or you can be a focused and differentiated player,” he said. “Depending on what you pick, it’s really important to be mobilized around the key success factors for each.”
For consolidators, that means building a “consolidation brand and reputation” by purchasing good businesses at good prices and keeping access to low-cost, stable financing. “You can’t leverage yourself up too much. It’s got to be done with a strong equity capital base and currency.”
Sellers’ success factors are “pretty straightforward,” he said. “You’ve got to be clear about what your objectives are. You’ve got to get the right valuation in place. And if you want to continue on a post-sale basis, it’s very, very important to find a firm with the right cultural fit.”
Most Fidelity clients fall into the last category, though, he said. They’re success is based on having a very clear value proposition; investing only in areas of differentiation, which Fidelity defines as the areas a firm’s customers are willing to play a premium for, and to “ruthlessly outsource everything else”; and exploiting adjacent businesses.
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