“Coach’s Forum” is a place in which you can ask your questions, tell your stories, or give your opinions on any aspect of practice management. For each column, George selects the most interesting and relevant comments from readers and offers his advice. Our objective is to build a community of people with a common interest in making their financial advisory practices as effective as possible.
Advisor says: Being a bit of a technology geek, I have been following industry commentary about the impact of technology on my work as a financial advisor. I hear many conflicting opinions, which range from dire warnings to enthusiastic embrace. Just wondering: what is your view?
Coach says: Technology will have a profound impact on the client experience and your relationship with your clients. Technology also will affect your business, and the way advisors manage the revolution in technology will make or break a practice.
I often state that advisory practices inevitably become more complex and require more management as they grow. Today, many advisors spend more time running their businesses than counselling clients. You would expect improved technology to assist in that regard – and, for many of the operational activities on which advisors spend too much time today, it will. Unfortunately, new responsibilities will arise in their place; responsibilities that, in many cases, will be more onerous and resources-consuming.
The biggest challenge will be privacy of information. With so much client data at your disposal, you will require super- secure information systems to assure both clients and regulators that confidentiality is protected.
A second operational challenge will be the shortage of qualified staff (something many advisors are experiencing already). Whereas you once could get away with hiring an assistant with basic Word and perhaps Excel spreadsheet experience, your future team members will have to work with increasingly sophisticated systems that store vast amounts of information, link processes and connect intermediaries.
This trend will lead to even greater competition among advisors for the talent they require to run their more complex businesses. The result will be higher staff costs and the need to be creative regarding compensation to attract and retain qualified people.
The technological heartbeat of your business will necessitate a higher level of expert support. You will need on-demand access to highly qualified technicians who can react quickly to any technological hiccup. That demand will swell your payroll costs further.
The requirement for higher-cost specialists also will accelerate the trend toward outsourcing that is underway. Today, more and more advisors outsource their portfolio management. Within the next 10 years, expect financial planning, marketing, compliance, operations management, research and some aspects of client service to be handled by independent contractors, leaving you and your internal team free to manage your intimate client relationships.
That future leads me to comment on the financial management of your business. With increased expenses and declining margins, practices simply must be managed in a more businesslike way to survive. Sound businesses have budgets, cash reserves for rainy days, money set aside for capital investment and a clear fix on profitability – items often absent from practice management today. You will have to think and act like a business owner, separating the compensation you receive as an advisor from the compensation you earn as the proprietor of your practice.
If there is any good news in this shift, it is that integrated technology will automate many compliance-related tasks. (Think “regtech” alongside “fintech.”) Making an investment recommendation that is not consistent with a client’s risk profile and objectives, for example, literally will become impossible because most of the information that you now are required to collect will be integrated and in the hands of compliance. If you go off-track, bells will ring and lights will flash in your office and discrepancies or missteps will be halted.
If my view of the future is even close to being accurate, the biggest change will be in your business model. The driving force will be the decline in margins that advisors have been dealing with for the past 20 years. Who does not believe that we will continue to experience downward pressure on fees at the same time as costs increase? And what will be the outcome?
Here are my predictions:
– Fee-based compensation. The majority of practices will be fee-based, and those fees will decline to perhaps half of what they are today. Get used to running your business on 50 basis points (bps), not 100 or more.
– Fewer, simpler products. The decline of mutual funds and the rise of ETFs have begun. Even though choices among the latter have exploded in the past five years, I expect rationalization as advisors settle on a core list of providers, just as what happened with mutual funds, leaving many ETF products with insufficient support in a world of declining management fees.
– Near-zero MERs. The commoditization of investment options makes price the basis for competition. In the “race to the bottom,” only product providers with broad-based support will prosper. Today, that support has to come from advisors. However, what will happen when Amazon.com Inc. or Google Inc. enters the investment-management business and consumers become the power that determines which providers succeed or fail?
– Larger practices. Lower revenue per client will mean only larger practices will be able to cover fixed costs and generate sufficient compensation for advisors and owners. At 50 bps, a practice with $50 million in assets under management (AUM) will produce gross revenue of just $250,000. After dealer share and operating costs, there won’t be much left for advisor compensation, let alone owner compensation. AUM of $100 million or more will become the new standard, with additional revenue coming from insurance and other sources.
– More clients. While many advisors today are scaling back their business or looking to narrow their market, I expect that trend to reverse itself – for two reasons.
First is the need to build continuity with the families of current clients. As wealth passes from one generation to the next, relationships with adult children will be essential. Because many of the inheritors still will be building their own financial base, they will not have the $500,000 or $1,000,000 to invest that many advisors insist on today.
Second, technology will enable you to serve clients with fewer investible assets. I see more and more practices having an “internship” or “junior partner” role for younger advisors to work with smaller clients.
– Partnerships. Another way to build scale is through a merger or acquisition. We already see a growing trend toward partnerships, primarily for succession-planning purposes. I anticipate that trend will accelerate as advisors also look for ways to share costs and resources. With aggregation of client information and integrated planning and implementation, having specifically qualified people as part of a multi-disciplinary team will be important. If these specialists are not direct team members, they will work under a strategic-alliance agreement.
– Less competition. The trend toward larger practices consisting of multiple advisors will reduce the number of direct competitors, particularly on the independent side of the business. Those advisors who have their act together will flourish and grow; those who do not will wither away.
– Succession plans. U.S. regulators already insist that advisors have a plan for the continuity of their business in the event of death, disability or disaster. It is a very short reach for them to include retirement as another contingency, given the aging of the advisor population. I can easily anticipate that Canadian regulators will follow suit.
Our industry isn’t in an evolutionary stage any longer. The financial advisory business is in the midst of a revolution, the nature of which we have never seen. If you are not already on the path to anticipating and adapting, I beg you to begin doing so right away. I will keep you posted on my thoughts as they progress – and I invite yours.
This is the second article in a two-part series on advisors and technology. The first article appeared in the Mid-February 2017 issue.
George Hartman is CEO of Market Logics Inc. in Toronto. Send questions and comments regarding this column to firstname.lastname@example.org. George’s practice-management videos can be viewed on www.investmentexecutive.com.
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