As the new decade begins, the financial advisory industry continues to evolve at an accelerating pace, presenting unprecedented challenges for advisors. Demographic shifts, advancing technology, changing investor preferences, and increasing regulatory scrutiny continue to converge on the industry, keeping it in a perpetual reactive mode. For firms hoping to gain some footing in 2020, a game-changing twist is sure to keep everyone off balance – and that is the enforcement of Regulation Best Interest that begins on June 30. 2020 is shaping up to be a pivotal year for advisors concerned about thriving or just surviving.
Reg BI Goes Live – How Will it Impact RIAs?
After a year of contentious debate, Reg BI goes into effect on June 30. Coming in the wake of the now-vacated Department of Labor fiduciary rule, the SEC version seeks to preserve the broker-dealer model while raising the standard of care for brokers. However, as an attempt at becoming a best interests standard that can be equally applied across the industry, Reg BI is likely to muddy the waters even further for investors trying to discern the difference between incentive-based advisors and fiduciary advisors who are legally obligated to put their clients’ interests first.
From investors’ perspective, there may be little to distinguish between a broker-dealer’s requirement to act “in the best interests of the customer when making a recommendation,” and an RIA’s imperative to act “in the best interests of the client,” even though they are worlds apart in practice. Suddenly, the fiduciary obligation is no longer the differentiator it once was.
In a saturated industry that’s becoming more commoditized by the day, the challenge for advisors has been how to differentiate themselves. With this convergence of standards, it will be more critical than ever for advisors to have a unique and compelling story to tell centering on what they can actually do for their clients. Equally important is developing the means to get their stories out to their target markets. Now more than ever, financial advisors must invest in their communications strategies to remain relevant to their target markets.
Shrinking Profit Margins – Who’s at Risk?
Downward fee pressure and increasing regulatory costs are weighing heavily on the profit margins of advisor firms across the spectrum. However, if you’re not one of the 4% of mega-RIAs that hold more than 60% of client assets, your firm is feeling the pain. While it’s natural to think that smaller advisory firms are most at risk, firms occupying the middle tier are in the greatest danger.
Industry studies show that, despite the same fee pressure and regulatory burdens, the more successful small firms and solo practices are generating record profits with per-partner take-home pay approaching the same level as partners in mega-firms. With the right technology, boutique firms that have carved out market niches can survive and thrive through differentiation.
However, firms in the middle – with AUM between $50 million and $2 billion – are most at risk because their revenue can’t keep up with the costs of scaling as the mega-firms keep siphoning off assets. In the current environment, it can take years to scale the growth wall and establish operational efficiency.
Firms approaching the cusp of an optimally-scaled operation can push on and, with a well-conceived marketing and branding strategy, manage to grow their way through the transition. However, an increasing number of firms are holding themselves out as an M&A target or rolling themselves into a larger firm to achieve the scale needed to live another day.
Technology Moves Front and Center
Outside of a significant market or macro event, technology may be the biggest news in 2020. After a decade of slow creep, technology in the financial advisory industry is advancing at an accelerated pace. Data analytics, machine learning, and AI are becoming mainstream among the big firms, while mid-tier and smaller firms continue to upgrade their digital capabilities.
The 2020s will be the decade when the great wealth transfer begins in earnest and, with more than $60 trillion at stake, financial advisors must be equipped technologically to appeal to tech-savvy millennials or risk obsolescence. Advisors who prioritize content-driven digital marketing strategies and omnichannel solutions stand the best chance of capturing the assets of next-generation clients.
Dan Sondhelm is CEO of Sondhelm Partners, a firm that helps asset managers, mutual funds, ETFs, wealth managers and fintech companies grow through marketing, public relations and sales programs. Click to read Dan’s latest Insight articles and to schedule a complimentary consultation.