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What’s Driving Change in Financial Planning?

July 21, 2016

The financial planning and investment advisory industry has always been evolving. The professionals in the financial planning business come from various professions and therefore have different types of training and experience, causing them to approach the business from various angles and offer a wide range of services. The trend is for the financial planning industry to continue to become more complicated for this and many other reasons. Examples of these trends include:

1. There was a time when Social Security and a company pension was all that was needed to retire.

Today, employees must take on the risk and responsibility of funding their own retirement via a corporate 401(k), profit sharing, IRAs, ROTH IRAs, inherited IRAs, Simple, SEP, or other structure. Today’s financial planner provides retirement and investment planning for the entire family and often the extended family. Sometimes planning broadens to family businesses, trusts, family governance issues and philanthropic interests. In addition, advisors may be involved in college funding and care of elderly parents. When problems develop in these areas today, families could end up in substantial financial difficulty. The bottom line is the scope of the financial advisor’s responsibilities has broadened substantially over time.

2. The expanding industry regulations and compliance have become overwhelmingly expensive and stressful for financial advisors.

The highly-regulated financial planning industry has gotten substantially more compliance- and regulation-focused because of fraud and losses from incidents like the banking/mortgage crisis in 2007, 2008 and 2009; damage from Bernie Madoff and other Ponzi schemes; and investment and commercial banks being repeatedly indicted for and convicted of fraudulent activities. Events like these cause the public to demand that regulators take more preventative actions by passing more restrictive and burdensome regulations. Therefore, we’ve seen increased regulations like The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) of 2010 and many others. The Department of Labor is currently working on regulation to protect workers and retirees from conflicts of interest in retirement investment advice. Increased regulations like these will continue to add costs and consume resources for financial advisors.

3. Technology is increasing costs and competition for financial advisors.

For example, “robo-advisors” are trying to automate financial planning and significantly reduce fees. Currently most robos are relatively small but their growth appears to be explosive. Developments like these and others are placing downward pressure on investment advisory fees.

4. Human capital is being squeezed by a lack of new financial advisors.

Many older financial advisors are retiring and demand for new advisors is outstripping supply. High-quality financial advisors with education, experience, proper certification and licenses take years to develop. To be a competitive financial planning firm, the goal of a company needs to be the development of a diverse organization of financial advisors able to fulfill its clients' many personal, family and business financial needs. Frankly, there just aren’t enough well-educated and experienced new advisors to replace those who are retiring. This is one reason we continue to see industry consolidation.

5. Generation Y and Millennials are faced with fears concerning the stability of social security.

Compounding their fears are additional concerns about government debt and the increasing cost of health care. The advisor needs a skill set including interpersonal relationship skills to calm the fragile nerves of these and all their clients. All of this creates more risk-averse investors who still expect to earn good returns, leaving advisors with the challenge of finding greater returns from lower-risk assets, often requiring a reduction in fees.

6. Many of the current trends today result in a reduced-fee structure.

Most advisors are aware of the shift from a commission-based fee structure to one that is fee based. Additionally, robo advisory plans and outsourcing of investment management are leading to investment approaches that use index mutual funds and exchange-traded funds. Outsourcing and TAMPs, for example, enable advisors to maintain and develop more client relationships. More and more financial planning and investment advisory services continue to be seen as commodities in the minds of investors. When products or services are seen as a commodity (that is, with little or no difference between financial planners/investment advisors) the business then goes to the lowest-cost provider. This also leads to a reduced fee structure and drives revenues per client relationship lower.

Financial advisors are in the center of significant and quickly-moving industry-wide change. Consolidation, technology, new regulation, retiring financial professionals, novel types of services and commoditization of services in the minds of clients all continue to challenge the financial advisory industry and make it imperative that independent financial planners quickly differentiate their practices and reach a critical mass of AUM if they intend to survive long term.