5 FORCES SHAPING OUR INDUSTRY. INSIDE: Learn how embracing change in a rapidly evolving industry can enhance practice growth.

Transcription

1 5 FORCES SHAPING OUR INDUSTRY INSIDE: Learn how embracing change in a rapidly evolving industry can enhance practice growth.

2 At no time have advisors been under so much pressure to evolve their practices and processes to accommodate rapidly changing industry standards and technology, regulatory change, and shifting client expectations. What s more, the pace of change is not anticipated to slow anytime soon. In fact, a recent wealth management industry study concluded that the level of change we re experiencing today should not be viewed as a one-time event, but rather a continuous pressure to innovate that will shape customer behaviors, business models, and the long-term structure of the wealth management industry. 1 While none of us can accurately predict what the advisory business will look like 10 or 20 years from now, the advisors and firms that realistically assess today s challenges and develop a plan to confront them will be the ones to not only survive, but prosper. In the following, we address the five primary forces reshaping the fabric of our industry, what they mean for your business, and ways you can turn these challenges into practice growth opportunities. 1. Margin Deterioration The widespread availability of low-cost and do-ityourself investment options continues to drive down the amount investors are willing to pay for advice, forcing advisors to reevaluate their pricing, service offerings, and value propositions. Along with providing automated, algorithm-based portfolio management advice, some online investment services offer automatic portfolio rebalancing and tax-loss harvesting. In addition, the shift from active to passive investments has lowered the perception of the value clients place on investment advice, which has become more of a commodity. Since automated advice services tend to charge less than the industry standard of 1% of assets managed for financial advisory services, many financial advisors find themselves under significant fee pressure, working harder to justify their fees and communicate the value of the services they provide. However, it s important for advisors to understand that robo advice is not a new channel, but a platform capability enabling advisors to scale their advice offerings. Most advisors already do that today through offering a range of advisory programs and services based on their clients needs. As such, automated advice offers significant opportunities for advisors seeking to build and diversify their books of business, especially when it comes to engaging the next generation of investors. In many respects, the advent of automated advice further highlights the value advisors bring in driving client outcomes as investors are less concerned about their allocations than whether or not they re on track to achieve their goals. A Washington, D.C.-area registered Selecting an Automated Advice Platform When selecting an automated advice platform to complement your current advice offering, look for the following features: Compliance-approved marketing materials The ability to seamlessly transfer clients to another investment program if their needs change Full integration with your current workstation and back office service provider Automated annual client check-in that is captured and saved for compliance purposes The ability to accept ACAT transfers to fund the account (many direct to consumer platforms only accept cash). LPL FINANCIAL 2

3 investment advisor (RIA) firm found that within six months of launching an automated investment offering, nearly all of its robo customers wanted to speak to a human planner. 2 This supports numerous industry studies, including Dalbar s Quantitative Analysis of Investor Behavior (QAIB) 2017 report, which concluded that meeting financial and investment goals is highly dependent on investors emotional and behavioral responses something human advisors can directly influence. Software simply can t address these or a host of other complex needs, such as estate planning, cash flow management, de-accumulation and retirement income planning, multigenerational wealth, family conflicts, insurance, and more. Going forward, advisors will need to clearly articulate the added services they provide, such as: A holistic, more comprehensive approach to planning Identifying a client s true risk tolerance and allocating assets to meet that tolerance Guidance and reassurance in helping clients manage the emotional aspects of investing, including being overly optimistic in bull markets or overly pessimistic in bear markets While automated advice can t replace the value human advisors bring to the table, it remains an important platform for meeting the needs of an underserved segment of the market, primarily young investors or those with limited assets. The right platform can allow you to further segment your book, diversifying your income stream, and free up more time to focus on the aspects of wealth planning that you find most rewarding and where you can provide the most value. 2. Regulatory Challenges While the Department of Labor s (DOL) fiduciary rule has dominated headlines for several years now, there are a number of other regulatory issues that are driving increased complexity and scrutiny in the business of providing financial advice. These shifts require a greater focus on developing compliant solutions that can fulfill advisors changing needs. Notable among these are new appointments to the federal agencies, especially the SEC and FINRA, and a targeted Dodd-Frank rollback by Congress. A sizeable issue Washington hopes to tackle this year is tax reform, which could have significant impacts on our industry from buoying financial institutions to creating challenges for the realization of deferred taxes. Curbing tax deferrals for retirement savings the tax breaks provided for contributions to 401(k) plans and individual retirement accounts (IRA s) has frequently been mentioned as a means to help pay for tax cuts without adding to the deficit. Another issue on the table is simplifying the titles used by brokers and financial advisors to help distinguish between a broker who meets suitability standards and a financial advisor subject to a fiduciary standard. And, as cybersecurity challenges continue to grow, firms are boosting IT spending to comply with new regulatory and information security requirements. While these are just a few of the looming regulatory issues advisors and their firms are grappling with, they highlight the level of disruption and uncertainty advisors are forced to cope with as they work to implement new regulatory requirements while managing day-to-day business needs and goals. As the regulatory environment continues to evolve, advisor practices of all sizes face increased pressure due to these and other factors: Difficulty balancing compliance and practice management demands Increasing compliance costs Pressure to rapidly implement a growing number of regulatory changes Ability to incorporate affordable regulatory technology solutions Adequacy and availability of skilled resources Cyber resilience, data security, and technology risk requirements While smaller firms typically lack the resources to develop a scalable compliance and risk management offering, even many larger RIAs are rethinking their strategy as risk management costs further squeeze their margins and force them to play a constant game of catch-up to remain compliant. Outsourcing compliance and risk management functions to a firm offering scalable resources and access to advanced LPL FINANCIAL 3

4 risk management and regulatory technology programs and capabilities is a strong solution for firms seeking to invest more of their time and resources in areas that help provide service to clients and improve profit margins while remaining one step ahead of compliance requirements. 3. Technology Americans of all ages and at all levels of wealth have become accustomed to an increasingly digital experience from banking to healthcare, consumer services, and all means of personal communication. As such, they seek the same level of accessibility and transparency from their financial advisors as they have with other service providers. While, globally, 72.9% of high-net-worth investors say digital maturity is significant or somewhat significant in their decision to increase assets with their wealth management firm over the next 24 months, 3 many firms continue to grapple with an aging technology infrastructure that can t cope with the demands of a highly networked, mobile-proficient client base. This makes the increasingly rapid evolution of technology one of the greatest threats to advisors and firms that lack the resources or wherewithal to invest in technology capabilities. Tech tools like customer relationship management systems (CRM), sophisticated portfolio trading platforms, social media, and online client portals make planning and investing more efficient while also highlighting your value as an advisor. Popular tools that enable web-based face-to-face meetings and apps like Skype and FaceTime eliminate travel time while improving the productivity and frequency of client communications. And advanced financial technology (FinTech) solutions enable client data to be captured and repurposed across integrated portals from new account setup to trading, risk management, and marketing platforms. Firms that have successfully integrated financial and regulatory technology capabilities enable advisors to efficiently track risk management parameters within client portfolios and comply with current and anticipated regulatory requirements relative to suitability and fiduciary requirements at the individual client and/or portfolio level. This results in tremendous practice efficiencies, which can lead to a superior client experience. 10 FinTech Themes Driving the Future of the Industry 1. FinTech will drive the new business model. 2. The sharing economy will be embedded in every part of the financial system. 3. Blockchain will shake things up. 4. Digital will become mainstream. 5. Customer intelligence will be the most important predictor of revenue growth and profitability. 6. Advances in robotics and artificial intelligence will start a wave of re-shoring and localization. 7. The public cloud will become the dominant infrastructure model. 8. Cybersecurity will be one of the top risks facing financial institutions. 9. Asia will emerge as a key center of technology-driven innovation. 10. Regulators will turn to technology as well. Source: PwC Financial Services Technology 2020 and Beyond LPL FINANCIAL 4

5 4. Aging Advisor Population The graying of the advice industry is leaving its future unclear. What is clear, however, is that as the advisor population ages, younger professionals aren t joining the business, creating concern that future access to independent financial advice may not be available to investors. Consider the following: According to the Certified Financial Planner Board of Standards, more CFP professionals are over the age of 70 than under the age of Consulting firm Moss Adams estimates the industry could face a shortfall of more than 200,000 advisors by Approximately 60% of current advisors have not completed a succession plan. 6 For many advisors, their financial services practice represents the single largest asset they own. That makes succession planning critical for protecting and realizing the value of that asset. Similar to clients who do not plan for retirement and therefore face a greater risk of missing their retirement goals, advisors who fail to begin planning early enough risk jeopardizing a successful transition. Without a plan in place, you may not realize the full value for your practice when you are ready to transition or sell, especially if you are forced to Quantifying the Gray Area The average age of a financial advisor is 51 years old and continues to rise every year. Only 22% of financial advisors are under 40 (only 5% are younger than 30). Just 40% of older financial advisors say that they have a completed succession plan. One in three firms experienced client retention of less than 50% during financial advisor succession well below the ideal target rate of 90%. leave the practice due to unexpected circumstances. Transitioning a practice under pressure doesn t allow you to properly investigate options and alternatives and can put you at a real disadvantage in negotiating the terms of a sale or buyout. Another risk of waiting, and one that increasingly impacts advisors nearing retirement age, is the loss of potential new business due to prospects concerns that the advisor may sell or retire in the near future with no obvious successor in place. Because advisors over age 50 outnumber their younger counterparts, it s inevitable that at some point in the next decade, the number of practices or books of business for sale will reach a critical mass. That makes it more important than ever to ensure your business is positioned to achieve optimal value when you re ready to transition or sell. However, succession planning is no longer simply about transitioning a business in retirement. Experienced succession planning specialists are trained to proactively build and evaluate practice value and develop effective business continuity and succession planning strategies to help ensure that regardless of expected or unexpected circumstances, a smooth transition of business can occur, and full value for your practice can be realized when it s time to sell or retire. When seeking a firm to facilitate the succession planning process, look for one offering simplified end-to-end solutions for: Developing and implementing an effective plan to ensure the continuity of your business, mitigating any disruption of service to your clients Evaluating and helping to maximize the value of your practice Providing guidance to help you add value to your practice and a path to the best outcome for yourself and clients Assisting you in growing your practice through the strategic acquisition of other practices Providing assistance in implementing a customized strategy to help you sell your practice LPL FINANCIAL 5

6 5. Department Of Labor (DOL) Changes Acting as an accelerant to the previous four trends are the changes resulting from the DOL fiduciary rule. Adhering to a fiduciary standard, rather than a suitability standard, calls for increased documentation and a greater level of accountability for investment decisions. It s also causing advisors to reexamine the value they provide clients and their business model for doing so. The DOL fiduciary rule: Broadens the definition of fiduciary Has the biggest impact on the IRA rollover market and ERISA plans Increases compliance requirements as broker/ dealer develop new systems to monitor advisors and produce client disclosures Drives firms to alter their business and/or compensation models to adhere to the new regulations Continued consolidation is expected among advisors and broker/dealers that are not equipped to (or choose not to) implement these sweeping regulatory changes by the January 2018 deadline. However, firms that took steps early on to comply with and prepare for the new rules are positioned to experience little to no business disruption. While the new rules have some impact on all financial advisors, those who work on commission, such as brokers and insurance agents, are impacted the most. 7 Advisors who rely on generating commissions must adjust from an upfront product sale to ongoing management of the portfolio, requiring them to move existing underlying investments to the lowest cost alternatives, effectively lowering their compensation. As a result, many advisors affiliated with wirehouses or other captive channels are considering the benefits of transitioning to an independent practice. 8 Work with Us The saying the only constant is change couldn t be more true for our industry than it is today. And, while change can be uncomfortable, and even painful at times, the wealth management industry continues to grow and reap the benefits of an ever-changing environment. At LPL, our teams of experts can help you with every aspect of enhancing profitability, practice growth, and underlying business value from segmenting and assessing your book to incorporating more sophisticated technology into your practice, as well as succession planning and generational wealth planning to expanding your product set. Our growth consultants will help you find and execute on opportunities to help maximize the value of your book of business. LPL FINANCIAL 6

7 Your Practice, Your Way However you envision the future of your practice or program, LPL s comprehensive support and broad range of innovative business models can help you build and grow your business, your way. LPL understands that independence doesn t have one single meaning. Whatever lens you view your independence through, LPL is here to support and provide clarity to that vision, whether you want to: Be an independent financial advisor at LPL with access to custodian services and a fully integrated platform to address the varied needs of your clients. Leverage the LPL Hybrid RIA model, which allows you to join LPL s broker/dealer platform while maintaining your Registered Investment Advisor (RIA) firm. Join an existing practice, bank, or credit union for established infrastructure, structured support, and access to new referral sources. Specialize in retirement plans and leverage tools and resources built by retirement plan advisors, for retirement plan advisors. Bring your entire practice or build one LPL offers customized clearing, advisory platforms, and technology solutions to help create efficiencies and scalability within your practice. Discover how LPL Financial can help you and your practice reach your full potential. Call us at (888) to speak in confidence with one of our experienced recruiters, or visit us online at today. 1 Redesigning Financial Services (RFS): Wealth Advice; Edition 1/2017. RFS is an interdisciplinary think tank founded by the Institute for Customer Insight at the University of St. Gallen (ICI-HSG) and the Department of Management, Technology, and Economics at the Swiss Federal Institute of Technology (MTEC-ETH). 2 Financial Planning: Why Robo Advice Will Help Human Advisers, by Tobias Salinger; July 12, Source: Capgemini: Top 10 Trends in Wealth Management ThinkAdvisor: Addressing the Shortage of Millennial Financial Advisors, March 28, Financial Planning: Should Your Firm Be More Flexible About Flex Time, by Kelli Cruz; February 8, EY: The Next Generation of Financial Advisors; Investopedia.com: DOL Fiduciary Rule Explained as of June 9, 2017; July 5, Financial Times: More B/Ds Expected to Break Away as Indie RIAs, by Rita Raagas De Ramos; April 11, About LPL LPL Financial is one of the nation s leading financial services companies and a publicly traded company under ticker symbol LPLA. The firm s mission is rooted in the belief that objective financial guidance is a fundamental need for everyone. LPL does not offer proprietary investment products or engage in investment banking activities; this means advisors affiliated with LPL are not pressured or influenced by LPL to sell its products. Thousands of financial advisors nationwide are able to rely on the firm s tools and resources to help them provide financial guidance and recommendations to address their clients needs. For more information about LPL Financial, visit LPL Financial, a registered investment advisor, member FINRA/SIPC BD Tracking # (exp. 08/19) LPL FINANCIAL 7