USNews
Schwab Independent Advisor Outlook Study: The Future of the RIA Industry
The RIA industry has accelerated changes that may have lasting impacts for clients and advisors alike.
Technology growth in 2020 has been accelerated by the health crisis. This has been viewed as an overall benefit to advisory firms, but this optimism comes with some exceptions.
Charles Schwab's latest Independent Advisor Outlook Study released on Oct. 27 surveyed more than 1,300 independent advisors for an analysis of how the financial services industry has been evolving. The key theme was how technology has played a game-changing role and has disrupted the industry at an accelerated pace.
We explored the findings to understand the current state of the independent advisory industry, how it has been impacted as a result of the pandemic and what changes will endure past the health crisis:
- Technology and the evolution of financial advisory services.
- Advisors' new focus: the client experience.
- Independent advisors face several obstacles.
Technology and the Evolution of Financial Advisory Services
Technology has enabled us to connect with others and increase the rate at which we do so. The transition into the digitization of financial advisory services has become essential in conducting business as a consequence of the pandemic since we cannot physically meet one another. This face-to-face interaction is a basic tenant of the registered investment advisor (RIA) business and has been taken away to abide by health guidelines.
But technology has allowed advisors to repurpose the way they interact with their clients by engaging with them through a virtual setting. This new way of interacting with existing and new clients may bring about changes to the RIA business model – not only how advisors interact with clients but also how teams interact with one another, bringing about changes in workflow processes, investments in new technologies and other business areas to support an updated work model.
Like many industries, the pandemic has accelerated technology trends that were already in place, says Hamesh Chawla, chief product and technology officer at Edelman Financial Engines in Santa Clara, California.
"Advisors have learned to embrace technology tools not because they necessarily want to, but because they see it as an enabler to help in their experience as well as the experience for their prospects and clients. This involves both connecting with clients virtually and automating workflows that were previously time-consuming," he says.
The industry has been heading in this direction as investors have been growing comfortable with technology and investing and in many cases expect tech integration in their investments. The trend has been accelerated in the wake of the pandemic. Technology has become a basic part of investors' financial lifestyle. The growth of fintech has given rise to retail investors taking a more hands-on approach to their finances and investments. Today, we use technology to track our spending, manage our finances, automate financial activity and to invest.
As a consequence of technology becoming widespread, it has created competition among financial advisors. Advisors face competition from discount brokers and robo advisors, which could pose a threat to their business. Millennials, the future customer base for financial advisors, are embracing fintech as they begin to invest. Fintech has created a virtual experience for consumers that offers a quick and easy way to automate and personalize the management of investments.
"Discount brokers, robo advisors and the big-name firms that solicit clients from their 401(k)s are all huge threats to our business, especially with millennials," says Priscilla Gilbert, president at CenterPoint Financial in Montpelier, Vermont. "Our services aren't as valuable to the young investor who doesn't need the full complement of our services."
Gilbert remains optimistic for growth by focusing on servicing clients and trying to make sure that they have a personal experience. "With all competitive threats with robo advisors, the personal relationship is so often missing in our society, especially during the pandemic," she says. "I'm optimistic and confident that word will spread and that there is a better option for financial services than the institutional trading of broker-dealers and robo advisors."
In a Price Waterhouse Coopers 2020 report, "Financial services technology 2020 and Beyond: Embracing Disruption," the consulting firm listed updating your information technology operating model to get ready for the "new normal" as one of its priorities for 2020, saying "financial institutions and their IT organizations must be prepared for a world where change is constant and where digital comes first."
The rate at which technology is changing the financial services industry is at a rapid pace with no signs of slowing. Digital integration of investing services is now a critical part of the RIA business model, and those who do not adapt will be left behind.
Advisors' New Focus: The Client Experience
While the pandemic has brought about some hurdles, financial advisors are navigating their new virtual work environment to find new growth opportunities. If advisors are wondering how to differentiate themselves from the competition, they could start with the client experience.
The Schwab survey reveals that advisors see opportunity in regard to improving client services. In the survey, 57% of respondents see "demonstrating client service and relationship focus" as an opportunity.
Bernie Clark, head of Schwab Advisor Services, says firms are shifting their focus on how to serve their clients, "Things that used to seem important, you may have learned aren't the most important aspect of your relationship and you're forced to change, recentering your values to make sure you're doing the best you possibly can for your clients."
There is a renewed emphasis on the client and building strong client-advisor relationships. We are in a period defined by uncertainty which can be an opportunity for advisors to re-emphasize their support to clients who are fearful of volatility.
Slowing social mobility has led to a decrease in new advisor-driven relationship opportunities, but long-standing clients have recommitted to their trusted advisors as they seek stability in a "fearful world," says Trevor Isham, senior vice president and wealth advisor for RMB Capital.
"The pandemic has caused massive job disruptions, which has driven many prospective clients to re-engage as they seek the assurance of a financial professional to help navigate them through a tumultuous environment. As usual, we are finding great opportunities amid uncertainty, but the pandemic has forced us to create new methods for connecting with families that need our help," Isham observes.
A major part of advisor growth will be redefining or strengthening company culture and improving the brand. Ask yourself if there are areas of the business that could be improved, particularly communication. Determine if there are new methods or styles of communication that can be used, and if so, identify whether there is a learning curve for your staff or clients for using new virtual communication services and how training is carried out. When the client-advisor experience is positive, this will be a topic of conversation among friends and family that can lead to referrals.
In a virtual setting, advisors are free of physical limitations. There is no such thing as a local firm; rather, the power of tech allows advisors to have a wider reach and expand their clientele. Several positives come with a virtual business including lower costs for events while expanding sales. While this is viewed as a challenge, advisors see this as a lasting industry change: As a result of the global health crisis, 57% of survey respondents anticipated the need for office space and 44% see virtual business development as a long-term impact.
RIAs Face Several Obstacles but Remain Optimistic
In this low interest rate environment, advisors are anxious about meeting clients' returns and financial goals. The survey pointed out that 32% of advisors see achieving client investment return goals as a challenge. The survey also noted that advisors hold growing concerns that achieving their clients' goals in the current environment will be challenging, with 50% having this sentiment in August 2020.
With advisors and clients fearing that an economic downturn will continue in 2021, advisors are compelled to look for market opportunities and potentially re-evaluate investment strategies to stay in line with client retirement goals. This may resort to clients increasing their portfolio risk to generate gains.
In its RIA Retirement Planning Survey 2020 of more than 200 advisors, DPL Financial Partners, an insurance network for RIAs, found that RIAs are struggling to find new investing strategies that meet client demands. It revealed that 57% of respondents were either dissatisfied or very dissatisfied with the current fixed-income market and fixed-income market returns, and to generate the same amount of returns, the amount of risk in their client portfolios needed to increase.
Clients also have to overcome some barriers, too. As a consequence of the new virtual experience, older generations who are accustomed to in-person advisor meetings now have to accommodate virtual meetings. This can be a learning gap for older generations who may be newer to technology. Being able to fluidly meet with clients is important now because several concerns are top of mind for clients.
Despite the challenges firms and the industry as a whole face, advisors' outlook is optimistic. According to the Schwab survey, 82% of firms expect growth in new assets this year and most of this growth is expected to be organic from existing and new clients.
Clark explains that while advisors' ability to plan is a challenge, they are "needed greatly just as they were in the credit crisis in 2008 and during the tech bubble in the early 2000s."
"They are sitting in a very good position in a very challenging time, helping their clients grow into the future," he says.