A new McKinsey report shows financial advisory growth stymied, with fewer active advisors in play, and per-advisor revenues in decline.
According to McKinsey, average assets under management per advisor “grew to a record $92 million in 2016, up 6 percent from 2015.” But revenues per advisor “decreased for a second consecutive year,” sliding 1 percent from $591,000 in 2015 to $583,000 in 2016.
“This trend is particularly disturbing in light of the strong equity market performance during that period,” McKinsey concluded.
A critical driver of asset and revenue growth is the addition of new client relationships. “Yet over the past several years, advisors have added fewer new clients, and 2016 saw a new low, with an average of just 7.5 new household relationships (compared to 8.3 in 2014,)” McKinsey noted.
In addition, financial advisor numbers are under significant pressure, too. Overall, the McKinsey report can hardly be considered to be a rosy one – but there’s a good reason for that.
“There are several factors at play that add up to fewer active advisors and clients in the financial advisory industry,” said Jim Adkins, chief executive officer at Strategic Financial Associates in Bethesda, Md. “Technology, demographics, and consolidation are likely the greatest forces behind the lack of growth in actual advisors in the industry.”
Fintech Tops the List
Fintech competition is at the top of that list, he said.
“Fintech allows advisors and groups to scale business and provide high-quality, personalized deliverables to clients at a level not possible previously,” he explained. “With fintech, a single advisor can reach and service more clients than before, scaling the business with technology and support staff, rather than multiple advisors.”
This results in multiple firms with one or two “advisors” and several support staff servicing more clients, while previously the industry saw more singular advisors.
Demographics are also driving the stagnation in advisors, Adkins added.
“The baby boomer generation is retiring, and many of these advisors are selling their books of business to other established advisors, rather than having a para-planner-like apprentice in-waiting to take over the business,” he said. “This further results in fewer advisors, and is possible largely because of the efficiencies and scale brought by fintech competitors.”
Of the two trends, technology is the bigger threat, industry insiders say.
“Financial advisors are facing disruptions many in the real estate field are facing,” said Aaron Norris, a money manager with The Norris Group in Riverside, Calif.
Technology is allowing companies to scale and lower costs, which allows consumers hybrid or self-serve models that skip the need for a financial planner.
“Real estate agents are facing a similar threat from tech firms,” Norris said. “We all have to be asking ourselves: What do I bring to the table that robots or artificial intelligence can't replace?”
Still, there are services and benefits fintech can and cannot provide, Norris added, and the distinctions are critical to the future of the financial advisory sector.
“For the finance industry, artificial intelligence is simply automating what financial planners have done,” he said. “It's basically e-Harmony for investments. You take a test, share a risk profile, horizon for retirement, and the computer model will invest based on algorithms and a vast treasure trove of data no financial planner can ever come close to mimicking. Computers are now thinking and computing at a much higher level that humans ever will.”
'Financial Planning Light'
While computers will surely get more sophisticated in the future, fintech models don’t go “deep,” however, and that represents an opportunity for human money managers.
“It's financial planning light,” Norris said. “A computer doesn't know my family, my personal job opportunities, how my life will change, goals, the local market, referral opportunities, and it certainly isn't looking at me and my entire body of assets to come up with a holistic plan.”
Thus, financial planners need to focus on being “money therapists” and far more on individual service and not so much on products, Norris said.
“Access to produce won't set you apart,” he added. “Customer service, sound advice, and a long-term relationship will.”
Advisors have another advantage in their corner – history.
“Wealthy families long ago figured out that no family will ever succeed financially without the help of wise advisors from many walks of life,” said Paul Ruedi, CEO of Ruedi Wealth Management in Champaign, Ill. “Moreover, such families have calculated that the cost of the wise counsel is a fraction of the benefit.”
Population trends favor advisors sticking around, Ruedi said.
“With 10,000 people facing retirement each day for another decade and at least some of them figuring out that failing to plan is planning to fail, there will never be a shortage of prospective clients,” he said.
The McKinsey report does raise some serious questions for financial advisors. But overall, industry veterans largely remain a confident bunch, even as multiple threats swirl around the industry.
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 email@example.com.
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