As widely chronicled, those unruly college kids of the 1960s, the visible spear-point of a post-World War II baby boom that has defined U.S. popular culture and macroeconomics for decades, are now on the doorsteps of retirement. Through life, baby boomers have swamped institutions and markets, from elementary schools, to universities, to jobs and housing situations, and soon will become the golden-year habitués of cruise ships, retirement homes and hospices.
And so too financial advisers are about to be overwhelmed. There are far too many baby boomers, 78.3 million by official count, for today’s declining workforce of financial advisers to serve adequately. By comparison, the total population of the United States is 323.1 million, meaning that roughly one out of four Americans are heading to Leisure World soon.
Curiously enough, young people today appear disinclined to become investment advisers or financial planners, despite the attractions of white-collar work in air-conditioned offices. There are more financial advisers over the age of 70 than under the age of 30, reports industry research from the Certified Financial Planning Board. The firm Moss Adams has estimated that the retail investment advisory industry could face a gap of more than 200,000 advisers by 2022. Just as the nation needs more financial advisers, the ranks of advisers appear to be thinning.
Bucking industry trends, the numbers of registered investment advisers, or those advisers registered with the Securities and Exchange Commission or state agencies, are growing. But the ranks of financial advisers employed with brokerage firms or elsewhere are shrinking, more than offsetting the rise of the RIAs.
SENIORS LEFT ALONE IN FINANCIAL COMPLEXITY
Exiting the workforce and the related paychecks, many retirees will find they cannot obtain the financial advice they need, as their assets and income are too small to afford services. And this picture will apply in a world made increasingly complex by regulation and tax law.
If there is a ray of light in this scenario, it is the emergence of the robo-adviser, or probably more accurately described, the human financial adviser who takes advantage of software to download client information, then allocate assets and help devise financial pathways for the client.
“Fintech is without a doubt a net gain,” comments Dara Albright, president of Dara Albright Media and FinTechREVOLUTION.tv. “The U.S. is facing a retirement crisis of unimaginable proportions. Much of this crisis is attributable to the fact that it has become cost-prohibitive for financial advisers to service smaller investors. Fortunately, fintech is making it once again affordable for advisers to once again accommodate retail.”
Albright and others contend that for the middle-class retiree the choice may be between a semi-automated financial advisory process and less face time with their adviser, or no service at all. Most retirees will, of course, have nest eggs to protect. A June 2015 Government Accountability Office report concluded that an average American between the ages of 55 and 64 had about $104,000 in retirement savings.
The $104,000 figure is probably too small a sum for a responsible financial adviser to work with. RIAs must meet fiduciary obligations, which include expensive and time-consuming documentation of actions taken to understand the client’s financial needs. Indeed, many in the industry note that modern-day compliance creates an environment in which nearly every action must be documented and retrievable, from e-mails to changes in Facebook pages or websites.
Moreover, even a modest 1 percent fee would cut deeply into middle-class clients’ annual returns. Assuming the golden years’ client earned 3 percent annually on a safe portfolio of blue-chip stocks and bonds, the 1 percent fee would take about one-third of the retirees’ return. The $1,000 fee looks modest to the adviser, but is serious money to the client, often living on a fixed-income.
The robo-adviser arrangement can improve the picture for the middling, retired client. A human adviser will often charge an annual fee of 1 percent to 2 percent of assets, but a robo-adviser can eke out a living at 0.25 percent to 0.50 percent of assets under management. The difference between, say, a 0.5 percent fee and a 1.5 percent fee might be negligible in certain short-term arrangements, or for high-net-worth individuals seeking hands-on advice and high risk-reward or opportunistic portfolios. But most retirees ideally seek a long-term relationship with a financial adviser. The difference between a 0.5 percent fee and a 1.5 percent fee on a $100,000 portfolio is $1,000 annually, or $10,000 in 10 years.
Obviously, $10,000 is a large chunk of capital for a silver-haired client with $100,000 in savings.
OFF-THE-SHELF ROBO-ADVISERS
For RIAs, there are a proliferating number of off-the-shelf robo-advisory platforms or services to help automate certain aspects of serving clients. Going by such names as Jemstep, Tradingfront, or Nestegg by Vanare, the automated platforms ease everything from the client’s opening of an account, to automated trading to keep portfolios in balance with client goals, to continuous online performance metrics and reporting for the client’s online perusal.
The financial advice industry may be entering a long-term shakeout mode. Some RIAs and others will take advantage of new and better software to service clients and compete somewhat on price. Other RIAs will upgrade software but remain largely service firms that handle clients in-office or possibly by webcam, with personal attention. In general, such RIAs will cater to wealthier clients.
Albright and others see a brighter future for both financial advisers and clients. New and better software, cloud-accessible services, and a clientele comfortable with going online will result in well-served clients at a fraction of the cost of the traditional hands-on financial management, for both middle class and wealthier clients.
Nearly all industry observers agree on this: Financial advisers will have to migrate a large part of their client services into fintech and robo-advising, whether serving high-end clients or not. The good news is that software prices are falling, while capabilities are increasing.
The authors of an August 2017 report from the Christensen Institute, titled Banking on Disruption: Wealth management in the machine age, put it this way: “To survive the rise of robo-advisers, incumbent firms will likely choose one of two strategic paths:
- Use robo-advisory services as a means to cater to existing customers in order to defend current market share.
- Use robo-advisory services as an engine of growth by reaching out to people who have historically been unable to access wealth management services.”
Interestingly, the Christensen Institute suggested there is a way for some financial planners, both entrants and some existing players, to engage in useful and meaningful product differentiation. The authors note that robo-advisers are limited in their investing horizons, usually to ETFs, or more broadly, to investing in securities.
“Other asset classes like commodities, precious metals and real estate are largely untapped,” the study observed.
Obviously, real assets are at least a counterweight to investing in securities, while real estate as a class often outperforms securities, in addition to offering estimable tax advantages.
The RIA who wishes to build a clientele in an age of robo-investing may find that real service differentiation rests in real assets.
Benjamin Cole is a freelance writer based near Korat, Thailand.