I don’t like being the bearer of bad news, but I see dark clouds looming for advisors.  Here’s why:

Managing investments isn’t enough

I recently asked Larry Swedroe for his thoughts on the future of the advisory industry.  Here’s what he wrote me, in part:   I've always believed that investment advisors are dead men walking--they will likely keep older clients who are reluctant to change horses, just not easy for humans, and the true wealth advisors will survive.

I have a particularly dim view of the future for advisors who hold themselves out as being able to “beat the market”, through stock picking, market timing or selecting active fund managers likely to outperform.  Swedroe sums up the problem nicely: One big change is that the academic research has been busy converting what was once alpha into beta, or exposure to common factors that can be accessed at very low costs. That makes the investment side more commodity like.

I’m surprised at how many advisors claim the ability to find managers likely to outperform.  I doubt an analysis of their track record would support their claims.

A business model premised on the ignorance of your clients will not be viable for long.

Shrinking profits

I see a lot of articles about how great business is for advisors.  Assets under management increased in 2017, but a deeper look at the numbers paints a different picture.

Market growth accounted for “about two-thirds” of the increase in AUM in 2017 over 2016.  A correction is long overdue.  What effect will that have on your business?

More troublesome is this fact:  Profit margins fell from 28% in 2016 to 20% in 2017.  It’s possible you’re spending more on technology and other items, but this decline may also reflect ongoing pressure to lower fees.

Benchmarking studies I’ve seen indicate many of you are spending only 1% or so of gross annual revenues on marketing.  Experts recommend spending 3 to 7% of your total revenue on your marketing.

Stealth competitive threats

In this thought-provoking article, Michael Kitces asserts that CPAs represent the biggest competitive threat to financial advisors today.

His argument is compelling.  CPA’s already have the trust of their clients.  They are the repository for much of their financial information.  They are highly trained.  They seem well-positioned to expand into financial planning and wealth management.

If you’re an advisor who lists one of your services as coordinating with your tax professional, you’ll find it especially difficult to compete with a CPA who offers one-stop shopping.  No need for “coordination.”

Don’t be lulled into a false sense of security.  There’s trouble on the horizon for many advisors.

Do you have a plan for dealing with it?

Resource of the week:

I recommend this article on the website of Michael Kitces, in which he discusses the competitive threat posed by CPAs.