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 StrategyAndResources.com), 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.