Facing the winds of change: An advisor survival guide for the next 10 years

At Russell Investments, we have spent the last 20 years helping thousands of advisors in the U.S., Canada, Australia and UK transition their client relationships to a fee-based advisory arrangement. In some cases, this transition was mandated by regulators explicitly (by banning commission-based transactions) or implicitly through fiduciary standards and full fee transparency requirements. In many cases, though, advisors were opting to make the transition without regulatory pressure because they believed it created a more valuable relationship for their clients and made better business sense. In the U.S. today, fewer than a third of advisors plans to charge commissions in 2018, according to Cerulli.¹

Looking at the horizon ahead

As we help advisors plan for the next 10 years, we believe the significant (head)winds of change will require those advisors who want to enjoy a growing, sustainable and profitable practice to consider making even more fundamental changes to the way they operate than “simply” transitioning clients to a fee-based advisory relationship.

Considering investment outsourcing

First and foremost, in our view, is the need for advisors to seriously consider embracing the use of outsourced model investment portfolios as the core of their investment process. Now you might be asking, “Why consider outsourcing when my clients are paying me to develop valuable investment solutions that are tailored to their individual needs?” Well, consider this: Advisors in the U.S. currently face three major (head)winds that should have them reconsidering the value of manufacturing their own investment portfolios.

1. The need to better optimize their time;
2. The need to better manage their product inventory;
3. The need to deliver the desired outcomes clients seek.

Let’s talk about each one of these (head)winds in turn.

Optimizing your time

Clients are looking for full service advisors who can help them with all their financial needs—essentially, they are seeking a financial quarterback. That desire is especially pronounced among high net worth clients, many of whom want a full suite of wealth management services. To meet their demands and deliver all the services they expect, you will need to optimize your time. Where do you currently spend your time and where might you be able to scale that back without your clients suffering the consequences—and perhaps even benefiting? Potentially through use of outsourced model portfolio solutions. A recent Cerulli study² reported that many advisors—including successful teams within wirehouse firms—are choosing to do exactly that because they recognize that fulfilling their role as a full-service wealth manager and financial planner creates too many time constraints. Arguably, independent advisors face even more time pressure given that they fulfill a third role, too: That of business owner. That likely helps explain why nearly half of advisors in this channel use outsourced models, by Cerulli’s estimates.³

Managing your product inventory

The second (head)wind advisors face is heightened regulatory scrutiny and requirements of the Department of Labor’s fiduciary rule. Advisors are required to take on full fiduciary responsibility for their client portfolios, including having a documented due diligence process and ongoing review of underlying client investments. To get a sense for how this requirement might affect advisors, we analyzed the books of 400 advisors who have been through our coaching program. We homed in specifically on the number of mutual funds each of these sample advisors uses and found that the average is 167 mutual funds. Depending on your current product inventory that may or may not sound like a lot. Once you translate it into Time, I’d argue it’s bordering on too much. Here’s the math: Compare that to the 2000 working hours in a year (assuming a 40-hour work week, with two weeks of vacation), and you realize that an advisor with 167 products is spending nearly half their time on product due diligence. That’s time not spent in front of clients and prospects. Instead, it’s time spent on a part of the business that robo-advisors are fast commoditizing. An investor with a $500,000 portfolio can get an asset allocated, diversified investment solution from the largest U.S. robo-advisor firms for as little as 31 basis points nowadays.⁴ Outsourcing to a provider who manages the due diligence of those individual mutual funds can save an advisor a lot of time. If you assume a suite of actively-managed multi-asset model strategies adapted to the varying risk tolerance levels within your book you’ve just saved yourself a heck of a lot of time. That’s likely the calculation that advisors who have transitioned to using outsourced models did. Delivering the outcomes your clients are seeking The final (head)wind advisors face is their ability to deliver on investors’ desired outcomes. In the low yield environment of the past few years, income-seeking investors have faced a challenging trade-off between generating sufficient income while also taking on additional risk. Looking ahead,

• interest rates are likely to rise—which will improve the situation for income seekers, but will also impact the price of the fixed income securities many of these investors hold—
• equity returns are likely to be lower and
• volatility is likely to return to the market.

It’s the type of environment in which few investors—whether they are aiming to accumulate, spend or preserve their wealth—can afford to forgo potential sources of return. It will likely involve evaluating potential opportunities from:

• the four corners of the universe (global opportunity sets),
• the full range of investment approaches (active, passive, factor)
• and the largest potential set of asset classes (traditional and the “things in between”).

Yet, that’s precisely the type of complex portfolio that is prohibitively time-consuming for advisors to successfully manage if they’re also focused on delivering valuable service to their clients. The proof is in the pudding: According to Cerulli⁵, strategist-managed portfolios have outperformed advisor-managed portfolios by 1.5% per year for the past seven years. Not only that: they’ve achieved this outperformance with less than half the volatility of advisor-managed portfolios, based on estimates by Envestnet.⁶ So, in order to survive the next 10 years, advisors are going to have to change their value proposition to one of delivering valuable service instead of promising the best returns at any given moment.

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¹ Source: https://www.barrons.com/articles/brokerages-must-evolve-to-survive-cerulli-1507753516

² The Cerulli Edge, U.S. Advisor Edition, 4Q2017, Issue #57. Models and Outsourcing Issue.

³ The Cerulli Edge, U.S. Advisor Edition, 4Q2017, Issue #57. Models and Outsourcing Issue.

⁴ Based on the average fee charged for investment-only management by the top 10 robo-advice offerings for a client portfolio of $500,000. Betterment, Wealthfront, Personal Capital, Wealthsimple, FutureAdvisor, Vanguard Personal Advisor Service, WiseBanyan, SigFig, Schwab Intelligent Portfolios, E*Trade Core Portfolios.

⁵ The Cerulli Edge, U.S. Advisor Edition, 4Q2017, Issue #57. Models and Outsourcing Issue.

⁶ Envestnet, Envestat Report March 2017.