Experienced, Educated Clients
When I started in the 1980s, clients knew little about mutual funds. Today, investors are far more experienced, having gone through everything from the crash of 1987 through the dot-com bubble of 2001 to the credit crisis of 2008. Consequently, our industry faces unprecedented demand for transparency about risks and fees.
Increasing Competition
Advanced medical technology won’t put doctors out of work. Likewise, online investing won’t put financial advisors out of work. But we are still going to have to change the way we do business.
We’ll contact clients in different ways, using mobile technology more than ever. We’ll be doing “planning-on-the-fly”—with clients watching us build analyses on their tablet or smartphone in real time. The days of demanding that clients drive to an office for a two-hour meeting and then getting back to them in two weeks are fast disappearing.
And of course, online advisory services might cause us all to change the way we charge for our services.
Ultimately, we will see a metamorphosis between online advisors and traditional brick-and-mortar advisory firms—and clients will be better off for it. How all this transpires remains to be seen, but it’s safe to say that huge changes are coming, and faster than most advisors realize.
Regulatory Oversight
The SEC was deeply embarrassed by its failure to detect Bernie Madoff’s crimes, and the agency is determined not to let that happen again. Finra and state regulators have also increased their efforts. This is good for investors and the financial markets—and therefore, also good for us—but it means that we have new, unprecedented compliance requirements. That means more work and more cost for advisors—and more risk (financially, legally, reputationally) if we fail to comply.
The Three Choices Advisors Face
As a result of all this, advisors need to realize that the business we know so well is fast disappearing. My fear is that most advisors do not fully appreciate what’s coming or the speed with which the future will arrive. Consequently, many are unprepared.
Within 10 years, practices that consist of 100 clients and $100 million in AUM will no longer exist—for the simple reason that operators of such firms will find the cost and complexity of doing business so great that they will be unwilling to pay for, or unable to deliver, the required services. Clients will increasingly demand services that are available elsewhere, and small-shop advisors will struggle to satisfy such needs.
Over the next 10 years, therefore, advisors will have three choices:
1. To focus intently on growing their books, meaning they must generate more clients and more AUM to produce the revenue they will need to compete;
2. To join a billion-dollar firm (or find several partners to create one);
3. To quit (or, to put it more euphemistically, to retire) This will be the most common course of action, since surveys say that more than half of all advisors are over age 55.
Why did I omit selling your practice as an option? Because most advisors don’t have a practice that’s worth buying. Mark Hurley says that 97% of advisors will never be able to sell their practices because they lack a sustainable business model. The 2014 Quantuvis study found that only 10% of advisors have a marketing plan. No wonder Chip Roame of Tiburon Strategic Advisors says half of all advisors will be gone in five years.
A few of us will enjoy massive increases in clients and AUM, and life will be fun and exciting. But the rest, I’m afraid, face more work, more stress, lower pay—and early retirement.
That’s why I recommend that advisors strongly consider option 2. There are many thriving firms for you to consider. Most multi-billion-dollar firms have the infrastructure, technology and branding in place that let advisors thrive, and the vast majority are adding advisors as quickly as they can, through recruiting, assimilation, acquisition and merger.
Take a serious look at where you are, and where you want to go. If what got you here won’t get you there, consider altering your course. The future is fast approaching, and the sooner you reset your path the better off you and your clients will be.
Ric Edelman is chairman and CEO of Edelman Financial Services LLC, a registered investment advisor. He is an investment advisor representative who offers advisory services through EFS and a registered principal of (offering securities through) Sanders Morris Harris Inc., an affiliated broker-dealer and member of Finra/SIPC. He can be reached at [email protected].
What Got You Here Won’t Get You There
February 2, 2015
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Comments
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Exactly dmeyers...The elephant in the room is the quest of AUM. AUM is the lifeblood of firms like Ric's, and that's what makes what he's built the most vulnerable of all business models, he just doesn't know it yet. This article is exhibit A for blindness on display.
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All three of Ric's pieces of advice are predicated on the idea that the only business model for financial advice and planning is based on assets-under-management. Perhaps the issue is that, with the rise of the robo advisors (and other low-cost portfolio management -- from target-date funds to index ETFs in general) -- the issue is that the public is starting to become aware that asset management -- AUM -- should be cheap. And maybe they'll start to be aware that the planning and advice is where the value is. If advisors start charging for planning and advice rather than AUM fees for portfolio management, then their business models aren't in any kind of trouble, as there doesn't appear to be any ultra-low-cost or "robo" threat to that part of the business.