Wealth Management
There is a momentous demographic turnover that reshapes the financial advisor landscape. According to Cerulli, nearly 40% of advisors will be retiring in the next decade. Currently, 60% of assets are managed by advisors who are 55 and older, while the average age of an advisor is 50.
This reality means that older advisors need to start thinking about succession planning. Proactive and proper succession planning can also help advisors maximize the value of their practice and ensure that their clients remain in good hands. Younger advisors should be formulating a strategy to capitalize on this opportunity.
Some key elements to successfully transition to the next generation are recruiting to replenish talent, appealing to younger investors, and scaling engagement and client service by leveraging technology.
At current rates, there are not enough new advisors to offset retirements and attrition. Therefore, it’s imperative that practices invest in recruitment efforts to identify talent and set them up for success. This entails looking at recruits from nontraditional backgrounds who have strong people and organizational skills.
Another important step is to gear prospecting and client service for millennials and Generation Z. This means understanding their perspective and becoming fluent with technology. Finally, advisors should be investing in technology that can help them scale personalized service to increase their capabilities and serve more clients.
Finsum: Succession planning will be even more critical in the coming decade due to the massive retirement wave in the financial advice industry. Here are some common elements of successful succession planning.
Forget active versus passive investing, the future is about having both, but with a twist: direct indexing. This strategy combines the low fees and market tracking of passive investing with the tax benefits and customization often desired by active investors.
Direct indexing lets you build a portfolio that mimics a market index, like the S&P 500, but with a twist. You can personalize it to minimize your tax bill through tax-loss harvesting, a strategy that sells losing investments to offset capital gains and lower your taxes. This can potentially lead to significant savings compared to traditional index funds, and research shows the alpha can be as high as 1%.
Technology plays a key role in direct indexing. It allows advisors to tailor the portfolio to your specific needs and tax situation, while still ensuring it closely tracks the chosen index. This level of customization combined with the potential for tax savings is fueling the growth of direct indexing, particularly within separately managed accounts.
Finsum: While active bonds may have an advantage, the semi-passive direct indexing offers advantageous tax alpha.
Financial advisors are flocking to independence. Some who switched to the RIA model, say it was a game-changer for their career, and they have gained an "entrepreneurial mindset" while creating lower-cost programs for clients.
This trend is widespread. Cerulli reports the RIA channel is experiencing the fastest growth in advisor headcount. The number of independent RIAs and advisors working there have grown steadily over the past decade. Advisors are seeking independence for several reasons. Clients demand lower fees, and RIAs allow advisors to deliver quality service at a competitive price. Wirehouses, on the other hand, are raising advisor costs.
One highlights of the RIA fee-based model is it has made RIAs a target for private equity firms. Cerulli predicts RIAs will control nearly a third of the market by 2027. Advisors like Harry Figgie see this as inevitable due to the open architecture, financial benefits, and equity-building opportunities offered by the RIA model.
Finsum: The RIA model has been made easier by the technological advancements in advisor space, and this trend might continue to ramp up.
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Many financial advisors are understandably uneasy about artificial intelligence (AI). Like any new technology, there will be considerable opportunities for those who can properly leverage and implement it.
However, it’s also important to understand its limitations, as it lacks human intuition and the ability to understand and respond to a client's deeper, emotional needs. Instead, AI can be thought of as a way to enhance an advisors' capabilities and can be quite useful in areas such as fraud detection, estate planning, and tax strategies. Additionally, many advisors are already using technology that has elements of AI, especially for making forecasts and future projections.
AI excels at tasks that require pattern recognition, optimization, and identifying trends. This means that it has applications in multiple areas such as prospecting, marketing, and planning. For example, estate planning is an area where AI is having a positive impact, as documents can be more quickly and easily understood by advisors and clients. It can also be used to streamline the process of updating documents based on notes taken from previous client interactions.
Overall, AI is like previous technologies in that it can potentially help advisors gain more leverage, increase productivity, and result in more time spent on value-added activities. With financial advice, it can be particularly useful in terms of increasing responsiveness and personalization on a larger scale.
Finsum: Artificial intelligence will affect nearly every industry and change how businesses operate. Here is how financial advisors should be thinking about this technology.
A recent study indicates that private credit investments fail to yield significant additional returns once fees are factored in. Despite the allure of higher potential returns, the study suggests that the added expenses associated with private credit largely offset any potential gains.
Researchers found that private credit funds typically charge higher fees compared to traditional fixed-income investments, which could erode investors' returns over time. This revelation challenges the notion that private credit offers superior returns, urging investors to carefully assess the costs involved before committing capital.
The study underscores the importance of transparency and due diligence in evaluating investment opportunities, particularly in alternative asset classes like private credit. Consequently, investors are advised to weigh the potential benefits against the associated costs to make informed decisions in their portfolios.
Finsum: Alpha can be sucked up by fees but the real draw of private credit would be the uncorrelated returns.
Every day, 12,000 individuals from the baby boomer generation in the US turn 65, and by 2030, all baby boomers will have reached this age milestone. This demographic shift has led to a change in investment priorities, with baby boomers now seeking more protection-oriented financial products, such as annuities. Annuities offering downside protection and guaranteed returns have gained popularity over those promising high growth potential.
In 2023, the annuity market in the US saw record-high sales of $385 billion, largely driven by the demand for products with downside protection features. Fixed annuities and fixed index annuities, accounting for 67% of total annuity sales, have become the preferred choice, reflecting a significant shift from previous years. These annuities align with the risk preferences of baby boomers, offering market-linked returns while shielding investments from market volatility.
Fixed index annuities, in particular, provide an attractive option for retirees seeking stable income streams, combining potential market returns with downside protection. However, they come with limitations, including capped returns and surrender periods, necessitating careful consideration before incorporation into retirement plans.
Finsum: Demographic shifts have already had a major long-term impact on bonds, and now retirement concerns are shifting the landscape once again.