Much has been made of the crisis facing the financial adviser industry as aging advisers exit and the industry searches for younger advisers to step in. According to the latest from Cerulli Associates Inc., over 100,000 advisers are projected to leave in the next ten years — a full third of the industry.
This headline-grabbing statistic is wreaking havoc among executives of established institutions that are dependent on the distribution that advisers provide, such as asset managers, custodians and broker-dealers. It is also creating angst and worry for the financial well-being of the millions and millions of baby boomers who are entering retirement.
Who or what will meet the staggering projected need and demand for financial advice as the adviser population continues to shrink? The good news for the adviser industry is that a bulk of that demand will be continue to be met by financial advisers, however, there will be much fewer of them, with the excess capacity filled by technology.
Just like in every industry, there is a natural evolution of growth, maturity and then a disruption or tipping point, often caused by technology, that transforms it to take on a different shape and direction. In the case for financial services, we are starting to see that disruption happen on the fringes of the investment world.
New online digital advisers (can we all agree not to call them robo-advisers anymore — they are not robots) are getting better and better at providing the basics of financial advice and will continue to evolve. Industry analyst Grant Easterbrook of research firm Corporate Insight now is tracking more than 100 of these online startups, up from just a dozen a few years ago, with new ones coming online every week.
Because the regulated nature of investing is difficult to navigate and many of these firms currently haven't solved distribution issues, most will fail. However, what we do know is that due to the powerful forces of technology innovation, over time, winners will emerge and those winners will get big — very big. As an example, once digital advisory firm Financial Engines solved the 401(k) marketplace distribution puzzle, they grew rapidly and now currently manage nearly $90 billion for 800,000 participants, according to their latest earnings release.
Fueled by savvy venture capital money and voracious entrepreneurs, these technology platforms are now providing highly sophisticated algorithmic investment services such as developing personalized asset allocations, efficiently investing in low cost securities, and re-balancing portfolios — all for 25 basis points or less.
Sounds pretty similar to what a lot of advisers are providing as their core service model for hundreds of basis points?
As we have seen in other industries, it is tough to compete with free or a better service experience. Just ask the travel agents 15 years ago about what happened to them when Expedia was spun off from Microsoft, or what is currently happening to taxi drivers and taxi companies as they fight a losing battle with mobile technology apps like Uber.
Will we need 300,000 advisers in the future when a majority of the basics of investing can be done efficiently, objectively and cost-effectively through technology? The rise of this segment of technology-enabled advice can more than make up for the declining capacity of a shrinking adviser population that will focus just on providing investment services.
The absolute good news story for the industry is that for advisers who go above and beyond the basics of investing to provide comprehensive financial planning and wealth management, those skills, knowledge and experience will be needed and in high demand. Specialists in investing categories, such as alternatives, ETFs and complex fixed income, also will be in high demand. The adviser who positions himself or herself in this arena will be held in high regard, in demand and a member of a distinct profession, where currently there is much debate as to who can or should be allowed to be a financial adviser.
Additionally, for the current infrastructure participants supporting advisers, such as asset managers, custodians and broker-dealers, they will be forced to deal with severe pricing pressure and fee compression and will need to reinvent themselves to remain relevant. They, too, can adapt by embracing technology and looking for ways to leverage the best of what the new era of digital advice will bring.
Just as TurboTax didn't put the accountants out of business and Legal Zoom didn't crush the legal industry, these digital advisers won't eliminate the need for professional advice. But what TurboTax and Legal Zoom did do was lop off the bottom end of the industry — those folks who only provided a basic service that could efficiently, and ultimately in a superior fashion, be solved by technology.
So, advice industry, let's not keep wringing our hands about natural evolution as the adviser population continues to age and begins to right-size itself. Rather, let's focus on embracing the change that technology will bring and escort us into a new professional adviser-led renaissance.
Timothy D. Welsh is president and founder of Nexus Strategy, and can be reached at firstname.lastname@example.org or on Twitter @NexusStrategy.