The Trends That Will Matter to Advisors in 2024
’Tis the season when we read all sorts of predictions about the future, most notably the year ahead, often about what the markets will do, how interest rates will shift up or down, and whether inflation will trend. The people making those predictions over such a short (one-year) time frame ought to be forced to wear wizard’s hats and be photographed staring at the entrails of sacrificed animals or gazing into murky crystal balls. Everyone would know that those soothsayers and necromancers in business suits were engaging in something other than science.
Worse, very seldom are those bold (reckless?) predictors-of-the-future ever held accountable. Who goes back to see where the pundit said, last year at this time, that the market was about to crash any minute now and we should be storing canned food, guns and Krugerrand coins under the floor of a remote retreat – and made the same forecast for the past five years?
With these caveats in mind, I’m going to predict the future. Not the coming year. Not the markets. But to outline the trends that will emerge in 2024 and will shape the future, which advisory firms can prepare for now so that the strong, gusty winds of change will howl at their backs instead of in their faces.
In the spirit of accountability, let me review what I’ve predicted before.
Two years ago, I got a lot of push-back when I wrote that I expected that the COVID emergency measures – most notably remote work and remote client meetings via Zoom or other platforms – would never go away. They would become mainstays in our business routines.
Extrapolating from that, I wrote that remote meeting technology, adopted by advisors and clients alike, would lead to a much more important, more far-reaching trend. It would force advisors to concentrate their marketing and service models on more focused clientele, specializing in, say, doctors emerging from residency or small business startups. I reasoned that in a remote meeting world, every advisor is now able to compete with every other one regardless of location. To stand out, an advisory firm would have to talk the language of a specific cohort and provide deeper levels of advice than just retirement planning and asset management.
If you’re a doctor coming out of residency, which would you rather work with: the financial planning firm next door that offers “fiduciary advice” on a ”fee-only basis” and manages her (currently nonexistent) assets? Or the firm on the other side of the Mississippi River that has helped dozens of other doctors emerging from residency negotiate their hospital privileges, set up their offices with the required technology and tools, identify the best liability insurance coverages and insurance billing procedures, and has advice to offer on staffing and office location?
Last year, I predicted that the competition for talent would heat up, and advisory firms would find it necessary – for the first time in the profession’s history – to treat staff the way they treat clients: market to them, sell them (“close”’ them) on the prospect of working with the firm, and provide ongoing coaching, guidance and development in a work environment that fosters easy teamwork where everybody has an inspiring shared mission. Most advisory firm founders had been accustomed to posting a job offer and ducking lest they be hit in the face with the tsunami of resumes. I predicted that this recruiting transition from supply to demand would be challenging, a longer-term work in progress that some firms would master much more quickly than others.
And I predicted that private equity money would dry up now that the markets had turned and advisory firms with 25-50% profit margins had to tighten their belts. The war for talent would cause salaries to skyrocket, creating internal career development programs would add to the costs, and clients would require more attention.
I also prognosticated that soon or later, the supply of low-hanging fruit of advisors who had never created a succession plan, and were eager to sell, would exhaust itself.
Finally, because no forecasting article is complete without an outrageous prediction, I forecast that the brokerage industry would experience a huge scandal. I had no idea what that would be, but the incentive structure reliably causes these scandals to build up internally before they finally explode into public view, and enough time had passed since the last one that we were about due.
The consequences of the M&A trend
This year, I’m going to retract a couple of these predictions and admit I was wrong, and then plunge into a few more that may turn out just as badly. I now think that the PE-backed consolidation trend will continue regardless of what the markets do, even though I don’t think it will end well for the consolidators. (More on that in a moment.) I now think that founding advisors are going to continue to get hefty multiples for their firms through 2024 and beyond until the Earth crashes into the Sun, perhaps a couple of years longer. But in my Inside Information newsletter, I’ve written about their painful regrets once they move inside the larger acquiring entities, and about how those founders, when they sell, are reneging on their real or implied promises that they would sell their firms to their successors. How can they turn down an outside offer that is roughly twice what the successors would be able to pay?
I’ve talked with several people close to the M&A world, and they all tell the same story. The banks can’t lend to successors at more than about 3-4 times EBITDA, while the PE firms are paying anywhere from 12 to sometimes 20. The acquirers can consolidate back-office operations and generate more efficiency, which justifies some of the higher price. But sellers also tell me that they didn’t realize that the buyers intended, all along, to generate more efficiency by reducing the level of personal service that the now-acquired firm had been providing to clients. And they chafed under a corporate structure that saw them as a cog in a machine rather than an entrepreneur with decision-making power.
If the founders were chafing with seven-figure payouts, imagine what the would-be successors were feeling about all this. They would get retention bonuses, yes, but no longer have the prospect of ownership, and more importantly, of turning the firm into something closer to their own vision of what financial planning should be.
So what’s my prediction here? I have several. The first goes back to my forecast that advisory firms will need to move beyond a generic service offering (similar to a general practitioner in the medical field), and specialize in specific client challenges. The challenge is to define the specialty; doctors coming out of residency have challenges that define them as a category of client. Small business startups have certain unique challenges. So do executives with a certain firm that offers unique benefits and equity compensation plans. So do ministers, who have unique tax issues.
In previous articles with my annual predictions, I anticipated that advisors would begin to specialize much more quickly than we have seen (another prediction gone wrong?). The mainstream profession has been slow to rise to this challenge because most firms are not growing and don’t seem to believe that growth is an urgent issue. There have been various studies – most recently including The Ensemble Practice’s Pulse survey – showing that the profession’s client growth is at or below 5%, cumulatively, most of that coming from a slow but steady influx of referrals. Established advisory firms seem content with that.
In other words, the profession seems to feel no urgency to respond to the challenge of thousands of other firms potentially outcompeting them for new clients on their turf. They’re not actively competing back.
My first prediction is that, ironically, the consolidation trend is going to lead to greater competition in the advisor marketplace, starting this year, accelerating in the future.
How? Remember those would-be successors? They’re working off their signing bonuses, but a significant number of them are not happy with the situation, and less happy as they notice that, in the name of efficiency, their ability to provide close, personal client service is being curtailed. They also envisioned working with clients who are different from the demographic that the consolidators most covet: pre-retirees with most of their financial challenges behind them and aging decumulators. I hear this from younger advisors all the time: their generational cohort needs planning too.
I’m going to boldly predict that a number of these once-but-no-longer successors – 10%? 20%? More? – are going to sneak out the back door and start their own firms once they realize that there is not a partner track for them. They still have strong opinions about how they wanted their former firm to pivot toward more and better technology, more services to a younger cohort, moving away from the AUM model toward fee-for-advice (more on that in a moment), and their dreams of running their own firm. Those dreams could become a reality as they exit larger firms that may not even notice their absence.
These younger advisors will have gained experience in management, will have a specific target market in mind, and know the soft spots in the large firm where they were previously working. They have client relationships, have fielded complaints from those clients about diminished service and lent a sympathetic ear. Think: wirehouse brokers leaving the firm to go independent, cherry-picking the clients to take with them. This is really a familiar dynamic in the advisor marketplace, just with some new players.
The profession will be sprinkled with these young firms, run by idealistic young advisors who want nothing more than to serve their clients as they think they should be served, and who can pick and choose a specialized client base to colonize. They will be aggressively marketing to their chosen client cohort.
They are the larger firms’ worst nightmare.
My follow-on predictions are that these smaller firms will quickly grow their client bases, be hungry for growth, and along the way they’ll attract other dissatisfied would-be partners. They will be much faster to pivot to the work environment that attracts younger talent. (Remember that war for talent that founding advisors have been slow to recognize and adapt to?)
These new firms will follow the preferences of their younger, accumulating clients, which means that they will abandon the AUM revenue model and operate on a leaner structure, undercutting the bloated fee structures of firms that bill based on client portfolios. They will embrace what many firms have so far only dabbled in: flat quarterly fee models or subscriptions. They will embrace remote work, which reduces their startup costs and ongoing expenses. l All of this will allow them to maintain reasonable margins without worrying about the vagaries of market movements.
Most importantly, these new firms, sprinkled across the landscape, toiling in obscurity at first, will offer that deeper level of advice that I have been predicting, which was stalled by the (please don’t be offended) fat-and-happy founding generation that saw no need to grow and adapt.
I predict that the advice that financial planners give, driven by specialization, will be orders of magnitude more valuable than the traditional focus on retirement planning and asset management. The consolidated firms will be slow to pivot, and their brands will stand for generic rather than customized advice. But of course, this won’t kill them, because, after all, there are always firms they can acquire to fuel their demand for growth.
Technology, AI and apps
Let’s pivot to the fintech world. Technology is already supporting this specialized planning trend, with software that lets younger clients see improvements in their financial circumstances in real time via links to a calculation engine that constantly updates assessments (Elements), and models tax-aware retirement sustainability in vastly more detail than a Monte Carlo analysis (Income Lab).
I predict more of the same; in fact, we are poised for an explosion of fintech sophistication, driven by (get ready for it) artificial intelligence.
You can see signs of this already in solutions like FP Alpha and Holistiplan, both of which scan client documents and offer suggestions to advisor users about what areas of their clients’ lives can be improved. FP Alpha offers these machine-learning suggestions in 17 different areas, most of them outside of the traditional scope of planning (P&C and auto insurance coverage, medical insurance, mortgage and student debt, identity theft, creditor protection and elder care). Holistiplan’s OCR technology makes it easy to populate its tax-planning modeling features, so advisors can explore the suggestions that the program generates.
These programs will incorporate AI to make these suggestions more relevant, and to pull in pricing data on coverage options or the lowest home mortgage rates from public sources on the Internet. The same technology could be applied to the new healthcare software programs like i65 and Caribou, college planning modules, and Social Security analysis tools, and they might further automate the cash management tools like MaxMyInterest and Flourish Cash to deploy client cash, in real time, into a bidding war among the banks to pay higher rates on deposits. Client onboarding? VRGL will not only use AI tools to scan in the data from client brokerage statements, but it will calculate relevant data like embedded taxes, annual costs, overlapping investments etc. compared with your own model portfolios, make observations on how the existing portfolio can be improved and calculate the tax cost of making the switch.
These tools, as they are enhanced, are already feeding into the specialized planning trend. Advisory firms have, at their fingertips, expertise in a box in a lot of different areas, allowing them to focus their attention on the specialized knowledge that they need to service their focused client cohort. More of the same will accelerate the trend.
The hidden impact of AI is on programming. I’ve been told by people in the fintech world that you can tell AI what outcome you want and get reasonably good coding more or less instantly. Already, many of the larger advisory firms are creating their own apps, which allow them to provide branded services to their clients. With AI, smaller firms that focus on specialized clientele would have the ability to create their own apps which, for example, could pull in all the various liability insurance coverages available to newly minted medical practices, or create a bidding war among office complexes for the practice’s new office.
This won’t happen in 2024, but this year could see the start of a trend toward advisors creating their own software applications, perhaps incorporating free or retail software tools like Asana and Airtable to connect AI to the internet in their preferred exploratory format.
In most areas of our economic landscape, AI is overhyped and likely to take far longer to become transformative than the breathless pundits would have you believe. In the financial services world, I think it’s an underappreciated (under-hyped?) driver of the future.
Data warehouses and portable custodial relationships
There are two other tech trends that are still in their very early stages. One is data warehouses. At our Insider’s Forum conference, Joel Bruckenstein outlined a future where all client data and every firm’s internal financial data are stored in a centralized location, apart from the various programs that use the data. All planning, CRM and asset management software (and, of course, apps) would pull data from this repository as needed. The firm could create customized apps that would access the firm’s financial information and calculate metrics and management-defined key performance indicators (KPIs) on a monthly or even weekly basis.
This is all science fiction, right? Actually, our 2024 Software Survey identified seven different providers of data warehouse services. All are in their infancy, but they’re backed by firms you might have heard of: Envestnet (with a Google-powered solution), Redshift (powered by Orion), Milemarker, Snowflake (standalone and part of Pershing’s new Wove platform), Incedo and The Oasis Group as a consultant that helps firms build custom apps and tie them into these data repositories.
If more firms opt to store their data in increasingly sophisticated warehouse platforms, it would mark the first time that advisory firms would truly own their own data. If they decide to switch from one CRM or portfolio management software to another, they will no longer have to beg their jilted tech lover for the keys to the data that they need to populate the relevant fields in their new tech squeeze.
This trend, as it emerges, will eliminate the ever-annoying integration issues between best-of-breed software solutions. Each program would connect to one data source rather than (often awkwardly) to each other, which would enhance office efficiency, potentially by orders of magnitude.
And new tech companies would have an easier time coming to market, because all they’d have to do is create the calculation features that would tie into existing information platforms. Advisory firms would be able to build those client service apps on top of the repositories – using AI, as mentioned earlier.
This would cause the fintech world to explode in a lot of new directions, many of them pioneered by advisory firms themselves. It reminds me of the Dark Ages in the profession, when many of the best fintech solutions were created by tech-savvy advisors, who were the experts on what they wanted and needed.
The other tech trend, which is much more established, is increasingly less onerous onboarding and client paperwork processes. Advisors report that moving clients to TradePMR or Altruist has gone from painful and regrettable to elegant, and standalone programs like Nest Wealth are providing similar solutions for advisors who want to move to a different custodian that isn’t quite as tech savvy. The CRM populates most of a questionnaire that auto-fills in the blanks in the paperwork, the system flags anything that’s missing before the paperwork is submitted, clients auto-sign, and in some cases the ACATs process is push-button as well. Altruist even checks the web to make sure that the client address and the spelling of the names of additional account holders is correct.
In the past, advisors were equally fond of root-canal procedures and changing custodians and repapering their clients, leaning toward the root canal. I won’t go so far as to say that (in 2024, anyway) anybody will look forward to repapering clients in their search for better custodial tech. But as repapering becomes less of a hassle for advisors and clients, those custodial relationships will become far less sticky than they have been in the past.
I am expecting some significant fallout from the disastrous conversion of TD Ameritrade-affiliated advisors to the Schwab platform, with 2024 seeing the greatest migration among and between custodians that the profession has ever seen. This will ultimately lead to a lot more competition in the custodial space, which will benefit advisors and consumers alike.
Personal goals and crypto headaches
Do you have time for a couple more predictions? One trend that has been moving at roughly the same pace as LA rush hour traffic is a shift in emphasis from advice and consulting to coaching.
The shift from asset management to advice as the core value proposition has been widely reported, to the point where it’s no longer a candidate for prediction. But increasingly, I’m hearing advisors say that the most-appreciated value they provide to their clients comes from helping them identify personal goals, and give them guidance, support, expertise where needed, and encouragement as they move to accomplish them.
The trend started with retirement planning, where, instead of simply getting the portfolio ready to support clients’ post-work lifestyles, advisors began inquiring about those lifestyles. What will that look like? How do you plan to spend your days? Pre-retiree clients who have their financial house in order found that this additional advice and counsel trumped anything that could be done with a more-than-adequate retirement portfolio.
Now, advisors – particularly younger ones working with a similarly aged cohort – are making those inquiries at a time in clients’ lives when they have the space to start creating their preferred future. Some of those specialized cohorts I referred to earlier may not be in business niches at all; they could be people who want to enjoy a travel-centric lifestyle, collect artwork, devote their time to charitable endeavors or – well, there are no limits to the imagination. Those goals, that lifestyle, is quite often more important to them than building wealth – but of course wealth (and financial advice) will tie into them at myriad junctures.
We used to call this life planning, but coaching is a better term for the emerging new service, and not every advisor is prepared to offer it. I suspect (tying this to another trend) advisors who are coaching their hires in their professional lives to attract and retain talent will expand this new activity into services that clients appreciate – and the value proposition might expand more quickly in 2024. It is at least a trend to pay attention to this year.
I predict that the competition for talent will intensify in 2024, and the profession will start to recruit career-changers in greater numbers. By the end of the year, new AI tools will reduce some of the back-office burdens, and back-office staffers will be repurposed into client service roles, providing more quality touches without raising internal costs.
I predict that with the new crypto ETFs, more clients will be asking about this frighteningly volatile new investment in 2024, and advisors will be reluctantly dragged into learning more about it so they can address client questions. If their clients do put a portion of their assets into crypto, then the higher level of volatility will, as volatility always does, trigger more fear and greed, which will require advisors to spend more time than they wish counseling clients away from rash decisions.
My timing was off on my prediction that the brokerage world would deliver a headline-grabbing scandal, but I am confident that one is percolating behind closed doors. The explosion, when it comes, will harm thousands and perhaps tens of thousands of clients who will realize, in retrospect, that they were taken advantage of by crafty brokers and firms that encouraged that craftiness with bonuses and other financial incentives. It could be in 2024; it could be later. It will happen, because it always does.
But I also predict that somehow those firms will survive the scandal with their reputations largely unsullied. I have no idea how they will do that, but they always seem to.
And in my most confident prediction, I say with a high degree of certainty that in this new year, the markets will go up and down in ways that none of us can predict, and that there will be events that nobody foresaw that will impact all of us in ways that are currently unknown. I predict that the advice profession will continue a slow, relentless movement toward more fiduciary, client-focused advice, and that advisors who follow that trend will win market share from those who do not.
And I predict that next year at this time I’ll be apologizing for some of the predictions I’ve made here today.
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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