The wealth management industry today is enjoying a sweet spot, but like all good things, that will end in time, according to recent panel discussion.
“Fast forward five to 10 years from now and there will be inflection point, a retirement tsunami of advisors,” said Tash Elwyn, president and CEO of Raymond James & Associates, noting that the average financial advisor today is 54 or 55 years old.
“Suddenly there will be more sellers than buyers” of firms, reversing the current pattern, he said. Valuations of firms that have been supported by late-stage economic expansion will be impacted.
Firms that are dependent on technology-enabled advice will be in the best position to handle the scale of clients and complexity of needs, Elwyn said.
“Digitally enabled advisors are going to even better serve their clients in the years ahead than they already so capably served them in years past … We’re doubling down on investing and reaffirming the human advisor as the center of the client-advisor relationship … and so the investments we’re making in client-facing technologies will enable self-service where we think self-service is a client preference and enabler for the advisor to gain more capacity for even greater value add.”
He added that Raymond James continues to pilot its Connected Advisor platform, which will allow advisors to onboard smaller clients and provide them model solutions, but noted that this platform is delivered through the advisor and not directly to clients.
Digitally enabled advisors are better able to handle to handle the current market environment, where costs continue to increase while revenues remain relatively flat and too few advisors are available to serve a growing number of Americans who need advice, said Shirl Penney, president and CEO of Dynasty Financial Partners.
“The only way to fill that void is to be tech-enabled,” said Penney, whose firm counsels advisors who want to going independent and set up their own shops.
Technology allows advisors to concentrate on the quality and services – the “secret sauce” that differentiates them from digital-only advice, according to Penney. “I spend a lot of time with advisors and their end clients,” said Penney. “The empathy, human element to understand the key life events of their clients – that is impossible to automate.”
At the same time, “the whole world is going digital,” said Penney. “If you don’t live in your client’s phone you run the risk of becoming irrelevant.”
Advisors also risk spending too little time serving clients if they don’t outsource compliance, and investment operations and technology, according to Penney and Elwyn.
In the meantime Penney and Tash expect continued consolidation in the advisory industry.
“Size matters,” said Elwyn, noting that new DOL fiduciary rule and Reg BI from the SEC “will be a heavy lift for some firms.”
Year-to-date, mergers and acquisitions across RIA and IBD channels increased 43% from a year-ago for the first three quarters, setting up for another record year, according to Fidelity Investments.
The two biggest deals – Oak Hill Capital’s investment in Mercer Advisors – and Hub International’s acquisitions of Global Retirement Partners – were by acquirors owned by private equity firm.
Penney warned about advisory firms selling to private equity firms because of the difficulty in being being able to get out such transactions and the structure of such deals, which are “designed to make a profit for the underlying investors” of the private equity firms.
He explained that a private equity firm typically gets a 50% to 75% stake in the form of preferred stock, leaving the sellers, including management, the 25% that’s left in common stock. As more advisors get wise to the pros and cons of working for a private equity-owned firm, well-run advisor-owned firms advisory firms will be able to attract more talent than private equity-owned firms over the next 10 years, said Penney.