The prospect of a recession loomed large over many conversations at last month’s Schwab Impact conference, as advisors wondered how a post-pandemic slowdown might influence many industries and regions around the globe.
Many of the advisors at the Denver event last month seemed delighted to be returning to live events after meeting over Zoom for the past two years. But even so, everyone realized they are now living in a different world. Indeed, it seemed that one of the only places likely to be exempted from a recession was the advisory profession, though it has been confronted with an entirely different set of problems.
If the RIA business is to sustain its current rate of growth, firms will need to hire 75,000 to 80,000 new advisors and other support professionals in the next five years, according to Bernie Clark, Schwab’s managing director and head of advisory services. Financial planning programs are enjoying growing enrollments at many universities, but firms are going to have to look at other pools of talent to find that many skilled people. Still, if the slowdown in the economy turns into a full-blown recession in 2023, RIA firms may benefit from people looking to switch careers.
Advisors formerly affiliated with TD Ameritrade, acquired by Schwab in 2020, will face their own challenges next year when their accounts are transferred to the Schwab platform. Schwab CEO Walt Bettinger was blunt with attendees, warning them that the transfer of millions of accounts at that scale would inevitably run into glitches. An estimated 2,500 advisors were in attendance at Impact, including about 1,000 first-timers. Many of them presumably had previously custodied assets at TD and were kicking the tires at their new custodian.
Liz Ann Sonders, Schwab’s chief investment strategist, told attendees she believes the best-case scenario for the U.S. economy would be a “rolling recession” of sorts, where different industries and regions of the country experience declines in output at different times so that the business cycle doesn’t go into a free fall all at once. But she didn’t offer any guarantees.
Five key indicators she cited—the housing market, CEO confidence, the Institute of Supply Management’s manufacturing orders, consumer sentiment and the S&P 500—all are exhibiting sharp declines in 2022. If one removes the energy sector, corporate profits are already declining, and many think the shrinking has only just begun.
Unless there’s an equity market rebound in the final six weeks of 2022, RIAs with asset-based fees could experience their first meaningful decline in revenues since 2008. Still, after 13 years with only a few quarterly declines, this year’s revenue shortfall should be manageable.
There was a sense that the next investing decade ahead would look very different. Sonders sounded a little less bearish than she did earlier in the year, but others were glum.
DoubleLine Capital CEO Jeffrey Gundlach told a room packed with advisors that he thought stocks would end the year about where they stood on November 2, though he added that tax-loss selling could change that forecast. Gundlach, one of the few asset managers to call the subprime housing crisis in 2007, said the Fed’s aggressive interest rate hikes this year had “doomed” both housing and housing prices. He did not say precisely how serious the damage might be, but he pointed to surging credit card debt as a warning sign and predicted millions of layoffs.
Gundlach voiced little confidence in the Fed’s ability to achieve a soft landing, saying he suspected the central bank’s goal at the start of the pandemic was to raise inflation to 4% and “they overshot by 500 basis points.” Why should anyone believe that when they miss a target by that much “they are going to nail the landing?” he asked.
True to his often contrarian nature, Gundlach urged advisors to look at beaten-up sectors, from Treasury bonds to emerging market stocks. He said the latter could outperform the S&P 500 by as much as 100%, which they did in the first decade of the current century.