The trend is not always your friend, and seizing opportunity is hard work.
With 2017 already well underway with a boom in U.S. equities and a dizzying array of political headlines, there are a number of trends that financial advisors should be aware of moving forward.
Joshua Pace, president and CEO of Colorado-based custodian Trust Company of America, and Matt Sommer, vice president and director of retirement strategy at Denver-based Janus Capital, have identified five trends that advisors can use to differentiate themselves.
No. 1: The Fiduciary Standard Will Trump Politics
Though opponents continue to attempt to delay or block the applicability of the Department of Labor’s fiduciary rule, Pace believes that Americans’ assets are likely to continue moving from commission-based products to those that charge low fees.
“There’s a land-grab of assets occurring right now at the highest level. It isn’t just the industry that’s moving, the consumer is moving away from commissions towards more DOL friendly, conflict-free, transparent-fee products,” Pace said. “Advisors have a fair amount to gain from this movement, as long as they’re marketing properly and emphasizing that they’re attached to those fee-based assets.”
Advisors are following the consumer toward more fiduciary-like offerings, says Pace, and fund managers are beginning to offer more fee-driven products.
It may be impossible to put the fiduciary genie back in the bottle, Sommer says.
“At this point, the industry has gone too far down the road of changing business models … and the fiduciary standard is likely to be the new normal,” says Sommer.
Increased fiduciary awareness could work to the benefit of independent advisors whose service models already align with the new regulation, says Pace.
No. 2: Competition Plays Into The Hands Of Independent Advisors
Advisors will continue to feel pressure not just from robo-advisors, but from offerings by companies like Vanguard, Schwab and TD Ameritrade that combine low-cost digital investment management with personalized financial advice via call banks of advisors.
Custodians, who still court advisors as key parts of their business, are now a formidable part of advisors’ competition, says Pace.
“They’re chasing the same consumer, investment advisors are under assault from multiple avenues of competition, and they’re going to have difficulty winning the fee battle,” says Pace.
Pace says that the continued momentum towards the fiduciary standard and fee compression will evaporate the assets of most broker-dealers and wipe out smaller brokers.
“There’s going to be consolidation; every time there’s a turn in this industry, it’s an opportunity,” Pace says. “This upheaval is good for advisors. The first order of business should be to dedicate as many advisors as they can to the front office, making their clients happy, seeking more referrals, crafting targeted marketing plans.”
No. 3: Move Towards A La Carte Services
In an a la carte fee model, advisors would charge different fees for different types and levels of service -- for example, a holistic financial plan would have a charge rather than the cost being absorbed in asset management fees. Investment and risk management would carry their own costs. Face-to-face meetings would also come with a specific fee.
The idea, says Pace, is to get out of the business of merely charging a flat percentage of a client’s AUM.
“If you don’t have an a la carte model plus a digital solution, you’re going to miss the boat with subsequent generations of clients,” says Pace. “They don’t want to have services and fees forced upon them; they’re by and large happier ordering off a menu and selecting the services that meet their needs and aspirations.”
No. 4: Take ESG Investing Seriously
Younger investors and women are most likely to demand investment options that are socially or environmentally responsible, says Pace -- they're also a prime source of new assets for advisors.
“If you look at the demographic footprint of women and younger investors, something like $1 of every $6 is going into a socially responsible product,” Pace says. “As the industry moves into those demographics, advisors have to have an answer for their desire to make socially conscious investments.”
A relatively recent ruling by the DOL has paved the way for environmental, social and governance (ESG) funds to be included in 401(k) plans.
“The Trump administration’s position on ESG remains to be seen, but these trends are catching on, particularly with millennials,” says Sommer.
No. 5: Innovative Value-Added Services To Attract And Retain Clients
Sommer notes two little-known opportunities for advisors to create some differentiation with risk management and planning with stock protection funds and digital estate planning.
“A group of accredited investors all with different concentrated positions contribute cash to a pool,” Sommer says. “The pool is invested conservatively, and after five years, the cash is used to offset losses incurred by investors on their positions. If no losses are incurred, the investors received their cash back, but during those five years investors continue to hold their stock, collect dividends and participate in all of the appreciation. Since the stock is unencumbered, it can still be sold at any time.”
While it may take some time for stock protection funds to become available on advisor platforms, independent advisors may find them to be helpful tools for high-net-worth investors who need to manage the downside risk of concentrated positions.
Advisors should also look more closely at some of their already existing services to find opportunities to add value.
Sommer says that advisors who engage in legacy planning might want to consider offering services that would help clients take care of their digital assets as part of their estates.
“According to at least one online survey, the average person has around 90 online accounts, and there are often no provisions that address access should the client become incapacitated,” says Sommer. “The key point is for advisors to suggest that their clients update their estate plan to address for their online accounts and relationships.”