As the industry looks ahead to 2017, many executives are concerned about profit margins. The cost of complying with new Department of Labor regulations adds to the inexorable upward march of costs, while new competition from digital advisors (yes, we’re talking about robos) has advisors and service providers worried about fees. Costs up, revenues static or down — it’s your classic margin squeeze, which causes small firms to suffer and medium to large firms to band together in search of scale.
This squeeze is stressing out financial services providers of all types and sizes, from “solopreneur” advisors to behemoth asset managers and custodians. And the market upheaval caused by political uncertainty at home and abroad doesn’t help — markets are unlikely to roar to the rescue.
Some of the squeeze is, in our opinion, self-inflicted. The industry is misreading the impact of emerging competitors that offer digital advice. Robos are happy to feed the perception that they’re a disruptor, but they are not. Instead, they are the latest iteration of the technology that brought us online trading, turnkey asset-management platforms, ETFs and ETF strategists. Robo technology is also a direct intellectual descendant of the debate over active versus passive management and the Bogleheads’ contention that low-cost investing is always best. Nevertheless, the emergence of robos has certainly pushed the entire financial services industry to evolve, and the smart organization embraces the inevitable rather than fighting it.
At our consulting firm, Strategy & Resources, we view this evolution through three lenses, which we’ve dubbed “The 3 C-Drivers.” They are:
Compliance and Regulation
So let’s use these lenses to look at margin compression and come up with some effective ways to fight it.
Consumer Demand: The True Bottom Line
“We need to provide the user experience offered by robos, with their easy to use, paperwork-free, always-on front ends, while bringing human intelligence and empathy to the fore when delivering advice.”
Do you know what your customers care about? Are you delivering the services that really matter to them? If you are, price is less of an issue and you will be paid well. If you’re trying to hang on with an outdated client-service model circa the pre-internet, pre-cell phone era, good luck.
Okay, we admit it: That’s easy to say, harder to act on.
We’ve talked to a lot of advisors who have said that their clients don’t leave them because of costs and that they aren’t really concerned about fees. And yet, anecdotally, advisors tell us that clients ask about robo-advisors or reference the flat performance of the stock market over the past couple of years, and are more sensitive to erosion of their account value due to fees. The lack of investment growth heightens their sensitivity.
Some advisors opine that if we were in a strong bull market, their clients wouldn’t care about fees. Others believe that notion is also an example of outdated thinking. The reality of the new normal is that advisors who are listening to their clients now understand that they have to justify their fees notwithstanding market performance.
The coming fiduciary standard aggravates advisors’ concerns. The perception in general is that they will have to be more transparent, and as every type of advisor (think rep/agent/advisor) willingly or reluctantly migrates toward a fiduciary model, they will have to show that they’re keeping costs down for the client.
Pundits may blame the DOL, and speculate that a President Donald Trump and a Republican Congress may stall or terminate the DOL fiduciary rule, but advisors are really struggling with a confluence of events, including what the next generation wants from an advisor or financial services firm.
The millennial generation is approaching their high-earning years when financial advice really matters. They are starting families, founding new businesses, buying homes. They are embarking on their financial life journeys having been molded by an economic environment that is radically different from the one that informed their parents. When millennials were in college, their families or their friends’ families were battered by the market meltdown and Great Recession — it may be their parents couldn’t help them with college, or their grandparents had to become “unretired.” For the first time since the 1930s, thousands of American families lost their homes. At the time millennials started paying attention to getting a job, the economy and financial system were in disarray. They still haven’t fully recovered.
This generation’s history is one of system failures, and of politicians who have earned their bones by beating up on Wall Street — not that the financial industry shouldn’t own some responsibility for that.
What’s more, millennials haven’t seen the value of a prolonged bull market, and have no context to ameliorate the past decade of underperformance. Add in the emergence of robos and this generation’s comfort with technology, sometimes over human interaction, and it’s clear these are not the clients who will spend three hours going through paperwork and discussing their financial goals. These are not the clients who will trust the markets to build wealth for them over time.
On the contrary, with the millennial generation the trust gap is wide. They come into financial planning discussions with a major dose of skepticism. They’re like our parents and grandparents who were permanently affected by the Depression. You’ve heard the stories of jars of cash buried in the back yard or stuffed into mattresses. What will be the millennial equivalent — bitcoins?
The industry will have to earn back this generation’s trust by being responsive, available and transparent.
In other words, we need to provide the user experience offered by robos, with their easy to use, paperwork-free, always-on front ends, while bringing human intelligence and empathy to the fore when delivering advice.
Furthermore, bear in mind that the new generation of financial planners, many of whom hold degrees, were also personally affected by the market meltdown and recession of 2008. As a result, these advisors want to help people and often don’t care all that much about the current business model. Advisors and broker-dealers who are trying to attract next-generation advisors as well as investors need to ask themselves: What do they care about? Am I aligned with providing that? The allure of financial advice today goes well beyond money.
Compliance: Another Day, Another Rule
“Are you getting squeezed out of your core business because of regulation, or is this an opportunity to pick up advisors and clients whose broker-dealers or vendors are getting squeezed?”
Yes, the Department of Labor’s new fiduciary regulations hit much of the industry like a bolt from the blue. But why is that? It’s not as if the government hasn’t been working on these regulations since the asset markets imploded in 2008, almost taking the world economy with them. The fight by some in the industry to preserve legacy business practices are translated by the consumer (and next-gen advisor) as “suing to protect the right not to work in investors’ best interests.”
To be sure, some of those fighting the DOL have fair arguments that the rule isn’t sufficiently clear, and it is reasonable to expect the DOL to clarify key issues so that those held to the new standard are able to comply. That said, this prolonged effort to fight the DOL, exacerbated by hopes of repeal of the fiduciary rule and even Dodd-Frank under President Trump, though perhaps well-intentioned by some, makes us all look bad. There are advantages to embracing this change and advocating for clients.
Ask yourself: Are you getting squeezed out of your core business because of regulation, or is this an opportunity to pick up advisors and clients whose BDs or vendors are getting squeezed?