Any industry observer knows that the last decade has brought significant change to the financial advisory industry, with technology (especially social media and robotics), regulations, and changes in demographics.
But has all that change resulted in a healthier industry in 2017? Not so, finds a new Fidelity Investments survey on the RIA sector.
The Fidelity study, titled “A Future Ready Pricing Model,” concluded that “organic growth” in RIA assets under management has “slowed to the lowest growth in five years.” The RIA industry is “in a period of unprecedented change,” it found.
It’s not just Fidelity. A 2015 study from RIA In a Box, which directly tracks the RIA sector, stated that industry assets under management growth rates are moving in the wrong direction, and at an alarming rate.
“Much of this decline can be attributed to the relative performance of the equity markets over the past two years, (and) demonstrates the potential year-to-year revenue volatility of a typical investment advisory firm regardless of size,” RIA In a Box noted.
The study found that average AUM growth rate for RIA firms during the 2015 calendar year was 1.97 percent, compared to 23.3 percent during 2014.
Adaptation is Key
While there is much concern over the RIA industry’s future, sector insiders aren’t writing any funeral dirges just yet.
“RIAs need to adapt or die,” said Larry Miles, principal at Advice Period in Los Angeles. “And advisors who most effectively implement new technology will be significantly ahead of their peers who do not.”
The investment and wealth advisory worlds are moving toward a true fiduciary standard, Miles said, and RIAs will be well positioned for that move. But he issued a key caveat: “RIAs who pin their futures on their investment performance beating the market will lose.
“The best RIAs will help their clients invest and plan for their futures. It's not enough to just help your clients invest. RIAs need to help them plan, which means budgeting, insurance reviews and tax planning. And RIAs are well suited to offer this advice.”
Mark Zoril, a money manager with Plan Vision, sees an unyielding move toward more sophisticated financial technologies as a game changer for the RIA profession.
“I certainly believe the industry is going through major changes,” Zoril said. “Technology is an important part of this. Much like the gig economy is affecting other industries, it’s also impacting the financial services as well.”
In the big picture, consumers are paying way too much in expenses that get siphoned out of their investments to support the RIA industry, and that hurts the industry, Zoril added.
“There is little justification for many of these costs, even though many firms promote all of the value they offer people, whether it be in investment management or financial guidance,” he said. “I think what they charge for their value proposition simply is not justified.”
Technology, in the form of investment management through roboadvisers and all-in-one portfolios through companies like Vanguard, are going to put tremendous pressure on industry and advisory fees, Zoril said.
“Wealth management won’t be a legitimate product in the long run,” he added. “It is going away.”
'Not In Decline'
Yet, where some industry professionals see direct industry threats (especially from technology), others see potential areas of change and opportunity for RIAs.
“The RIA industry is not in decline; it is just maturing,” said Corey Kupfer, founder of Kupfer & Associates in New York, which provides advisory services for RIA firms.
“The slowdown in organic growth of firms, the impact of roboadvisors and the need to address ongoing regulation are all just part of that maturation,” he explained. “Although volume of breakaways may have slowed, we continue to see larger and more sophisticated teams breaking away and a lot of merger and acquisition activity.”
Fee models are changing, too, and the way they’re changing will help shape the RIA profession going forwards, said Scott MacKillop, CEO of First Ascent Asset Management.
“RIAs brought fee-based pricing to the market and were hailed as heroes relative to their commissioned-based brethren,” he said. “However, several factors are compressing fees across financial services, and RIAs will need to retool pricing models.”
The old “1 percent of AUM” pricing model worked for many, but advisors need to be less defensive about their fee schedule and more creative.
Some industry professionals view an RIA market decline as inevitable, mostly due to technology.
“Wonderful, easy-to-use technology is allowing more and more people to do everything themselves,” noted Douglas Carey, founder of Wealth Trace, a financial planning software provider in Boulder, Colo. “The typical financial advisor charges 1 percent per year to manage investment assets while robo-advisors can charge as little as 0.15 percent per year, while offering way better technology and planning tools.”
The younger generation of investors and savers scoffs at the notion of going into an office and talking with a financial advisor, Carey added. “They absolutely expect most important items in their life to be accessible from their smartphone or tablet. This is where all the new technology comes in.”
The technology that financial advisors use is a decade behind, if not more, Carey said.
“Financial advisors still dump a 100-page financial planning report onto the laps of their clients, rather than giving them easy-to-use online tools to manage their own plan over time,” he said. “They’re being outflanked by smaller and more nimble technology companies that know how to deliver an easy-to-use platform and amazing financial planning tools.”
Carey predicted the financial advisor industry will not be completely destroyed by the internet, unlike travel agents and video stores.
“But it will decline in a major way over the next ten years, similar to how retail stores have slowly but noticeably declined due to online competition,” he concluded.
That would not be good news for an RIA industry that needs to stay relevant.
Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at firstname.lastname@example.org.
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