As boomers age and spend their savings, advisors will need to adapt their practices.
As more baby boomers stop accumulating assets and
withdraw from their portfolios to pay for retirement, independent
advisors will have to adapt or face lower revenue, higher marginal
costs and less profit, predicts a white paper by Thornburg Investment
Management.
The paper, Preparing For Tomorrow-The Role Of The
Advisor In A Depleting Asset Environment, was released in May and
summarizes conclusions from the firm's 6th Annual Wealth Management
Conference in Santa Fe, N.M.
"The extraordinary demographic and economic shift
caused by the baby boom generation will transform the financial
securities industry into a depleting asset environment, or one that is
also referred to as a 'spend down' environment. In these new
surroundings, the role of the financial advisor is going to change.
Accepting the changes and adapting to them will be critical to the
prosperity of our profession," the paper says.
As investment portfolios are used more for financing
lifestyles and medical bills rather than accumulating assets, their
balances may not shrink but they will not receive any more
contributions, the report continues. Independent advisors will need to
shift from investment management to financial advice, the paper
maintains, and will face four significant challenges: succeeding
against increasing competition, anticipating how advice and service
needs will change, compensating for the changes to maintain
profitability, and defining your value-added proposition.
"The issue is that the fundamental aspects of a
business model as it applies to an accumulation practice are way
different than the model that would be applied to a distribution
practice," says advisor David Lawrence. Lawrence, a speaker at the
conference, is president of practice consulting firm David Lawrence and
Associates in Lutz, Fla.
Succeeding Against Increased Competition
Competition will increase exponentially. Today's
overall marketplace includes 19,000 registered investment advisors with
combined assets of $2.1 trillion under management, the report says.
Seven sectors of the financial services business are all vying for a
piece of the pie, including full-service brokers, independent advisors,
retail banks, private banks and money managers, CPAs and law firms,
insurance companies and discount brokers.
One of the most formidable competitors today is
full-service brokers, or the wirehouses. They control 50% of the
private client market (clients with assets of between $500,000 and $1
million), the report says. The wirehouses are training and educating
their brokers to be wealth managers, who they want to be doing
fee-based business, the report says. "The big firms are increasing
their advisory services and the leader is Merrill Lynch," it notes.
But independent advisors captured the lead with 36%
growth in assets per year and have emerged as competitive forces
against wirehouses. "By providing complete wealth management services,
advisors can move away from simply offering a better price or more
products. Personal service is this group's winning formula," says the
report.
Still, wirehouses are making a comprehensive effort
to gather assets before people retire so that they are the firms of
choice when $1.9 trillion is rolled over in the next five years. They
also are rolling out new products that focus on generating income and
are marketing themselves as providers of "retirement solutions," the
report says. They also are gearing up to offer these services through
face-to-face interactions and seminars to help people work through
issues and concepts in a wealth management product, it continues.
Meanwhile, the commoditization of investment
management is continuing, and the same thing is happening to asset
allocation, once the unique selling proposition of independent
advisors. For most independent financial advisors, the only viable
choice is to increase their value by offering "client-centered"
services. One solution may be to offer very distinctive financial
services to different segments of the market, the report adds.
Anticipating How Advice Needs Will Change
As baby boomer needs change, more
advisors will focus not only on asset distribution but also on
lifestyle issues. The paper predicts services offered by advisors will
change in seven ways:
Investment management will become less relevant.
In a declining asset environment, advisors will need to differentiate
themselves in some other way, such as wealth preservation to meet
extended longevity.
Knowledge will be required about new products focused on distribution and income-producing assets.
Taxes and tax planning will become more important.
As people liquidate assets, important concerns will be capital gains
issues, required distributions out of tax-deferred accounts and
maximizing after-tax income.
Bill paying, tax preparation and health-care
advice will be more in demand. Clients may call on you to manage bill
paying and tax preparation, and may ask for your advice on health-care
issues.
Wealth transfer will take on more urgency. The
creation of a complete estate plan, along with a charitable giving
plan, will increase in priority.
Risk management will become more critical
(longevity and health-care risks in addition to wealth preservation).
More clients will move into a wealth preservation and protection phase,
and advisors need to be aware of it.
Educating staff about the marketplace and the changing needs of clients will become more challenging.
How Will You Compensate For These
Changes To Maintain Profitability?
As many client portfolios decline in value, advisors
who want to maintain their firm's profitability will need to offer more
services and have more clients, the paper says. They'll also need to
better manage overhead costs through outsourcing, leveraging and
smarter employee hiring and management.
Compensation models traditionally have been based on
an advisor's ability to gather and grow assets. Advisors will need to
transition their fee structure from a percentage of assets under
management to an a la carte fee structure with a fixed component for
financial planning services, says the paper. And they'll need to
persuade clients that they need to pay for advice in some way other
than assets-based fees.
"It's not demographics that will directly change the
way advisors need to charge. But demographics will change what clients
need, therefore what advisors need to deliver and therefore how they
should charge," says Rebecca Pomering, a conference speaker and a
principal in Moss Adams LLP who consults with financial advisory
practices on various issues.
As clients age, they require more than asset
management or a different approach to it, Pomering says. While some
firms already deliver more to their clients, the pricing model for most
advisors is based on a percentage of AUM, which does not necessarily
reflect what they are delivering, she adds.
"Historically, advisors have had a tough time
getting compensated for financial planning, but the biggest barrier to
this has been advisors themselves. When advisors do ask clients for
fees, very seldom, if ever, are they turned down," the report says. "If
clients value what their advisors do for them they are willing to pay."
The challenge becomes how to adjust your pricing to
reflect the value you've provided all along, the report says. "It's
difficult, but may be necessary, to say to clients, 'I've been charging
you incorrectly all the years of the great stock market-now that asset
management is a smaller component of my service offering, I'm going to
need to change my pricing model because I'm not getting compensated
adequately.'"
How Will You Define Value Added?
One solution to adapt to the changing environment is
to become a client-centric advisor, the paper says, and this entails
modifying your business model from one that was investment centered.
The client-centric business model is more focused around relationships
with clients and the management of their overall wealth and well-being.
Client-centered planning focuses on current client needs and
supervision.
"I put forth the notion of a client-centric model,
where virtually every aspect of a practice relates to a central theme
and a central question: Whether you are dealing with technology, new
products, new hiring, whatever the decision, you make the decision
based on how it is going benefit your client," says Lawrence.
The paper says that the client-centric advisor is a
wealth manager who builds and quarterbacks a team of outside
specialists who can help clients achieve their financial and life
goals. This "virtual company" design allows the advisor to expand
services without expanding costs, the paper says.
"Positioning your firm as a wealth manager can also
serve as a defense against the big wirehouses, as well as help you
leverage existing relationships with baby boomers and the affluent,"
the paper concludes.