These trends are changing the way advisors serve their clients and build their businesses. (Illustration: Gary Neill)

It’s been a tough few months for financial advisors and other firms along the supply chain. There’s been no shortage of daily distractions: The markets have given AUMs a haircut. Regulators continue to wrestle over standards of service. And robo-advisors are both capturing investors’ imaginations and threatening to squeeze margins.

What can you do? Start by lifting your sights from the day-to-day stresses and think about the major trends affecting our industry — and your long-term strategy. That always helps put distractions in the appropriate context. Right now, I count five trends important enough to require that you think proactively about how you are going to deal with them.

What’s Driving the Trends?

It’s important to know what the trends are, and it’s important to know what’s driving them: Consumer preferences, competitive threats, compliance and regulatory noise or some combination of these “Three C’s.” Then you can decide, if you’re an advisor or part of a firm that serves them, whether it’s just a passing fad, a trend you can beat or a systemic change you can’t ignore.

Take robo-advisors: They’ll either carve out some market share or expand the pie — and one way or another, you’ll have to deal. Ask yourself: How do the new algorithmic platforms affect my business? If you have a tech-intensive client-service experience, you might be more sensitive. And if you are looking to work for only three to five more years, maybe you don’t have to spend a lot of time on the issue (but your successors will).

Together with my resource partners (see Open Architecture Structure at, I recently had the opportunity to discuss the five trends that matter with an impressive group of industry executives while at the FPA Major Firms Symposium. Here, in order of importance, are the top five trends — and some ideas for how to deal with them.

Trend 1: Regulatory Storm
Drivers: Consumer preference, compliance and regulatory noise

Many people equate regulation with the fiduciary fight because it’s in the headlines so often. Certainly that’s the big brouhaha going on now, but it’s far from the only set of rules in transition. Regardless of your business model or how successful you are, you can still be derailed by regulatory over-reach. Think about the evolving focus on cybersecurity: Are you certain that you know what you need to do?

In a recent survey Strategy and Resources executed for the Financial Services Institute (FSI), CEOs ranked regulation as their No. 1 problem because they have the least amount of control over it and the least ability to prepare. The ongoing uncertainty and the political circus make for interesting discussions in boardrooms, but insofar as creating a strategy, it’s hard to implement meaningful change. Take the coming Department of Labor (DOL) rules. You may think you know the way it will go, but there’s no rule yet. How do you convince your board, which represents your shareholders, that you should change the firm in anticipation of rules that may morph dramatically, or may never even come to pass? If you’re smart, you’ve got multiple strategies in mind, awaiting final guidance.

When thinking about fiduciary regulation, or regulation in general, consider that there are two drivers. One is the obvious fact that regulators need to justify their existence. But the second driver — the reason for the regulatory over-reach — is important. The fiduciary fight has traction because of the trust gap that exists between consumers and the industry, Main Street versus Wall Street. Years of self-inflicted wounds, from Bernie Madoff’s massive Ponzi scheme to the market meltdown, have fostered distrust in capital markets in general. People lost a lot of money and suffered a great deal psychologically as well. Retirees had to scramble and workers lost jobs and homes. Even if your firm was not directly involved, it’s easy to see that the overall financial industry did not serve our society well at that moment.

What’s worse, the industry did not step up to remedy its problems internally, within the family of firms. Instead it’s drawn lines in the sand and each side has thrown the other under a bus. That opens the door for consumer advocates like Barbara Roper, director of investor protection at the Consumer Federation of America, to imply that the entire industry is tilted against the consumer, like casinos, and the little guy won’t ever get a fair deal.

This is something the industry has to face with courage and figure out together. It’s not good for us to fight among ourselves — especially in a language most consumers don’t understand. It just makes them even more distrustful.

Our communications are buried in gobbledygook. The industry has not helped itself by avoiding the obligation to create an informed consumer. As a result, regulators see an aging population that doesn’t understand what they’re buying, that may have cognitive issues, that may be working longer and doesn’t have time to lose money or to recoup. If the industry doesn’t try to solve the problem, the regulators will. And it creates room for a disruptor to step in.

Trend 2: Succession or Consolidation? That Is the Question
Drivers: Consumer preference, competitive threat

Most advisors fail to plan effectively for succession. Owing to misinformation in the marketplace about practice valuations, the number of active buyers, etc., there’s a belief that even the smallest solo practitioner has built actual transferable equity, and that he or she will enjoy a liquidity event when it’s time to “go fishing.”

In most cases, that equity simply isn’t there, at least not in terms of value to an outside buyer.

The result is two-fold: The advisor’s expectations will not be met, and clients and possibly staff will be abandoned when the principal retires or dies.

Like investors, advisors have suffered from the impact of the Great Recession. Some have successfully rebounded while others are simply not as effective as they once were. Many among the soon-to-be-retired generation of advisors are accidental entrepreneurs — great rainmakers, but not so good at operations. Many never wanted to run a business and they didn’t develop the skills to do so.

Today, advisors have a new succession opportunity: They can sell to consolidators and institutional players. Over time, there will be increased exit options on both the buy and sell side for advisors, as well as for broker-dealers (see my former colleague Mark Tibergien’s column, “RIA Buyers and Sellers Are Growing Wiser,” on this very issue).

Consolidators have different strengths and focus. Some can solve for operational efficiency, some for business development, and some provide a pathway to becoming a hybrid — the business model with the edge right now. But bear in mind that there’s only so much money out there. While mega deals have been struck, very few firms merit mega deals.

Consumers are driving the consolidation trend as well. According to a recent Barron’s survey, more than 70% of affluent consumers say they’d rather do business with a team than a solo practitioner. According to our own research, 40% of advisors say they’re part of a team, and 30% plan to join a team going forward. Building a team positions advisors to transfer equity in their practices when they retire, and helps them create a consistent client experience.

If you’re considering a transition, ask yourself these questions: Do I want equity out of my practice? Do I need a partner that has infrastructure to help me?

If you’re not looking to sell to an outside firm, you have a different challenge: making your business attractive enough to interest next-generation successors. People entering the financial services industry today are different from the first generation. They are university-trained, with degrees in personal finance or financial planning. They haven’t been through wirehouse or insurance agency training programs.

If you think about what many advisors offer, it goes something like this: “You can follow my path, work 100 hours a week, live on rice and beans for a few years and walk uphill to and from the office — and then, maybe, I’ll give you the opportunity to borrow money from me to buy my business.” Would you go for that? Of course not.

The typical next-generation advisor wants a career path, where the ability to serve the end client is clear, compensation is fair and the ability to grow wealth is visible.

Rather than trying to make the next generation just like the last one, I encourage joining them. They are well-versed in technology, both the software that is essential to financial services and the new communications platforms that their generation uses as naturally as older folks breathe air.

Adapting the business to suit the needs of a next-generation successor will put it on more solid ground. But it requires capital — and many advisors may need an institutional partner’s help in that regard.

Trend 3: New Roads to Revenue
Drivers: Consumer preference

Until 2008, everyone thought that charging clients a percentage of AUM was the answer to their business models. A fee-based advice model meant recurring revenue, and it enabled advisors to participate in the gains they generated for clients. After 2008, many fee-based advisors found that they were working harder and making a lot less money because of market losses that were beyond their control.

Is there a better way?

A lot of advisors are experimenting with new models for delivering services. Pundits fling predictions like Frisbees. One popular prognostication is that most advisors will move to charging by the hour. In my experience, I’d say that’s not likely. What is happening, however, is an important shift toward separating the value of advice from the bundled way business has been done in the past, when compensation was baked into the product structure.

By separating out and charging for a financial plan, advisors are actually getting paid for the value they add based upon their business model.

Part of this shift has been driven by advisors’ self-interest. Consumers are moving to less expensive investment products, like ETFs and other passive products, while 12b-1 trails are drying up. As a result, advisors are rethinking their fee structure to accommodate the change.

Some advisors are adopting a family-office approach and moving to retainer-based pricing. They may not even manage the assets, or they use a separate service. Others are going in the opposite direction and taking portfolio management and stock selection into their own hands. These advisors are keeping some of the compensation that used to go to asset management firms — and their clients still come out ahead. The big question mark, however, is their investment performance. Thus far, the statistics are not impressive.

In addition to costs changing, clients are changing. What does this mean for the way you deliver advice? Should you hire staff? Change focus? This is both a demographic issue and a consumer issue, and deserves real attention.

One reality to consider: Women will control $22 trillion in assets in less than five years. The industry is only starting to pay attention to what they want, and still assumes that most women will gain control of these trillions through inheritance. Today, though, many women are creating their own wealth. They are executives; they are entrepreneurs. And these women think differently from women who inherited their wealth. They’re involved in accumulation, are better informed and are living longer.

And then there are the Digital Natives and “Henrys” — High Earning, Not Rich Yet workers who, with the right guidance and support, will be generating the next wave of wealth. This demographic ties in to the next trend: new marketing realities.

Trend 4: All Marketing Is Digital
Drivers: Consumer preference, competitive threat

Yes, everybody has a website now. But that’s just the first step toward a new marketing paradigm. If you want to attract new clients who are under 50, you have to think about social media and digital communications. This is what consumers prefer and their expectations will only become stronger.

In addition to my firms’ extensive research on the topic of changing consumer preferences, my daughter serves as my one-woman focus group. She’s in her 20s, living in a major city and working in her chosen field — she’s a successful millennial. For her friends, in terms of making purchasing decisions, if the business isn’t mobile accessible, it doesn’t exist. And if you recommend a business that doesn’t have a Yelp review, they won’t use it. They completely distrust any traditional marketing methods, and place trust in peers instead. This means they’re giving the cold shoulder to the institutions in the industry.

We live in a new era where old financial institutions are losing their control. Everyone has access to markets and to timely data. You can launch IPOs without a bank. Getting recommended on LinkedIn or liked on Facebook has more power in many cases than being the good guy in the community. So if you’re running a broker-dealer, bank or custodian, or any firm that serves financial advisors, marketing is getting pretty interesting.

There is increasing evidence that most broker-dealers have resolved the compliance issues around the use of social media, and many of them are actually providing support for it. This is despite the fact that social media is essentially unregulated — there’s guidance but few rules. For years, BDs prevented advisors from using social media, blaming regulations and claiming, “FINRA’s not clear about what you can do and say.”

Well, FINRA’s still not clear, but more and more, nobody cares. Finally, broker-dealers have recognized that advisors are going to have to use these tools and that the need is consumer-driven — millions of people are on social media and advisors don’t want to be on the outside looking in. Consumer preference is outweighing the perceived compliance risk.

If you want the next generation of clients to find you, and the next generation of advisors to work with you, you have to deal with and embrace social media. Outsourcing it, at least to some degree, is an option. The outperforming financial firms now employ social media to convey their message and build their brand.

Firms still have to develop clarity about their message. They need to get their content out, and to express their points in a meaningful way. This is why branding in the age of robos is such an important topic.

Every firm has a brand, whether they know it or not. Care must be taken to deliberately define and promote that clear and distinctive brand.

Trend 5: The Squeeze on Fees
Drivers: Consumer preference, competitive threat

All the data being published, and my firm’s own research, confirms there is fee compression in the advisory space. Is everyone in the supply chain experiencing it? No. Are the cost savings being passed through to end clients? Again, no.

This is why robo-advisors are so compelling. Robo-advisors could be perceived as a threat — but are they really?

Are consumers attracted to robos because of lower cost? Convenience? Desire for control? Simon Roy, president of Jemstep — a robo for advisors — says that the improved user experience and ease of onboarding that robos provide “makes it easy for the client to say yes.” This doesn’t sound like such a bad thing — so long as you are strategic in how you go with the trend.

Others are trying to beat the trend. Some advisors have made fee adjustments out of a perception that cost is the way to compete, giving up margin without a basis in fact. This is more of a tactical response, and one that’s not fully informed. Why enter a race to the bottom?

Advisors concerned about fee compression should examine their own value propositions. If they are plumping their margins by acting as a portfolio manager, is their performance up to snuff? Unfortunately, data suggests that typical performance in rep-as-portfolio-manager accounts is just below that of self-directed investors.

Ultimately, if regulation forces advisors to become completely transparent and disclose clients’ actual investing costs, will their business model hold up? If you actually had to lay it out to your clients, it would go something like this: “There are five parties that are involved in providing this fund, and here’s my fee, plus the transaction fee, the platform fee and the 12b-1 fee.” What if you couldn’t deduct these fees from the account and instead, your client had to write a separate check to cover investing costs? If clients actually had to approve those unbundled fees each quarter, then we’d really be talking about fee compression.

At this point, advisors should be thinking instead of how they can get ahead of that change. Can I be a disruptor by providing more transparency around fees? If I provide a clear value-add, can I charge an hourly rate or project fee?

Advisors who are holding firm on pricing and figuring out how to be more efficient are actually expanding their margins. They can streamline their operations by maximizing their use of technology. They can lower the cost of investing by switching to less-expensive implementation solutions.

Smart firms should be asking whether they’re part of the problem or part of the solution. Otherwise, they will be vulnerable to being marginalized.

Adapt and Conquer

Think about how these trends affect your firm. Break down each element of the services and products you deliver. What really needs to exist and who should be responsible? What are the costs? Ultimately, you can make your firm more efficient and more effective, and pass the cost savings to your clients.

If you are interested in drilling down further into these five trends that matter, a full transcript of the resource partners’ roundtable dialog mentioned above, along with corresponding video clips, may be found on

Business is always changing, and today’s changes are accelerated by the shift to digital technology and communications. Consumers, including your clients, expect all services to compete in the digital world. You need to ensure that your own practice is always on, easy to access and competitively priced.

In addition, any potential buyer or successor will want evidence that you are comfortable in the new business world. Continuing to pursue the old model is simply not a viable option.