Financial advisers can no longer rely on traditional business and service models to operate effectively. The advice industry needs to adapt more readily to trends in customer preferences, financial regulation, demographics and wealth management, among other things, if it is to flourish as a profession and continue to fulfil the important role it plays in growing people’s wealth and bolstering their financial security.
This was my impression after attending the recent Morningstar Investment Conference in Cape Town, at which Nicholas VanDerSchie, global head of strategy and execution for Morningstar’s Wealth group talked about “Wealth industry mega trends” and a panel of financial advisers discussed “The changing nature of advice”.
VanDerSchie said that, globally, populations are growing, their wealth is growing, and they are living longer, all indicating a greater demand for advice. However, the number of advisers is not growing.
In the US, the adviser headcount has been flat for the past decade or so and is likely to remain stagnant. Independent advisers are on the increase while tied advisers (those in the employ of insurers and banks) are decreasing, but overall the numbers are flat. This is also the case in South Africa, while in Australia adviser numbers have decreased quite dramatically.
VanDerSchie explained that the adviser population in the US is ageing – 38% of advisers are expected to retire in the next decade, and they are not being replaced quickly enough. There is a high dropout rate (72%) among young advisers entering the profession, which is particularly evident in start-up independent advice firms.
One reason for the high dropout rate is the rise of fee-based advice. Fee-based advisers need to take on more clients more quickly to achieve a sustainable level of income than advisers who work on commission.
Awareness of costs
Consumers are generally more conscious of fees than they used to be. In the US, clients’ awareness about what and how they are being charged has increased substantially over the last decade or so. VanDerSchie quoted research showing that in 2011, 31% of clients were not sure how they were being charged for advice and 33% believed they were not being charged at all – that the adviser’s service was “complementary”. Those numbers had decreased to 21% and 19% respectively by 2022.
In the same research, the percentage of clients who said they were receiving fee-based advice rose from about 10% in 2011 to about 36% in 2022, indicating the surge in popularity of fee-based advice in the US. This trend has not yet affected the South African industry in a big way, but I believe it is looming as clients become more fee-savvy.
Regulation pressures
Another headwind is increased regulation. Advisers worldwide are facing heightened compliance requirements, which may be beneficial to clients but which place additional strains and costs on practices. The industry in Australia was particularly hard hit. Adviser headcount plummeted 45% in the five years after 2018, the year of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry which, in 2019, issued 76 recommendations to fix the industry.
Here in South Africa, legislation on the protection of personal information and measures to prevent money-laundering and identify sources of money flows are proving a headache to implement, as Old Mutual has recently discovered after being fined R16 million by the Prudential Authority for failures in this regard.
Client demographics
Clients themselves are ageing, and it is not certain that their children will use financial advisers to the same extent and, if they do, how different their expectations will be.
A poll of the audience at the conference, made up largely of financial advisers, on the average age of their clients, showed that for 40% of advisers, the average client age was 50-60 years; for 32% it was 60-80 years; for 21% it was 40-50 years, and for only 7% was it under 40 years.
VanDerSchie said it was important for advisers to build relationships with their clients’ children, quoting a finding that in the US 70% of people who inherited money from their parents fired their parents’ advisers. “They may not have any money right now,” he said, “but you need to get to know them or you risk losing them.”
One difference between the generations is the type of service they expect. “The service model you deliver to a Baby Boomer is very different from the service model you want to deliver to a younger demographic. Maybe it’s the type of interaction – text or social media as opposed to face-to-face interaction – or maybe it’s your responsiveness,” VanDerSchie said.
Investment preferences
Another difference, also highlighted by the adviser panel in the “changing nature of advice” discussion, was the types of investments younger generations were leaning towards. Younger clients were more open to sustainable investments (shares in companies that are environmentally friendly and have sustainable business models) and more eager to explore non-traditional asset classes, including alternatives such as private equity (investments in companies not listed on a stock exchange) and cryptocurrency.
“You may not want to offer cryptocurrency,” VanDerSchie told the adviser audience, “but you need to have the conversation with your clients.”
* Hesse is the former editor of Personal Finance.
PERSONAL FINANCE