Being a financial advisor is difficult: You have to be smart, forward-thinking and possess the right mix of technical and interpersonal skills. Most advisors find it noble work, despite the stress and all-consuming nature of the role.
The last decade has offered some relief. In part, that’s due to advancements in advisor-facing technology, which have reduced manual tasks that once took hours or even days to complete to a few clicks of a mouse.
However, a bigger reason is the outsized performance of the equities market during that time. From the end of September 2014 to October 16 of this year, the S&P 500 advanced by over 250%.
Gains like this, of course, are good for clients, helping them get closer to achieving their goals. They are also a boon to advisors, most of whom now get paid based on the assets they manage. Yet, swelling portfolios have undoubtedly insulated advisors from criticism during this period.
Though not all clients are focused solely on performance, it’s a high priority for most. What happens if these consistently strong returns don't continue? At least one prominent Wall Street bank doesn’t think they will.
Therefore, it’s a question that most everyone in our industry today should strategize around. Indeed, advisors must ensure that their value transcends stock performance. Here are some areas to think about to do that.
Taxes
Clients are set to face tax challenges on multiple fronts. For one, the 2017 Tax Cuts and Jobs Act could lapse at the end of 2025. Whether that happens is very much up in the air, with the upcoming election going a long way toward determining that.
Beyond that, a more systemic problem exists: The nation's budget deficit is unsustainably high, recently eclipsing $1.8 trillion. With elected officials unable to agree on which government programs to cut, there are few alternatives to bring that down.
That's why tax increases on high earners in the not-too-distant future are a possibility. Therefore, advisors should consider either incorporating in-house CPA capabilities or building close relationships with tax professionals to ensure clients can tackle their obligations efficiently. This includes everything from advising on trusts and charitable giving to more complicated strategies, such as family limited partnerships for business owners.
Expanded Investment Access
Stocks could certainly continue to rise at the same pace. Despite respected investors predicting doom and gloom long ago, the economy has remained resilient, and indexes continue to set records. What's more, artificial intelligence is a powerful force, with its impact potentially being transformational.
The counter to that, of course, is that market corrections are inevitable. To prepare for this reality, advisors will need access to a wide variety of investment options, including private credit and private equity-based assets, which, until recently, have only been available to UHNW clients and institutions.
More than that, they may also have to upgrade their technology. Many of today's systems have difficulty making sense of the types of investments mentioned above, which is a problem because the lock-up periods and vesting schedules can cause a liquidity crunch if an advisor’s trading platform can’t reconcile them properly. Other non-traditional investments―like fine art, collectibles and venture capital―create similar problems.
Conquering Family Dynamics
Paradoxically, the one client demographic that tends to be less consumed by returns is ultra-wealthy families. They may prioritize other aspects of their financial plan, such as wealth preservation, leaving a legacy and creating a sense of personal fulfillment.
Family offices appreciate this. That’s why they lead with services like wealth transfer strategies, endowment and foundation solutions, and life planning. Family offices also understand that their clients often have additional personal dynamics to manage.
These could be mental health or substance abuse problems or more general concerns about family governance. Whatever the case, all advisors should seek to build or refine the so-called softer skills necessary to help clients solve these problems.
What do you think will matter more to a client? A portfolio that stays marginally ahead of the S&P or an advisor who can help keep their family life more harmonious and preserve their cherished values and traditions for generations to come?
It’s impossible to argue that the favorable equities market environment has been bad for advisors. Still, it should be easy to see how the landscape may have masked holes in their advisory practice.
If stocks do slump for an extended period―or just return to the historical norm―those holes will become more apparent to clients. That’s why it’s best to work toward covering them up now by creating a value proposition that extends beyond stock market performance.
Josh Harris is a wealth manager and managing director of corporate development with Coldstream.