Around this time at the end of last year, when people asked me to predict what they should expect for the coming 12 months, I offered some modest forecasts. I said that, beginning in February, the country would be increasingly consumed by a new raging pandemic that would force advisory firm staff to work remotely for the next 12-14 months or more. I predicted that the markets would experience a precipitous free-fall in early March, losing (I tried to be precise about this) 26% of their value in just four trading days. And then, I said, the market would come roaring back despite record unemployment and a more severe GDP decline than we saw during the Great Recession.
I said that the government response to the pandemic would be clumsy at best, there would be three waves of mass infections, and yet the stock market would become increasingly disconnected from economic reality and continue its boom as if nothing had happened.
And, of course, I told people that despite the raging calamity, advisory firms would largely continue business as usual. They would smoothly replace in-person client meetings with Zoom calls, and their clients – even the aging ones – would rapidly adapt to the unfamiliar technology and become accustomed to face-to-screen relationships and advisor screensharing.
I didn't forget to mention that, in the middle of this chaos, the SEC would increase its exam schedule, albeit remotely, that we would see the completion of Reg BI as a distant (some would say cynical) substitute for a universal fiduciary standard. I foresaw that the Schwab acquisition of TD Ameritrade would be approved without any regulatory concerns over the anticompetitive implications of two of the four leading independent custodians combining into one dominant entity.
I offer this fictional account of my forecasting abilities because, well, who could possibly have predicted what we went through in the past 12 months? In hopes that this new year will be less stressful, I'm going to assess the state of the profession as we emerge, exhausted, from our tumultuous 2020 experience.
Let's peer through the veil of time, armed with no shortage of humility.
Where are we now, and where are we going?
The most surprising thing about 2020 was how calm RIA clients proved to be despite many reasons for crippling anxiety. In a recent poll conducted by Marie Swift of Impact Communications, most advisory firms reported that their clients hardly called during the swift downturn in March. I think we all know why. Advisors were quick to reach out to clients, particularly after the so-called Black Monday II incident and reassure them that they (the advisors) were carefully monitoring the situation. They offered, preemptively, to update financial plans.
But a bigger reason that clients weren't pounding the phones was that the downturn didn't last long enough to terrify investors. The remarkably quick recovery and subsequent boom had a calming effect that laid to rest any lingering concerns that clients might have had about eating cat food in retirement.
But one should detect an unhealthy self-congratulatory note in those smug reports of silent phones despite a 13% one-day loss in equity values. Some advisors learned a lesson that will not serve them well in 2021: If they sufficiently train their clients about the possibility of market downturns, all they must do is send out reassuring messages whenever the next bear market hammers portfolio values.
Clients generally become increasingly anxious the longer that markets are declining. The stock market has not yet seen a full reckoning of the economic facts on the ground or the long-term impact of the coronavirus on the enterprise value of American (and global) publicly traded companies. Despite my near-perfect forecasts for 2020, I am not foolish enough to tell this audience when and where the next decline will come, or what the true value of the companies in the S&P 500 should be when we finally factor the economic downturn into the equation.
It will not be pretty.
Thus, advisors in the coming year might experience a new opportunity to see exactly how well-trained their clients are to not call or panic in a more prolonged downturn. There will be a testing of relationships that are based largely on the quarterly portfolio statement rather than professional advice and the enhancement of a client's life.
Is there a pre-emptive solution to this future trauma? A smaller number of advisors in Swift's survey are the people I've been talking with through my newsletter and in interviews. Instead of congratulating themselves on how well-trained their clients have become, they have been reaching out and inviting deeper, more personal conversations with their clients. As we look back at 2020, we see that the real challenges of COVID were not portfolio related. They were the stress of being temporarily – or permanently – laid off, of trying to work from home while having to homeschool their kids, having adult children moving back in the house, or cancelling looked-forward-to vacation trips and holiday visits with grandkids.
Those deeper conversations would uncover unexpected changes in the goals underpinning their clients' financial plans. Instead of buying a vacation home, their clients might be thinking about moving closer to kids and grandkids. Those who were infected might have to deal with additional medical expenses and long-term health impacts, while those who were not might have a recovering parent who is going to live out her last years in their home. A small business has gone on hold for so long that it is no longer viable. Should the client simply retire or take the riskier course of using retirement assets to restart from scratch?
Bigger picture on the same general theme, 2020 may have been the year when something important came to a head in our society. Over the last decade and a half, Americans have gradually diminished the quality of their personal interactions and substituted less satisfying (but easier to maintain) social media relationships. The result was a growing hunger for more meaningful connection. As all the uncertainties of the pandemic swirled around us, people have started wishing that they had somebody to talk to about it all, somebody who cared about their challenges and circumstances.
Somebody who, when they asked, "How's it going?" were open to a real answer.
The best life-planning-oriented advisors have been offering something that people could find nowhere else: a person who would talk to them, and have the conversation focus on them, on what the clients were thinking, planning, worried about, expecting, dealing with – and best of all, the conversation might offer advice and solutions that strayed outside the strict boundaries of financial issues.
That hunger for meaningful connection will intensify in the coming year. Advisors who are providing it, preemptively before the market reckoning, will bear-proof their client relationships before clients become dissatisfied with their third or fourth consecutive negative performance statement and start to search for a new advisor. There will be an unusual number of winners and losers in the 2021 advisor marketplace as client loyalties get redistributed.
Meanwhile, a larger trend is underway. The sudden shift from face-to-face client meetings to remote Zoom interactions will have consequences that the profession has hardly begun to consider. If clients are comfortable receiving your advice remotely, you can start working with people who are located virtually anywhere – even if (this is not a 2021 prediction) they happen to be employed on a base on the Moon.
That sounds like great news. Starting in January 2021, financial advisors will no longer have to confine their marketing activities to the local area within a 40-minute drive of their offices. They can work with anybody.
But when you think this through, you realize that this is a decidedly mixed blessing. Zoom relationships mean that every advisor in the country will be able to compete with everybody else. An advisor's territory can be invaded by thousands of RIAs offering what may be a more compelling value proposition. Is it possible that there's an advisory firm, anywhere in the country, that looks and sounds more compelling than you do?
How do you prepare for something like this? It's not realistic to tell every Advisor Perspectives reader to develop the most compelling value proposition in the country. But each and every one of you should develop the most compelling value proposition for a particular subsector of the economic landscape.
As an example, suppose you are a generalist who provides financial planning analysis and manages client assets using model portfolios. An advisory firm on the other side of the Mississippi has developed expertise in helping dentists coming out of dental school establish their businesses and negotiates their arrangements with established dental groups. The planners at this other firm understand the peculiar business challenges that dentists face. They know the dental profession's jokes and idioms, they regularly attend (and sometimes speak at) dental conferences, they do periodic polling about the most common financial challenges that dentists face, and they advertise their services in the specialized dental publications.
Now imagine a young person just coming out of dental school with a wonderfully lucrative career ahead of her, looking for a financial advisor. This person goes on the Internet to look for professional help. She lives and works three blocks away from your offices. You come up on her search, but so too does this advisory firm on the other side of the Mississippi.
Which of you do you think she will select as her advisor?
Multiply this story by a thousand other specialties, too numerous to name, and you see an emerging trend that advisors can either embrace or deny while the early adopters increase market share at their expense.
As we cross the threshold to 2021, the profession is entering a new age of specialization and narrowly focused expertise, driven by remote relationships. It's a trend that will accelerate throughout this decade and beyond.
Meanwhile, financial planners are likely to enter 2021 with a vastly different business model than at this time last year. Staff members are likely to continue working at home even when we finally have COVID under control. That will raise some interesting questions. Should the firm cut back on home-office space and allow workers to continue working from home? That would allow the firm to reduce expenses, but the leadership team would also have to shift how they evaluate staff from, "How much time to they spend in the office?" to, "How much are they getting done, day-to-day, week-to-week?"
Perhaps the firm should fully embrace Zoom staff meetings and remote coordination, and expand its reach by hiring advisors and operations professionals who live halfway across the country. This, too, might reduce staff expenses for firms that operate in high-expense parts of the country; they could hire very productive workers in rural areas where expenses (and salaries) are lower.
Embrace these trends, and you are traveling boldly into unexplored territory. Nobody knows the long-term impact on corporate culture when there are no longer any casual water-cooler conversations or management by walking around or (as Philip Palaveev has recently put it) all the important nuances and cues that we receive when we communicate face-to-face. For the first time, we know how to get work done when it is being done remotely. But do we know how to maintain a tight, mutually supportive staff if those conditions are extended indefinitely?
There will be many experiments around these issues, and I expect that a few workable models will emerge that others will emulate. Keep watching these pages for profiles of those firms and explanations of how their solutions are working.
Anything else? At least 10 times in my career, I've fielded complaints from my Inside Information readers about having to learn an entirely new tax regime, the result of that over-and-over process we facetiously call "tax reform." I once published a cartoon showing a smiling network studio anchor person announcing, with all the naivite of a TV reporter, "Today, Congress has simplified our tax code by adding a thousand additional pages to it."
Here we go again.
I'm sure many of you have read the incoming Biden administration's tax proposals, and you know that whatever it says will be churned over by Congress. As I write this, we don't have any idea what to say to advisory clients.
Or do we? Tax rates will go up for the wealthiest segment of Americans, and I would bet that the estate tax exclusion will drop as well. In an Insider's Forum remote presentation, three prominent CPA planners agreed that the next Congress will be focused on paying down the national debt, and the money will come out of the pockets of your most significant clients.
Complain if you must, but these upcoming revisions to the tax code are a blessing for the profession. Rising taxes create some of your best marketing opportunities, because potential clients are not enthusiastic about seeing their tax bill go up. The most successful marketing campaigns in the coming year will focus on how you can minimize the impact of this new round of confiscatory legislation, whether through shifting income from one year to another, handling Roth conversions, bunching deductions, setting up trusts, prefunding charitable contributions or recommending more sophisticated planned giving strategies.
Advisory firms that put this message out early will attract clients who are looking for more than a well-diversified portfolio. The combination of a market downturn and higher taxes might flush out all those do-it-yourself investors who finally realize that they might benefit from professional advice.
Speaking of those do-it-yourself investors, a small trend in the advisory world will grow dramatically in the coming 12 months, as the profession starts to execute a long-term shift in revenue models. I recently published a fee survey that showed that a large plurality of RIAs are offering their services on a flat-fee basis to the huge blue ocean of people who either don't want to entrust their portfolio to an advisor, or who have good income but not (yet) a portfolio large enough to bill based on AUM.
It's hard to imagine the impact that this shift in revenue model will have on the profession, but you can get close if you realize that, according to the most recent TD Ameritrade survey, only about 21% of American consumers have more than $500,000 in their retirement portfolios, and most of that is in a company-sponsored retirement plan. When you look at people in their 40s and 50s, that number diminishes to 14%. If you take out the 401(k) assets, Alan Moore, founder of the XY Planning Network, estimates that no more than 5% of Americans are appropriate for the AUM revenue model. Charge flat fees, and that other 79% to 95% of consumers become potentially profitable clients who were previously inaccessible to you because of how you charged your clients.
My survey didn't show a huge trend of RIA firms going cold turkey from AUM to flat fees; only 13% of the survey participants were exclusively charging their clients via quarterly flat-fee retainers. But when I dug deeper, I found that 33% of the surveyed firms were charging some clients (presumably the Baby Boomers) via AUM, and other clients via flat fees. I asked them why they had created this bifurcated fee model, and 60% said the flat-fee model was to serve younger, unwealthy clients.
Most of these bifurcated fee arrangements are still in the experimental stage, a test to see if young people will pay for planning advice. AUM clients still greatly outnumber those who are paying flat fees. I predict that 2021 will be the year when advisory firms begin pushing this alternative fee model and start honing their service model for the "other 95%" of the American population. As the Baby Boomer generation begins to die off, advisory firms will gradually, by natural attrition, begin serving most of their clients on a flat-fee basis.
The firms that begin their flat-fee experiments early will lock up future clients who will become wealthy over the coming decade, and those who wait will be locked out of these opportunities.
If you combine these various swirling winds of change, you get an admittedly hazy picture of an optimal path forward for 2021 and thereafter.
Advisory firms will deepen their existing client relationships, and prepare clients for a reckoning in the markets, whenever that may come.
They will increasingly manage client relationships on a face-to-screen basis and recognize that their future success will require them develop deep expertise in a narrowly focused type of client.
Advisors will use the changing tax regime as a marketing opportunity and open their doors to an enormous blue ocean of younger or less-wealthy clients who have the income to pay for their services. (Those less-wealthy clients will sort themselves out into specialized clients as well.)
More staff will work remotely, and the profession will face a new set of management challenges, with the reward of lower expenses and a better way to measure staff productivity.
Once COVID goes away – and it will, though I can't pinpoint the date – all of this will lead to a brighter future. The profession has been forced to undergo more evolution in the past 10 months than in the past five to 10 years. To the extent that advisory firms can continue to overcome our hard-wired resistance to change and build on the adaptations that have been forced on all of us, they will serve more clients, with deeper relationships, more profitably and efficiently, than they did before this 2020 nightmare descended upon us.
Plus, if you're reading this, you're still alive. We should count our blessings.
Bob Veres' Inside Information service is the best practice management, marketing, client service resource for financial services professionals. Check out his blog at: www.bobveres.com.
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