“Physician, heal thyself.”
This revered proverb often comes to mind when I’m speaking to wealth advisors. They’re working so hard to help their clients achieve their financial objectives, but often don’t focus enough time and energy on ensuring the long-term health and wellness of their business. That kind of client focus is totally understandable — even laudable — but it can be problematic if you’re not giving your own company the necessary TLC to ensure future viability.
At YCharts, we find that our customers’ time and fees are under attack. Advisors need to recoup time to develop and implement better strategies to justify their fees.
To help advisors understand how to get their valuable time back, I’ve put together a 3-part series of posts, based on the “Physician, heal thyself” proverb: This first post diagnoses the “symptoms” that many wealth advisors are dealing with; the second will help them understand and define what “optimal health” looks like; and the final post will help them develop the “path to recovery.”
Part 1: Identifying the Symptoms of the Illness
Over the years, advisors have provided valuable perspective, coaching and guidance to their clients, especially in the category of growing their wealth. However, demographic, regulatory, and technology trends are now serving as the combined catalysts for significant disruption in the industry. It’s important for advisors to first understand what is ailing them to subsequently innovate their way back to full health.
To that end, here are the key pain points that are impacting the thousands of wealth advisors we interact with:
1. Baby boomers are passing down their wealth.
According to a recent CNBC article, approximately $30 trillion of wealth will be transferred from aging baby boomers in the next 30 years. This is a massive risk to the annuity stream most advisors enjoy after decades of building their AUM. The fundamental challenge here is that the patriarch’s progeny (and presumed heirs) are not like their predecessors.
The next generation of wealth holders is tech savvy, data-enabled, fiercely self-assured, and not easily impressed by a steak dinner or a chance to watch an NBA game in a skybox. They’re using data to: 1) decide if they can just manage their wealth on their own and 2) make objective decisions on how, when and where they will invest their wealth, if they need help. It is far from a foregone conclusion that mom and dad’s wealth advisor will have a role in managing their assets and shaping their financial future.
Wealth advisor, does this symptom, “My long-term AUM is at risk,” apply to you?
2. Wealth advisors must justify their fees.
According to analysis on YCharts tools, only 8% of actively managed funds have outperformed the Vanguard 500 Index the past five years, and only 16% have done so over the past 10 years. This fact causes many individuals who leverage advisors to ask, “Why am I paying my advisor 1-2% of AUM annually? Should I refocus my efforts on my personal brokerage account and put all my assets in an index fund? Should I go the low-cost robo-advisor route?” Investors are becoming more and more analytical, and they don’t quantitatively value or factor into the cost-benefit equation some of the financial planning and life advice provided by advisors.
Wealth advisor, does this symptom, “I’m regularly needing to justify my fees,” apply to you?
3. The regulatory landscape has become increasingly complex.
The much-covered, and often maligned, Labor Department fiduciary rule has turned into a big headache for many advisors. While the concept of acting in a client’s “best interest” is clear at the 30,000-foot level, the certainty of timing and requirements for complying with the transparency, documentation and monitoring provisions is murky.
On top of the fiduciary rule, advisors find themselves constantly seeking to understand the ever-changing U.S. tax code to optimize the tax efficiency of their client portfolios. Strategizing around regulatory-related topics robs wealth advisors of valuable time they’d rather be spending elsewhere.
Wealth advisor, does this symptom, “I’m spending a ton of time just trying to understand and react to changing regulations,” apply to you?
4. The marketplace for software tools is confusing and extremely fragmented.
Technology solves a lot of problems experienced by advisors. Robo-advisors can be seen by advisors as threats to the core of their businesses, or they can be seen as cost-effective mechanisms for servicing lower AUM customers. Treating robo as friend or foe needs to be thought through carefully.
The broader landscape of tech tools is fragmented. Many vendors offer a plethora of different siloed solutions that combine to stymie advisors who are just trying to make the most of the tech they already have at their disposal.
Advisors generally are not big enough enterprises to be able to employ internal technology teams. From my conversations with them, many have a strong interest in finding technology platforms, or at least integration-enabled, best-of-breed vendors, that enable, rather than inhibit, their business.
Wealth advisor, does this symptom, “Leveraging technology to better run my business is an issue,” apply to you?
5. Cyberattacks are an omnipresent threat.
Advisors have access to their clients’ most precious data. Financial services companies need to comply with Financial Industry Regulatory Authority and/or Securities and Exchange Commission guidance on protecting clients’ personal and sensitive information. A recent Financial Planning Association study detailed that, while more than 80% of advisors say cybersecurity is a high priority, less than one-third of them say they are fully prepared to address this risk. We’ve already established that advisors struggle with technology enabling their operations, and cybersecurity adds another layer of complexity and risk.
Wealth advisor, does this symptom, “I’m not yet confident that I’m doing enough to manage cyber risks,” apply to you?
If none of the symptoms above are affecting you, congratulations! You clearly stand out among your peers, and seem poised for growth.
For those that answered “Yes” to any or all of the above, don’t worry. No need to take down your shingle.
The first step to getting on the path to a healthier business is to acknowledge your symptoms. Keep track of how you are spending your days and weeks. If you own up to the fact that demographic shifts, regulations, technology-related opportunities, and threats are a drain on your time and an impediment to your near and long-term margins, Part 2 of this series will focus on defining your envisioned “healthy” state, so that you can subsequently (Part 3) chart a path to long-term health.