Six Questions for the Future of the Planning Profession

4. Will the merger trend create short-term turmoil in the profession?

   Yes, says Diane MacPhee, who consults with advisory firms with $300,000 to $1 million in gross revenues, many of which are searching for scale.  She says that many older advisors are starting to experience "a gnawing feeling in their gut" that they need to do something to take care of their clients if/when they retire, which is already leading to impulsive, not-carefully-thought-out merger activity and very messy, disorganized dating activities. 

   "In the next five to ten years, we're going to see a real whirlwind of older advisors who will be crashing into one another all at once scrambling to see who can take the reins," she says.  Add to that the present-day challenges of failed or dysfunctional mergers whose owners are trying to repair damage that should have been averted in the dating stage, and you get a lot of short-term pain spreading across the profession.

5. Is the regulatory situation more threatening than is commonly realized?

   Yes.  Rick Kahler, of Kahler Financial Group in Rapid City, SD makes the blunt prediction that the "fiduciary" concept will be homogenized by the SEC and FINRA to mean "full disclosure of fees."  He also thinks that "fee-only" will eventually be expanded to include "fee-and-commission," eradicating two of the key issues that professional advisors have relied on to distinguish themselves from sales professionals.  (I’d be interested to see if some of you strongly disagree.)

   Clark Blackman, of Alpha Wealth Strategies in Dallas, TX, is concerned that the next "Madoff event" will give FINRA an opening to swoop in and convince lawmakers that they're the answer to the lack of oversight and examinations.

   If FINRA takes over RIA oversight, then the dramatically higher compliance costs it imposes on independent RIAs will necessitate merging with a regional firm, and financial advice will become more corporate and careful under the burden of increased regulation.  Mitchell Keil at Integrity Financial Advisory in Fountain Valley, CA calls this gloomy possible future "the death knell for independent fiduciary advisory firms."  (How likely do you think this is, and are you preparing for it?)

   David Morganstern of Confluence Wealth Management in Portland, OR thinks that FINRA’s encroachment efforts are part of a larger competitive landscape, where the brokerage firms are instituting copycat fee-like solutions in order to retain their top advisors and blur the differences between them and the independent competition. 

   Mark Berg, at Timothy Financial Counsel in Wheaton, IL puts it more bluntly. "We have awoken the giants, and the war is on," he says.  His hope is that smarter, younger consumers and university-trained advisors who are averse to making a career in product sales will allow the fiduciary profession to win in the marketplace, even if it loses short-term battles in the regulatory arena.  (Do you agree that open war has been declared?  If so, how do we respond?)

6. Will future returns support today's retirement planning projections?

   Possibly not.  What keeps Troy Daum, of Wealth Analytics in San Diego, CA awake at night is the possibility that the markets won't deliver, in the next 10-20 years, the investment performance that his clients require to successfully retire.  "Even though our clients' portfolios have now recovered from 2008, their longer-term actual returns are still on the low side," he says.  "Can we still trust Bengen's 4% rule?  Will we need to continually be advising our clients to reduce their standard of living over many years?"

   Bob Kargenian, of TABR Capital Management in Orange, CA, is a bit more certain that advisors are facing a low-return environment.  "Long-term valuation models are indicating that for the next 10 years, stocks and bonds are priced to deliver about 2.5% to 3% a year," he says.  "If clients are taking a 4% draw rate, what will happen to the planning scenarios we all map out?"

   Of course, as Mike Sikora at Bighorn Wealth Management in Westminster, CO points out, if a medical breakthrough raises lifespans an average of 10 or 20 years, this problem suddenly becomes a crisis.

   Amy Jo Lauber, who practices in West Seneca, NY, goes so far as to think that our U.S. lifestyle itself represents a bubble.  She cites student loan debt, increasing lifestyle demands and manufacturing being moved to a greater degree overseas, and says that people have come to her office after being laid off or downsized, and having to cobble together a living doing part-time jobs.

   Several others, including Les Atchley in Cour d'Alene, ID, think the markets may deliver surprisingly good long-term returns.  That might cause an equal number of problems for advisors whose portfolios are positioned defensively.  Larry Ginsburg, who practices in Oakland, CA, lists "an unexpected bull market run" as one of his top concerns.  (I won’t ask you to predict the markets.  But how ARE you preparing for the possibility that the markets will dramatically under- or over-perform what your clients are expecting and you’ve projected?)

Is the asset management process likely to evolve in the future?

Almost certainly – but in what direction?  George Bates, of Bates Financial Group in Rockford, IL, thinks that as passive management becomes more popular (through ETFs as well as funds), the profession might reach a tipping point where active managers will be easier to identify, and the lazy money (investments that are made without research) will make it easier for active managers to add value.  This could lead to an interesting bifurcation, where a small group of advisors consciously compete with the robo-advisors, not based on their financial planning differentiation, but on performance itself.  At the same time, a growing cohort of advisors will simply surrender to the commoditization of asset management, embrace passive management, and emphasize flesh-and-blood planning as their differentiator. 

At the other side of the spectrum, Rich Arzaga, of Cornerstone Wealth Management in San Ramon, CA, thinks it's possible that the commoditization of asset management will drive many investment-centered advisors out of the market altogether.  In the process, they may reduce their fees down to robo-advisor levels, confusing the marketplace into thinking that these lower fees are the standard, and putting pressure on advisors who offer more comprehensive services.

Some of those AUM-focused firms could be driven out of business for other reasons.  Brian Whalen, who practices in Gainesville, GA, says that he sees a lot of advisors making the investment process more complicated than it is, by embracing smart beta strategies and putting together amateur combinations of ETFs.  "It takes highly-skilled people with great contacts to build wealth over time," he says.  "Smart beta is no different than the short-term global bond funds in the early 90s or the Dogs of the Dow in the mid 90s.  Investment by data mining never ends well in the long term."

Is financial planning changing in some fundamental way?

It may or may not be.  A number of advisors talked about making their advice more relevant to clients' lives rather than their portfolios.  "I am driven to create a service that makes clients present in their lives," says Rich Feight, who practices in Okemos, MI.  He's more ambitious than many advisors when he talks about "a service that focuses on quality of life. It would blend the head/mind/analytically/planning with the physical/implementing/body and the heart/spiritual/soul/emotional lives."  But this is the path that many advisors seem to be on, and the more of this we see in the profession, the more consumers may be demanding it.

"I foresee a potential for a phenomenal merging of industries – life coaching, counseling and financial planning," says Will Rogers, who practices in Evans, GA.  "If we're really about treating the whole person, then where does the line get drawn?"

Bob Dunn, of Private Wealth Management Group in Princeton, NJ was one of many who said that the next cohort of clients (younger, more comfortable with technology, more comfortable handling their own financial decisions) will require a very different service model than what the delegator baby boomers have received during the profession's formative stages.  These new clients may want to keep their assets at a robo-advisor, eliminating the AUM service altogether.  They'll want validation more than a plan and they'll be comfortable driving, sometimes by themselves, the financial planning software that you provide, asking questions along the way. 

Brooke Salvini, who practices in Avila Beach, CA, adds that many of her younger clients are moving across international borders to pursue their careers, along the way accumulating assets sourced from multiple countries.  "As this occurs, I see increased demand for planners to be able to advice on ex-pat issues," she says.

Meanwhile, I heard from several advisors who follow the commission model, and they're suffering.  Their BD accounting software is clunky and slow to evolve, and there is no easy way to verify their commissions.  FINRA's increasingly onerous oversight is forcing BDs to become extra-cautious about what they'll allow their reps to do or say, and they are also scaling back on non-traded REITs and options trading – two of the most lucrative products a BD rep can offer.  On the asset-gathering side, the BD takes an increasing share of the pie to pay for compliance costs.

What does that tell us?  While fee-only advisors worry about the regulatory hammer that is about to fall on them, it has already, repeatedly, hammered down on people under FINRA regulation.  What's keeping them from going fee-only?  The thought that FINRA will end up regulating them anyway.  If FINRA's regulatory initiatives are ever definitively repulsed, expect a lot of BD and wirehouse reps to take the opportunity to end the pain by jumping out of the Series 7 world all at once.

That could change the profession's dynamics all by itself.  "Successful wirehouse brokers have business acumen and are used to scalability, processes and marketing," says Giles Almond, of Matrix Wealth Advisors in Charlotte, NC.  "They can sell circles around the typical NAPFA member.  While many want to adhere to a fiduciary standard of some sort, they don't have any particular affinity for being fee-only.  They will increasingly become a potent competitive force."  (What do you think?  Will Rip Van Planner recognize planning, or planners, five years from now?  If not, what do you think we should be doing now?)

Is the profession's revenue model changing?

Some people certainly think so, and of course they cite the so-called robo-advisor challenge.  "We bill for a commoditized service – which the robo-advisory competition highlights – while providing planning services," says Daum.  In his own future, he envisions a slow, painful migration to a retainer model – with a lot of renegotiation of client fees – which will also require advisors to better communicate their value proposition.

Blackman says that these online asset management platforms could force fiduciary advisors to migrate to higher AUM levels and a more comprehensive, personalized service model.  "The advisor who does not understand income and estate tax consequences and sophisticated planning strategies will either go out of business or have to merge with a more comprehensive firm," he says.

Noah Rosenfarb, at Freedom Business Advisors in Short Hills, NJ, expects AUM fees to drop from around 1% today to something closer to 0.25% in the not-too-distant future.  "I expect to move away from that model over time, and bill clients based on their overall net worth – since we provide advice on their overall wealth, irrespective of form," he says.

But robo-advice is not the only challenge; some believe that advisors of the future will need to provide services to less-wealthy consumers as the wealthy delegator population becomes saturated.  "For as long as I've been in this industry we've grappled with how to serve the middle class, and never arrived at an answer," says a senior executive at one of the custodial firms, adding: "RIAs charging 100 basis points to construct and maintain asset allocation portfolios may not last much longer."

My article on the Gen X/Y Planning network and the new band of Gen Y entrepreneurs shows that it is indeed possible to work profitably with people of lesser wealth – through technology, reduced emphasis on the AUM labors, more specialization (which reduces the mental overhead of trying to research a lot of different types of client challenges) and, of course, the simple fact that less-wealthy people present less-complicated, less labor-intensive (but no less important) challenges.

And finally, as the profession creates scale through the current wave of merger activity, a lot of one-off, hand-manufactured planning will be systematized, and advisors will be freed from some of the administrative chores they're doing now. 

Dave Shore, who practices in Larkspur, CA, envisions an evolution much like doctors have been experiencing these past 20 years.  "I see us evolving away from Marcus Welby land and more into a Kaiser-like world," he says.  "In short, less relationship, lower pay, perhaps a better output."  (Your turn: are you preparing for a shift in the profession’s standard revenue model?  Or do you think AUM will survive?)

Will the structure of the typical advisory firm change in the near future?

It will have to, because the profession can't continue down its current path.  Several advisors talked about the "mission creep" of their administrative and back office duties, which once took up maybe 10% of their time and attention, and now take up as much as 50% to 60% – not to mention a larger share of their firm's revenues.  That trend obviously can't continue; otherwise planners will eventually have no time to spend with clients. 

In the future, advisors will spend MORE time with clients, not less.  Because they'll take a page from the robo-advisory firms and automate a lot of the "grunt work" that they're currently doing.

What will change?  One hint was provided in a presentation at the recent NAPFA conference, where two younger advisors shared a workflow diagram of their technology "stacks" (the word in vogue these days), and some of the more established advisors were blown away at the leverage these advisory firms are now able to achieve.  The client fills out most of the basic information online, which flows directly into the CRM, and the advisor and client together log into the credit card, custodian and banking platforms and have the financial data flow, through the account aggregation software, directly into the CRM, client portfolio management software and the financial planning software.  The trading and rebalancing software overlays the portfolio management software, so that component is already populated and ready for immediate implementation.

The client agreement and account transfer documents all flow out to the client after the initial meeting, automatically populated with the right information, and the client uses one of the electronic signature programs to send it back.  

As more people adopt these workflow/integration "stacks," the back office "mindshare creep" that is plaguing the profession evaporates on its own.

At the same time, the robo-advisor competition will be met when advisors outsource and automate the same things that the Wealthfronts and Betterments do – the ongoing drudgery of managing client portfolios, including downloading, reconciliation, producing performance statements, tax-loss harvesting and rebalancing.  Much of the mission creep will be eliminated simply because the outsource providers can do that labor more efficiently than a human can.

But of course, this is going to be a messy transition.  As Bates puts it: where do you find the time to learn about and learn to use all this technology? 

Other issues cited:

• Lack of faith and trust in the financial system among investors, and the possibility that another reckless Wall Street debacle (or a messy collapse of non-traded REITs, which would hit close to home) will reduce or eliminate it altogether.
• A potential revenue crisis in the U.S. public sector, with cities, counties, towns and possibly states defaulting on their bonds due to unfunded and/or unrealistic pension plans.
• The possibility that in 2024, we'll still be wondering what it will take to turn this business into a true profession.
• Hackers will discover the trove of financial information in the financial planning profession and systematically exploit careless handling and/or storage of client data, causing huge problems for clients and an enormous PR black eye for all stripes of advisors.
• Tax "reform" that will reduce incentives for making investments.
• Complete annihilation or extinction of humanity - which would be very bad for the planning business.

There's a lot to think about as you navigate your firm through these waters.  If you have any additional thoughts or clarifications, please send them along.  You can email them to me at [email protected], or post them to APViewpoint's discussion forum, which can be reached here.  Either way, I'll read them with gratitude and interest.

And please, if you plan to attend the Insider's Forum conference in September (9-11 in Dallas), try to reserve your space sooner rather than later; we expect to sell out.  (http://www.insidersforum.com ).  Remember to claim your $50 discount.

To respond to the points raised in this article, go here.

Read more articles by Bob Veres