Wealth Managers Toolkit

The changing landscape of wealth management

Andrew Osterland, special to CNBC.com

It seems that since the financial crisis, every year has been one of uncertainty and transition in the wealth management industry.

Despite the strong tailwinds provided by financial markets, financial advisors are dealing with demographic, technological and regulatory changes that could make the next bear market very hard to deal with.

This year may represent a true inflection point in the evolution of the industry. The combination of regulatory change — most notably the new fiduciary rule passed by the Department of Labor — and evolving technologies, such as the so-called robo-advisors, is rapidly changing the ways investors access investment products and receive financial advice.

Stacey Bramhall | Getty Images

This new paradigm is challenging the business models of long-established advisory firms and providing opportunities for new competitors. It is also a potential boon for investors.

"Consumers will be huge winners in this environment," said certified financial planner Ron Carson, founder and CEO of Carson Wealth Management Group, which has nearly $6.6 billion in assets under administration.

Carson said he has spent nearly $20 million in the last three years on compliance, technology infrastructure and new staff, adding that his profit margins are half what they were 10 years ago. "Margins will continue to fall in the industry, and investors will get more services and pay less for them," he said.

For advisory firms the landscape looks more ominous, although there is certainly still opportunity. U.S. households had more than $35 trillion in investable assets at the end of 2014, according to Cerulli Associates.

Much of that is concentrated among baby boomer–generation savers, who will need ever more advisory services in the retirement and asset-distribution phases of their lives.

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The costs of serving those clients, however, have gone up dramatically since the financial crisis. The compliance burden has increased, and the bar for technology-enabled customer service has been raised.

The challenge for advisors is to have and to articulate a good value proposition to clients.

"Depending on where you stand in the industry, you may do better than some, but it's a very challenging environment," said Alois Pirker, a research director with consultant Aite Group. "There's a big need for change at advisory firms.

"It costs money, and it's difficult to do," he added.

The most immediate challenge for all advisors is dealing with the new fiduciary standard of conduct applying to retirement account advice. In April the Department of Labor finalized its rule requiring advisors to 401(k) plans and individual retirement accounts to always act in the best interests of their clients, and it expects all firms to comply with it by April 2017.

Small advisors approaching the end of their careers who have a large part of their business tied to commissions are in big trouble.
Ron Carson
founder and CEO of Carson Wealth Management Group

Opponents to the rule suggest it will raise the costs of serving smaller clients, force firms to leave the market and result in less access to advice for lower and middle-income investors.

That may not be a bad thing, suggested John Bowman, managing director of the Americas for the CFA Institute.

"No advice [at all], or [pricier] advice, is better than bad advice," Bowman said. "This shake-up is a good thing, and some capacity should exit the business."

Bowman sees the DOL's rule as a much-needed opportunity to raise the standard of conduct in the investment advisory business. He hopes the Securities & Exchange Commission will now expand fiduciary obligations to advisors of all investment accounts.

"The industry needs to grow up," Bowman said. "Either we're going to be a profession working in the public good or a self-serving trade that tries to maximize profits."

The DOL rule will impact the entire industry, but financial advisors who make their money through product commissions are likely to have the hardest time.

"We think the rule has the most potential impact on the broker-dealers and the insurance companies that rely on commission revenues," said Kenton Shirk, an associate director at Cerulli Associates.

Two major insurance companies — AIG and MetLife — have recently sold their brokerage businesses to concentrate solely on product manufacturing and avoid the conflicts of interest they would have to disclose to customers.

Product commissions aren't outlawed by the DOL rule, but they will have to be disclosed and justified to clients, and that could be tough sledding for many brokers.

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"Small advisors approaching the end of their careers who have a large part of their business tied to commissions are in big trouble," Carson said. "Even if they have the desire, I don't know if they have the wherewithal to make the changes they need to."

Along with the heavier compliance burden and the threat from low-cost automated advice platforms, the financial advice industry also has a major workforce issue looming on the horizon.

The bulk of financial advisors are baby boomers, and the industry is woefully short on next-gen talent. While technology can be expected to significantly increase the productivity of firms and their ability to serve clients with fewer advisors, the industry is facing a big shortage of bodies in the next two decades.

According to Cerulli research, advisor headcount rose by 1.1 percent in 2014, to 308,937 — the first net increase in the advisor ranks in nine years. That's somewhat encouraging, but not nearly enough.

Cerulli 's Shirk said that surveys suggest only 2.5 percent of advisors plan to retire in the next three years, but the figure could jump to 14.2 percent in the next five to 10 years.

"There will be an increasing number of advisors retiring as their baby boomer clients need more advice," said Shirk, adding, "It's a very big challenge for the industry." One of many.

— By Andrew Osterland, special to CNBC.com