From increased regulatory scrutiny, to downward pressure on costs and rapidly changing client demands, there is no doubt that today’s financial advisers are facing headwinds from all directions.
I recently presented at the Financial Standard Managed Accounts Forum in Melbourne, examining some of these megatrends, which are not only shaping the current environment but are set to change the way advisers do business forever.
Today’s advisers are facing pressure to charge less for their services, while also seeing the cost of regulation and compliance impacting on their bottom lines. Competition is also on the increase, as robo-advisers challenge traditional advice models.
Further, despite the growing demand for financial advice, the industry has been unsuccessful in arresting the decline in client numbers of the past decade. Data from Investment Trends showing advisers are losing three clients for every two they gain (Investment Trends 2017 Financial Advice Report).
A focus on client service
What we are seeing is many forward-thinking financial advice firms are already adapting their business models to this changing environment, moving beyond traditional investment advice to assist clients with a broader range of financial needs.
A key part of onboarding and retaining accumulators and pre-retirees is understanding what drives them. Research from PwC shows that the top unmet advice needs of everyday Australians centre on retirement planning and budgeting (2017 PricewaterhouseCoopers Survey).
Half of clients are worried about having enough to pay for unexpected expenses and 42% say it is hard to cover monthly expenses, regardless of their income levels. Therefore, significant opportunities exist for advice providers who can effectively meet these needs.
There is also increasing recognition that the dominant model of the advice industry does not match the preferences of ordinary Australians. Research shows only 8% of clients require a full face-to-face comprehensive advice model, while the majority 30% prefer a piece-by-piece model and a huge 77% are willing to transition to a face-to-face model as their needs change (Investment Trends).
Globally, there is also a fair amount of work happening to assist financial advisers with the challenge of retaining clients in the face of increased market volatility and scepticism around returns.
In his book Thinking, Fast and Slow, Nobel Prize-winning economist Daniel Kahneman analysed the destruction in portfolio values of clients disengaging when the market goes down and then reengaging when markets recover.
His solution was to design two portfolios, one risky and one safer, based on the ‘regret propensity’ of each investor. Generally, one of the portfolios is always doing better than the market, which means investors are less likely to panic or change their minds when something does go wrong.
This research highlights the need for an adviser not just as a source of investment advice but as a coach and mentor to help clients stay the course in uncertain times.
Increased automation – moving in to Managed Accounts
Another key way successful advice practices are adapting is by incorporating new technologies into their businesses.
While robo-advisers and new entrants such as online budgeting tools continue to challenge the financial advice industry, what is clear is that automated advice will never entirely replace the need for professional input. As such, future financial advice models will marry the best of digital and human.
In the US, we are seeing the emergence of ‘model marketplaces’ – investment menus with in-built investment advisers, who can provide guidance on the most appropriate investment choice for an individual.
In Australia, with increased scrutiny and regulatory requirements being placed on advice firms, we have seen increased focus on solutions that can minimise the administration and compliance burden, freeing up more time to focus on client service and build much-needed scale.
The use of managed accounts in Australia has therefore been rising at a rapid pace. As at 31 December 2017, managed accounts held a total of $57.05 billion Funds Under Management (FUM), up by an impressive 18.9% in the six months from 30 June 2017 (Investment Trends: Managed Accounts Report – February 2018).
According to research from Investment Trends, financial advisers who use managed accounts spend significantly less time and effort on administrative tasks, compliance requirements and preparing Statements of Advice, gaining an extra 12.4 hours per week (Investment Trends: Managed Accounts Report – February 2018).
The fact that managed accounts can be used for the average investor, rather than those who just have high account balances, will make advice more accessible and attractive to a wider range of clients across the wealth spectrum.
Financial advice firms are currently facing a number of pressures which are forcing them to modify business practices for sustained growth. What is clear is that the businesses that survive will be the ones who can attract and retain younger clients, utilising new technologies and investment models to service them in the most efficient way.