As we head into 2015, financial advisors have much to be thankful for. The markets have been strong for several consecutive years with abnormally low levels of volatility. That may be coming to an end, which sets the potential foundation for more difficult conversations at prospect and client meetings in the near future. Here are a few themes for the New Year and beyond.

The Threat Of Robo-Advisors And Do-It-Yourselfers
We are all aware of the increasing importance of financial planning. This trend is so omnipresent that it reminds us of the trend away from commissions to fee-based revenues years ago. It is that powerful. However, many financial advisors lack the expertise or willingness to incorporate planning as their primary service offering. Investors seeking financial planning will go elsewhere to get the services. Online brokers and robo-advisors are taking advantage of this gap. These firms are delivering the technology and tools to allow do-it-yourselfers to complete basic planning accompanied by asset allocation recommendations.
With a return of volatile markets, those that believe they can do it on their own, or with a limited robo-advisor relationship, may second-guess their abilities and come back to a more consultative and planning-based relationship. This opens an opportunity for advisors to provide more services to clients. The best advisors go beyond the basic risk tolerance and asset allocation planning to find what personal goals and aspirations their clients have and tailor investment solutions to help them reach those goals. Preparing for a future lifestyle in retirement is becoming more important to clients. Thus, advisors and their firms should not feel compelled to discount their fees to match these commoditized competitive offerings. Rather, advisors should understand their value and be able to articulate it to prospects and clients.

The Rebuttal Of Goals-Based Investing
The concept of an asset allocation recommendation being the primary output of a financial plan means advisors often miss the opportunity to deepen relationships through planning. Those plans that base their recommendations on a simple risk tolerance questionnaire tied to an asset allocation mix are being commoditized. The real value in true financial planning is that you can help clients identify their life goals, cash-flow needs and other objectives for their money. After all, beating the S&P 500 is little comfort if a client has an inadequate or inappropriate plan and cannot meet his or her goals. The better and more comprehensive financial planning tools allow advisors to help clients understand the likelihood of meeting goals by testing the probability of the outcomes. This is far more important than participating in the decade-old discussion about whether clients should be exclusively investing in active managers or passive index vehicles. Advisors that can raise themselves up to this higher level will have better and longer-lasting client relationships.
40-Act Alternative Investments As Solutions
The array of tools available to advisors for goals-based planning has never been broader, and it includes an impressive proliferation of alternative investments in mutual fund vehicles (though some of this proliferation is attributable to investment management firms dressing up their long-only strategies in an effort to justify higher fees and more shelf space).

Many advisors have sold alternative products based on the concept that these will deliver more aggressive returns (higher relative returns). But the reality is that true hedge funds are intended to hedge and dampen returns and volatility and offer lower correlations and better diversification. Still, novice investors and the media continue to compare these products to the equity markets, talking about the lackluster returns in alternatives as a broad group, not realizing what they should be used for.

The funds that will be successful are those designed to be absolute-return oriented, not dressed up relative-return mimics. The absolute-return orientation will take on more importance as equity and bond markets falter and clients and advisors realize the better performance benchmark is a goal-based nominal return approach instead of an arbitrary index.

Fee Transparency And The Retirement Plan Market
Fee transparency is becoming more and more important since the Department of Labor enacted the new rules for retirement plans in 2012. Most practitioners who adhere to a fiduciary standard should welcome this. While many people have commoditized investments by choosing the lowest cost solution, retirement plans can improve outcomes by educating participants about where and when to pay more for better investment solutions. The fee transparency changes are fast becoming a better marketing tool, rather than just offering what is perceived to be the lowest cost solution. As in other parts of the investment world, product developments here allow participants and advisors flexibility. Target-date funds are an example of options that were not available just a few years ago.

Low And Rising Interest Rates Create Problems
The bull market for bonds is at its end. Interest rates declined from around 15.5% in 1981 to less than 2% recently. That’s a paltry source of income, and if interest rates meanwhile rise, bond investors could face market value declines that far exceed the annual yield on their bonds. A 1% increase in interest rates equates to an approximate 8.8% decline in price for the current 10-year Treasury. 

Even if interest rates remain flat, then inflation and fees eat away nearly all the income. Here lies a troubled foundation that impacts many other areas for financial advisors. Should investors turn to equities? While the economy is getting stronger, the domestic equity market alone is harder to navigate now that we are in the sixth year of a bull market. There are many other investment opportunities to consider. However, advisors should consider investor needs and risk tolerances before making recommendations or changes for investors concerned about the interest rate environment.

As we look forward to 2015, we have never had a better foundation of tools to provide service to clients. It is an exciting time to be an advisor and a time to be thankful and take pride in our work.

Bob Jones is President and CEO of Central Trust & Investment Company a $4.5 billion wealth management firm headquartered in St. Louis. [email protected] 314-746-4674