The past decade was a time of unprecedented change in the wealth-management industry. Disruption was the main theme and as the years progressed, it became evident that the old way of doing business was no longer going to cut it.
As we enter the 2020s, the industry’s evolution is likely to continue unabated. For financial advisors, embracing the level of service and professionalism that investors are increasingly demanding – and that top-end advisors are already delivering – will be the key to making it to the 2030s.
The global financial crisis ushered in a decade-long bull run that persists to this day. At the same time, it opened many investors’ eyes to the cost of financial advice – and the impact of that cost on their total returns.
In many cases, investors came to the realization that paying management fees in excess of 2 per cent for mutual funds that did little more than track their benchmark indexes didn’t make much sense when exchange-traded funds (ETFs) offered the same returns at a fraction of the price.
The greater attention to fees, in general, and the increased transparency to those fees brought on by regulatory initiatives led many investors to ask exactly what they were getting for their money. To many, an annual call from their advisors seeking contributions to their registered retirement savings plans (RRSPs) was no longer enough value for the thousands of dollars they paid yearly for financial advice.
The industry had to change – and fast. During the 2010s, we saw more attention to holistic wealth management as advisors placed a greater focus on financial planning and related services. On the investment side, many made the shift away from mutual funds and embedded commissions to ETFs and a fee-based compensation structure. Finally, the rise of fintech, in particular robo-advisors, gave advisors both formidable competition and an ally in helping them transform their businesses.
Yet the industry remains bifurcated. While there are some advisors who are ambitiously trying new ways of providing advice and charging for their services, many still are doing things the old way. Time will tell if those advisors will be able to continue doing so, given the increasing attention to fees – and how they eat away at investment returns.
To justify the cost of advice, advisors will have to find ways to add value. Calling clients once a year or preparing a financial plan every three to five years are no longer enough.
No advisor is immune from this reality. Even those who have made the switch to a fee-based practice have to justify the annual 1 per cent or so they withdraw from clients’ investment accounts on an annual basis. Think about it: Let’s say a client has $1-million invested. That equals $10,000 a year in management fees. For the first year, when you go through a comprehensive financial plan, that fee is justifiable. But what about in the third or fourth year? How will advisors justify their value then, when clients come calling?
There is no magic formula, but in effect, advisors will have to become more professional in the years ahead. What exactly does that mean? For one, much like accountants, lawyers and dentists, advisors will have to be proactive in discussing how much their services cost during most conversations with clients. Don’t wait for them to bring it up. Beyond that, advisors should then provide an itemized list of services rendered for those fees.
That will have a positive impact among a variety of clients. Those who are more knowledgeable will no longer wonder what they received for the fees they paid when looking at their statements. And it will eliminate the belief that persists with many retail investors that financial advice is “free.” Above all, it will make it clear that advisors are professionals and are up-front about their fees and the services provided.
In terms of those services, basic investment, financial, tax and estate planning are table stakes. But there’s plenty of creativity in how those services are delivered. For example, one advisor recently told me he provides these various components of a holistic financial plan piecemeal during the course of a few years. That way, rather than having a financial plan become a burdensome and overwhelming process for clients done once every few years, it becomes much more easily digestible. And the advisor provides value on a continuous basis.
When it comes to investments, advisors would be wise to rely more on technology. Whether that’s outsourcing investment management to a digital service, adopting new tools that help clients see whether they’re on track to meet their various goals, or leveraging big data and analytics, the trend is clear. Those advisors who fail to heed the call of technology will have to answer to an increasingly tech-savvy client base.
At the same time, Canadians are becoming more discerning about their investments, and advisors will have to take note and adapt. A recent poll from the Responsible Investment Association found that 72 per cent of investors expressed an interest in responsible investing (RI). Furthermore, 79 per cent of survey participants would like their advisor to inform them about RI, yet only 23 per cent said their advisor has asked them if they’re interested in it. That’s a tremendous opportunity – especially as the effects of climate change become more pronounced and younger generations, who are just entering their prime earning years, will want to invest on their values.
Speaking of youth, taking on younger but less profitable clients will be key this decade. Why? Well, recent studies suggest that the average age of advisors is in the mid to late 50s – and most of their clients are of the same vintage or older. When more advisors begin to retire in the next 10 years, with fewer younger advisors than ever to replace them, there will be a premium on books of business that have a healthy mix of older Canadians, who need their wealth managed to generate income, and younger generations who are in the process of building out their wealth.
There’s no doubt that the past decade was a time of significant change in this business. What the next 10 years holds is anyone’s guess. I don’t have a crystal ball, but I’m willing to go out on a limb and suggest that to be successful in the years ahead, advisors will have to be professional and transparent with their clients, focus on creative and new ways to provide advice, embrace technology and find ways to serve more younger Canadians.
Those who fail to meet the needs of an increasingly perceptive investor do so at their peril.
Pablo Fuchs is editor of Globe Advisor.