Looking Back at the Advisory Profession 20 Years from Now
Q: So you're just sitting there with your feet on the desk?
Advisor: I monitor the conversations and jump in whenever my avatar gets a question that only a human can answer. As smart as the machines are getting, they still can't handle everything without human intervention, and they still can't beat a relationship where I talk to the client face-to-face through the video screen. I think that will always be the case.
Q: That's comforting to know. How smart are those avatar things?
Advisor: They're great at searching the cloud for any kind of information you might want, comparing different sources of advice, polling the avatars of experts in any field and coming back with a consensus and minority report. They can handle all the scheduling between me and my clients and answer a lot of basic questions – including a lot of questions and answers that we program into them, sort of like the FAQs of your primitive day. But when it comes to real advice, wisdom and judgment, you still need a person somewhere in the loop.
Q: It sounds like you're still managing client portfolios. It would be interesting to my readers to know which mutual funds are going to be big outperformers in the next 20 years.
Advisor: Mutual funds? What a quaint idea! Whatever gave you the idea that I use mutual funds in client portfolios?
Q: Well, back where I come from –
Advisor: A mutual fund gives every single one of its investors the same portfolio, the same returns and tax distributions, regardless of whether they're young or old, rich or poor, in a high or a low tax bracket. You wouldn't create generic financial plans and sell them on the street to just anybody, would you?
Q: No; of course not.
Advisor: Each of our clients is invested in a customized portfolio of individual investments – stocks and direct participations – that is optimized so that their portfolio's volatility is as uncorrelated as possible with the industry that the client happens to work in. The people who used to be fund managers now sell their portfolio recommendations on a subscription basis, so we can buy their research directly, mix and match their recommendations and add an opportunistic tax harvesting and rebalancing overlay for each client. Most of it is automated through the software.
Q: But you still provide quarterly statements, right?
Advisor: People can track their progress to their goals in real time through our daily feeds on the other side of a private door on their social media avatar page. Any time they want, they can add goals or change goals, and the portfolio will be adjusted accordingly. Most people don't check that often. They might glance at the portfolio occasionally on their smart-watch or pendant, but there's never any really exciting news to be found in the white noise of the markets.
Q: You mentioned something about 'direct participations' earlier. I'm not familiar with those.
Advisor: Stocks make up a diminishing part of the investment markets these days; in fact, some advisors have done away with them altogether. Once the idea of crowdsourcing was introduced, it was only a matter of time before companies began posting their capital needs on the Internet, offering investors a combination of income – kind of like a bond – plus participation in the growth of the company for a set period of time. It allowed global corporations and small companies alike to avoid the Wall Street IPO cartel that was siphoning 7% off the top and then underpricing the IPO so they could rake in additional dollars on the first day's price rise. Looking back, I have to say that was a real racket those brokerage firms had going, but today it costs nothing to raise money for your next factory. You put out there what you need and investors – or, more normally, professional advisors like us – bid the return we want to receive in an auction-like environment. The Internet has become a superconductor of capital.
Q: Interesting. And I suppose these direct participations also take the place of bonds in the corporate capital structure and client portfolios.
Advisor: Of course. When you bid, you can offer a more bond-like or stock-like return structure, and companies select those that look most attractive based on what they're going to use the capital for.
Q: But how do you evaluate these investments? Aren't you still dependent on Wall Street analysts?
Advisor: Those clowns? After the big Wall Street scandals of 2019 and 2028, the whole research side was mostly shut down.
Q: Wow! I guess those big banking and brokerage firms are mostly gone now, right?
Advisor: Aren't you naive! As long as they still control the regulators and Congress, they'll always be free to rake in quasi-legal profits out of the pockets of the least sophisticated investors. The only way to get rid of them would be to require everybody in Congress to use a broker for all their investment decisions.
Q: So… who took their place on the research side?
Advisor: In retrospect, it was kind of obvious. The accounting firms that performed corporate audits shifted their revenue model. Instead of being paid by the firms they were auditing – which, of course, was the focal point of a few earlier scandals, and never made much sense – they started taking on customers like us, providing research reports, initially, but now they give audited financials and commentary on the companies they audit in real time. The interesting part is that selling research was much more lucrative AND less conflicted for the bigger accounting organizations. And accounting professionals are now a lot more enthusiastic about a career in auditing.
Q: So what does the advisory industry look like in your time period?
Advisor: We have a lot of small independents, just like back in your day. But the majority of advisors today work in multi-partner, multi-office organizations where a group of younger advisors are competing for the privilege of becoming a partner at some point in their career.
Q: How are they structured?
Advisor: There are two models. At our firm, a client is a client of the company, and the advisors are hired to work on salary as part of a client service team. The other type of advisory firm has advisors who manage their own offices and have their own clients and staff, who all plug into a common back office. It depends on how corporate or entrepreneurial you happen to be.
Q: What kind of practice management issues do people talk about these days?
Advisor: It's interesting. When you hire advisors into a the multi-partner arrangement, they have to agree to provide services according to the company model, which means there isn't a lot of creativity and freelancing, and they fall under a lot of supervision to make sure things are done the company way. This creates a lot of the same challenges that the brokerage firms and their brokers faced back in your day. The company has to make sure its advisors aren't offering so much personal service to clients that the operation becomes unprofitable.
Q: The silo organizations don't face that challenge?
Advisor: No, they have different issues, which are much more like some of the tensions you used to find between reps and their independent broker-dealers. The back office has to make a profit, because it is the center of gravity of the organization. The silo advisors want to pay as little as possible for what they regard as a suite of commoditized back office services. It would probably look to you like the 'payout' question arising under a different organizational structure; which firm will offer my silo the lowest costs for the same services. You see a lot more moving around and recruiting among those firms. Firms like ours are the incubators of the small solo advisory practices, when the people who realize they are never going to make partner decide to go out on their own.
Q: What about the regulatory situation these days? Is the SEC still dithering about how to define and enforce a fiduciary standard?
Advisor: Funny; they just issued another request for input, which is either number 14 or 15, depending on how you count it, since the toothless Dodd Frank bill. If I called up somebody in the year 2050, they would probably be thinking about how to respond to yet another SEC request for input, number 20 or 25. But it doesn't really matter to the profession. We finally managed to solve that problem ourselves.
Advisor: The financial planning/investment advisory profession finally got tired of being outspent 1,000-1 by Wall Street lobbyists, and redirected its campaign contributions to create a professional regulatory organization: the American Society of Professional Financial Planners and Advisors. To become a member, you have to have the CFP or PFS credential, two years of experience at a financial planning firm, and you have to sign a document stating that you will adhere to a very clearly-specified fiduciary standard in all dealings with your clients. You undergo peer review every two years that is far more insightful than the old SEC examinations, and the SEC provides oversight of the peer review process itself.
Q: So the public can distinguish between a professional advisor and a sales professional simply based on who is and is not a member of this organization?
Advisor: Exactly right. It's actually working pretty well. There's a statue of a person named Ron Rhoades in the lobby of the Society's headquarters, so I'm thinking he must have had something to do with the founding of it.
Q: And brokers are disallowed from participating?
Advisor: If they hold the right credentials and experience and are willing to sign that document, they're as free to join and hang their membership certificate on the wall as anybody else. It's not our fault that their firms won't let them sign a document which basically says they guarantee to treat their clients the way they would treat their own mother.
Q: And you still offer financial planning services?
Advisor: The tools are there for most people to do their own planning. Their expenditures are all collected in one place and broken out into any categories they want, they can calculate how much they need to save and invest in order to meet a variety of goals that they can basically select right off the cloud, drag and drop right into the calculation systems, and the costs will flow in with them. In retrospect, it never made a lot of sense that professionals had to do those purely calculation chores for investors.
Q: So where's your value-added? What do you charge for?
Advisor: Basically, I'm an expert on money, but also on the things you have to do to reach your goals in this complicated financial world. We manage the portfolios, of course. But mainly, I'm here to answer questions, give them advice about financial challenges or issues that come up, and coach them, so they'll actually take the steps they've input into the calculators. It's funny, and maybe a quirk of human nature, but they'll do those things they intend to do if I remind them and hold them accountable. On their own, they always seem to stray from the plan. I think it may have something to do with the way we're wired.
Q: What kind of goals are we talking about?
Advisor: Oh, the usual. Some want to take a week's vacation on the moon. Others are hot to own one of those rocket-powered flying cars – which may be a midlife thing. You get people who are saving their pennies so they can genetically modify their children for maximum intelligence, or go to one of those big ticket spas which reset your telomeres and extend your lifespan by a few decades.
Q: I only have a few more questions. Is the dollar still the world's reserve currency?
Advisor: Ever since that awful bitcoin crash, the dollar doesn't really have a lot of competition.
Q: Is the Fed still meddling in the economy and the investment markets?
Advisor: Clumsily as ever.
Q: Partisanship in Congress?
Advisor: Still pretty awful. We're all grateful that neither side will let the other do anything.
Q: Do lobbyists still run the country?
Advisor: Some things never change.
Q: I'm pretty sure my readers will want you to offer some tips on what stocks to buy, based on 20-20 hindsight.
Advisor: Honestly, even if I gave you copies of the daily stock reports, you probably wouldn't do a lot better than a globally-diversified portfolio of good companies.
Q: That's pretty boring advice.
Advisor: Who said investing, over the long term, was ever exciting? That's one of the few things that won't change much over the next 20 years. What? Oh, I apologize; my implanted Internet connection is telling me that my avatar has just returned from a major industry conference. We're going to debrief and decide which sessions to store in my long-term memory chip. Our CE responsibilities are more demanding now than they've ever been.
Q: I guess I should go then. Any final words of advice?
Advisor: Don't hold your breath that partisan bickering is going to end in Congress anytime soon. Don't imagine that you've seen the last Wall Street scandal. Above all, don't fool yourself into thinking that the world is going to slow down or that tomorrow will look exactly like today. And don't believe all the predictions you read. Looking back, it's pretty clear that the future has a very bad habit of twisting in unexpected directions.
Q: By the way, does there happen to be a statue of Bob Veres in that lobby?
With grateful acknowledgement to Phil DeMuth and especially Chapter four of his book entitled The Affluent Investor , and to Dennis Stearns of Stearns Financial Group in Greensboro, NC.
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