10 years on: Despite dramatic change, ‘personal touch’ will dominate financial advice space

Personal finance

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Where is the future of financial advice headed?

The answers always seem fraught with risk and uncertainty. While the bull market in stocks has gone a long way to helping the advice industry recover from the reputational fallout of the financial crisis, technology, demographics and regulatory confusion continue to challenge all corners of the industry.

What happens when advisors’ baby boomer clients pass their wealth on to kids who want nothing to do with Mom and Dad’s financial advisor? Why pay an advisor a fee when you can build a customized investment portfolio online for a fraction of the cost? How will the industry cope when thousands of boomer advisors retire over the next decade?

I think the prospects for independent RIAs are excellent. We’re on the right side of the argument.

David Yeske

co-founder of Yeske Buie

For all the worries that seem to plague the advisory business, one thing suggests it will continue to thrive: The demand for financial advice is, and will remain, strong.

“I’m very bullish on the long-term success of the financial advice business,” said certified financial planner Evelyn Zohlen, head of Inspired Financial in Huntington Beach, California, and current president of the Financial Planning Association. “The demand for advice will continue to grow and the industry offers a great career path for young people.”

The outlook is particularly good for independent registered investment advisors offering comprehensive financial planning, adds CFP David Yeske, co-founder of advisory firm Yeske Buie.

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“I think the prospects for independent RIAs are excellent,” said Yeske, who founded his San Francisco-based company in 1990. “We’re on the right side of the argument.”

Where will the industry be 10 years from now?

It’s a safe bet that the answer is, “In a very different place from today.”

We looked at three factors driving change in the financial advice industry and among the fee-based RIAs that still represent the fasting-growing segment of the wealth management industry.

Technology and maturing millennials

It’s tempting to see technology as a great disruptor, and it is. If you can build a perfectly good portfolio cheaply online based on your financial goals and tolerance for risk, why pay a 1%-plus fee to an advisor to do it?

The robo-advisors are still growing rapidly, particularly as big firms such as Vanguard and Schwab got into the business. The total assets under robo management grew 15% last year to $257 billion, according to research firm Aite Group, and could top $1 trillion by 2023.

“The big variable is how aggressively the big firms push their digital platforms,” said Alois Pirker, senior analyst at Aite. “The offerings are getting more sophisticated and it’s a viable segment in the RIA space.”

It’s also a small drop in the $83.7 trillion bucket of assets managed by nearly 13,000 RIAs across the country, according to the Investment Advisor Association. What robo-advisors don’t do is talk to people about how to achieve their goals and how to adjust their plans when life changes occur.

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“We give investment advice and we manage portfolios but we spend much more time on financial planning,” Yeske said. “A small minority of the population will be happy with automated advice via a web browser, but we help people deal with stress and help them modify their behavior.

“We engage with them as human beings.”

Where technology is having a bigger effect is in the operations of firms and the way advisors interact with clients.

Asked what the biggest challenge facing firms is, financial planner Michelle Perry Higgins, principal at California Financial Advisors in San Ramon, California — ranked No. 7 on the CNBC FA 100 list of top-rated wealth management firms — cited “technology, technology, technology — staying on the cutting edge with technology while not losing the personal touch with our clients.”

The power of software to help manage customer relationships and investment portfolios, handle back-office functions and even draft financial plans enables advisors to serve more clients and spend more time with them. Firms that don’t invest in technology will have trouble keeping up.

“Technology can help amplify the human component that is so crucial to successful relationships,” Zohlen said. “Advisors have to embrace digital solutions and meet clients where they are in life.”

The rapid advancement of technology is both a blessing and a curse to the financial advisory space.

Cory Robinson

vice president, Tom Johnson Investment Management

For millennials, whose income and wealth is increasing most rapidly, that means online.

“They will sometimes let me buy them a cup of coffee, but all my millennial clients want to interact via video conference,” Zohlen said. “Advisors need the systems to deliver services and interact with clients in new ways.”

But technology also comes with risk, cautions financial advisor Cory Robinson, vice president and portfolio manager at CNBC FA 100-ranked firm Tom Johnson Investment Management in Oklahoma City.

“The rapid advancement of technology is both a blessing and a curse to the financial advisory space,” he said. “It can be used to make advisory practices more efficient; it can automate communicating with clients; it can make it easier for firms to effectively service smaller clients.”

“It also empowers cybercriminals to be able to execute more effective scams and attacks,” he added. “Cybersecurity of client data is going to be a huge challenge going forward.”

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Fiduciary rules

The endless debate on how to regulate investment brokers and financial advisors still appears years away from resolution.

The Securities and Exchange Commission passed a rule, known as Regulation Best Interest, that establishes a new standard of conduct for brokers. Instead of offering advice and products that are “suitable” to investors, brokers are now required to make recommendations that are in their clients’ “best interests” and must disclose potential conflicts of interest such as product commissions and bonuses.

While the new rule may be an improvement over the suitability standard, it is still not the full fiduciary obligation that applies to RIAs, who can be sued for breaching their duty.

That leaves RIAs as the only advisors operating under the fiduciary standard of the 1940 Investment Advisors Act. However, Reg BI still leaves investors potentially vulnerable to conflicted advice depending on the interpretation of “best interests.”

The fiduciary train has left the station. Whether the wirehouses and broker-dealers like it or not, it’s coming.

Evelyn Zohlen

head of Inspired Financial

“Reg BI doesn’t rise to the level of a true fiduciary standard,” Yeske said. “If someone looks like a fiduciary but isn’t one, it’s a problem.”

Zohlen also thinks the new rule fails to provide any more clarity for investors about the differences between brokers and RIAs. “The rule muddies the water further,” she said. “It makes it easier for advisors to claim they’re doing something that they’re not.” Lawsuits have been filed to stop the rule.

Regardless of how the regulatory environment plays out, RIAs are confident that they are on the right side of the argument. “The fiduciary train has left the station,” Zohlen said. “Whether the wirehouses and broker-dealers like it or not, it’s coming.

“Ten years from now, anyone calling themselves a financial planner will be under a fiduciary duty.”

RIA consolidation: The big get bigger

Size does matter in the RIA business — all the more so in the rapidly changing technology environment. There are thousands of small RIA shops, many of them sole practitioners, that lack the resources to stay competitive and have no successor to carry on their business. Many hope to sell their practices to other advisors, yet many likely won’t.

“The small shops are in a tough position,” Pirker said. “Most of the advisors are in the late stages of their careers and if they don’t invest in their firms, it will be hard to sell.

“Most of those practices will probably fade away.”

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And the clients of most of those advisors will gravitate to bigger firms.

The top 200 firms are growing significantly faster than the industry as a whole, says Pirker, and in 10 years time, they will likely have a significantly bigger share of the market.

“We’re going to see a lot of disruption going forward as advisors get out of the business voluntarily and involuntarily,” said Inspired Financial’s Zohlen. “I expect to see a lot of consolidation in the industry.”

Not to say that entrepreneurial-minded advisors won’t hang out their shingles anymore. The support systems of the custodians and turnkey asset management programs make launching a new practice a lot easier.

“I’m still seeing a lot of new firms being created,” said Yeske, who is also a professor of financial planning at Golden Gate University. “The entrepreneurial spirit is alive and well.”

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