These trends are shaping the future of financial advice
The new administration has brought a focus on deregulation across all industries, including financial services.
Most recently, an executive order was signed to halt the April 10 implementation of the Department of Labor fiduciary rule. Lawmakers are likely to continue the debate, as advocates endorse the benefits to consumers, while opponents look to revise certain provisions or repeal the ruling entirely.
Regardless of the DoL fiduciary rule’s status, there is already a strong secular trend moving in this direction across all areas of financial services. It continues to accelerate as the advisory industry has been moving from commission-based sales to fee-based and fee-only advice.
Assets under management at fee-based firms and registered investment advisers will increase more than 60% to $6.6 trillion in 2019 from $4.1 trillion in 2015, and the headcount will expand to 67,000 from 59,000, according to research firm Cerulli Associates.
A growing number of advisers recognize that putting clients’ best interests first is not only the right thing to do, it is also good for their business.
Numerous industry studies have shown that the highest-growth and most profitable firms are those that adopt a fee-based model.
Likewise, as we learned in our most recent Advisor Authority study of more than 1,300 fee-based advisers, RIAs and individual investors nationwide, the most successful advisers are more likely to serve clients using a fee-based fiduciary standard.
Our study also shows that a fee-based fiduciary standard is among the top three reasons investors choose to work with an adviser. Educated consumers expect it and demand it.
Ultimately, what adviser doesn’t want to be known for putting clients’ best interests first?
INTEGRATING RISK MANAGEMENT
The new administration has also inherited an economy that is the strongest in years and shows positive momentum.
Unemployment is down, while gross domestic, household income and wages are moving up. Many economists project that these trends will continue.
But there are also concerns.
Fee-based advisers and RIAs cited continued volatility, global instability and rising interest rates among the macro issues that are adversely affecting client’s portfolios, according to our study.
As Washington moves to renegotiate trade deals, impose higher tariffs, and enforce other political and regulatory changes, it will likely take time to achieve equilibrium with partners abroad.
Likewise, now that the Federal Reserve has signaled a slow return to higher rates this year advisers and their clients can expect challenges for the foreseeable future when investing in fixed income. They can also expect to see increases in the cost of borrowing, refinancing and servicing debt.
Beyond these macro risks, advisers must also manage the investment risks within clients’ portfolio. In a market where all asset classes have become increasingly correlated, alternatives can also provide a unique source of returns and risk to clients’ portfolios and can significantly enhance diversification.
Liquid alternatives offer many of the same characteristics of hedge funds and use the same nontraditional investing strategies, while also providing daily liquidity, greater transparency and lower fees.
An integrated and systematic approach is imperative for advisers to identify and manage these macro risks and investment risks. It begins by determining a client’s tolerance for risk and then regularly identifying hidden investment risks within their fund holdings.
Advisers must continuously assess and address macro developments in an increasingly interconnected and rapidly changing global economy. The most successful advisers will be both proactive and reactive in their approach to integrate risk management with financial planning.
The most successful advisers invest more in technology and use twice as much technology when compared with the typical adviser, according to our Advisor Authority study.
These tech-enabled advisers are using technology to refine their practice, enhance investing and advising capabilities, and ultimately serve clients more efficiently and more profitably at every point in the relationship. They can create a more seamless end-to-end customer experience, and provide more holistic advice, rather than focusing on one-off objectives.
At the same time, they can also use technology to serve the client’s best interest and maintain a fiduciary standard by providing greater transparency, lower costs and more choice.
It begins on the front end by offering a simple and transparent interface to give clients instant access from any device. It facilitates effective real-time communications and transactions across any channel.
On the back end, it leverages functionality to create a fully-integrated wealth management platform, to aggregate and manage all a client’s holdings, across taxable and tax-deferred investments, other held-away accounts, and a broader range of their assets and liabilities.
And rather than being replaced by a robo-adviser, tech-enabled advisers use robos as a low-cost automated tool for portfolio allocations as part of this fully integrated platform.
Although some factors may be out of an adviser’s hands, everyone benefits when advisers take control of that they can.
Start by re-tooling the practice to recognize these three long-term secular trends that are shaping the future of advising, planning and financial technology.
First, take a more holistic approach to planning and put clients first, because fiduciary is here to stay.
Second, have proactive and reactive strategies in place to fully integrate risk management into the financial planning process.
Third, leverage innovative technology to minimize costs and maximize profitability, while serving clients’ best interests through increased transparency and more choice.
The greatest opportunities and the greatest success often come from the greatest challenges. In times of challenge and change, have a strategy, stay the course and focus on the long term to build more wealth for clients and a more durable practice.
This story is part of a 30-30 series on strategies to boost your practice. It was originally published on Feb. 24.