Crystal Ball

Risk and ‘robo’ competitors top challenges in 2015

A little volatility in the stock market might be just what investors need heading into 2015.

With another year of double-digit gains in the large-cap stock indexes behind us, financial advisors' biggest concern heading into the new year is that many clients now want to jump into the market with both feet.

"At market extremes, diversification is difficult to maintain," said Barry Glassman, a certified financial planner and head of Glassman Wealth Services. "Investors want to put more money into things that have done well in the past."

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Greg Ghodsi, managing director of investments for advisory firm 360 Wealth Management Group at Raymond James, sees the same propensity to chase returns with his clients. "People want to buy the hot product, and right now the hot product is the S&P 500 [index]," he said.

Trying to keep up with the market—namely, the Dow Jones and S&P 500 indexes—is a fool's errand, say financial advisors, and one that can get people into serious trouble. While economic conditions still look favorable for U.S. stocks—accelerating growth, good outlook for corporate earnings, low inflation and low interest rates—the market is up nearly 40 percent in the last two years and almost 200 percent since the spring of 2009.

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"The biggest risk I see is that people have become apathetic about risk," said Kathy Boyle, president of Chapin Hill Advisors. "With the market up for the last five years and volatility low, they've been lulled to sleep. They underestimate the risks in their investment portfolios and in their lives."

Boyle, like most financial advisors, counsels her clients to diversify their investment holdings and manage their risks. Large-cap U.S. stocks may continue to do well this year, but that doesn't mean investors should increase their exposure to them.

"Our job is to communicate to clients the risks they take when they concentrate in an asset," Ghodsi said.

"Stick to the financial plan, and don't get too excited or too depressed." That kind of advice is "what people pay us for," she added.

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The anxiety about performance, however, doesn't just affect investors. It's a problem for advisors, too, according to Ron Carson, a CFP and founder and CEO of Carson Wealth Management.

Those advisors who concentrate solely on investment management rather than financial planning for clients are getting killed by the market indexes and struggling to prove their value to clients, he said, and it's tough on morale.

"Smaller advisors in the mode of just picking funds or packaged products for their clients are having a hard time justifying their fee," said Carson, who also founded the Peak Advisor Alliance, which provides coaching services for financial advisors.

Changing role of financial planner

"They are good advisors, but they're stretched too thin," he said. "Many are getting out of the business, and we already have a shortage of advisors in the profession."

Another major practice-management concern for Carson and other advisors is the increasing cost of compliance in the profession over the last five years. It is a huge and still growing burden for advisors, and a particular challenge for smaller practices.

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"Our compliance costs are up seven to eight times since the financial crisis," said Carson, whose firm manages about $4 billion in assets. "I have the resources to deal with it, but a lot of advisors out there don't."

Carson also sees the rise of the so-called robo-advisors offering online investment management and advice as a growing challenge for traditional advisors. The challenge is not so much in competing with these new businesses but in making the right use of technology in their own practices.

Does Google want in on this market? Does Apple? Those companies could be major disruptors in the industry.
Ron Carson
founder and CEO of Carson Wealth Management

"It's about combining technology with human touch and allowing clients to interact with advisors the way they want to," said Carson. "It has to be seamless and easy. If we get it right, there's a lot of opportunity."

In the online-only space, Carson suspects that the "winner" may not even exist in the market today. "Does Google want in on this market? Does Apple? Those companies could be major disruptors in the industry," he said.

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Practice-management issues aside, the perennial concern of financial advisors is keeping their clients on track with their financial plans—regardless of what happens in the market. The turmoil in stocks so far this year may help on that front.

"We put asset allocation into place to deal with volatility," Glassman said. "Now we're getting it."