Adviser eyes will be laser-focused on the Labor Department in 2016, as the agency is poised to finalize new rules requiring advisers to act in the best interests of their retirement clients. But despite concerns about effects the rule might have on their businesses and the havoc global unrest could wreak on markets, advisers are quite optimistic.
The DOL fiduciary rule — and a proposal the Securities and Exchange Commission is developing, also based on a best-interests standard — is just the beginning of the new rules advisers will confront in 2016.
Others include proposals to require outside compliance reviews and anti-money-laundering programs, as well as a possible rewrite of the accredited investor standard.
“The regulatory climate in D.C. and around the world is more challenging and more complex than ever,” said Karen Barr, chief executive of the Investment Adviser Association. “The cumulative effect of all these will have a real impact on people's businesses.”
About 35% of advisers said regulatory overload is the biggest issue the financial advice industry will face this year, according to the InvestmentNews 2016 Outlook survey. When asked to choose the regulatory or legislative initiative advisers worry most about, 62% picked the DOL fiduciary standard and 11% selected a possible SEC best-interest rule. About 14% of advisers said cybersecurity rules are their top regulatory concern, the online survey of 423 advisers found.
Of course, 2016 will be an especially interesting year because of the November presidential election.
Seven months out from the political conventions that will finalize the Democratic and Republican tickets, about 22% of advisers would vote for Sen. Marco Rubio, R-Fla., and 19% would pick former Secretary of State Hillary Clinton. New York real-estate developer Donald Trump finds support among 11% of advisers, according to the survey.
Historical research about the performance of equity markets during a presidential election shows the event doesn't have much influence, but some advisory clients will be affected by the process no matter who wins.
“The election isn't going to matter from a market perspective, but it will have an impact on client attitudes,” said Ric Edelman, founder and chief executive of Edelman Financial Services. “If their candidate loses, clients can become fearful, and the adviser will have to spend more time reassuring them that the world isn't coming to an end.”
Advisers believe risk from the U.S. political environment is the second biggest issue facing the nation's financial markets. About 23% worry about the American political climate, while 33% believe global unrest is the greatest threat to markets, the survey showed.
Both these worries are top of mind for clients too, who will need advisers to calm a lot of nerves and help them stick to long-range financial plans, experts said.
“The DOL's pending fiduciary ruling, rising technology and compliance costs, and increased regulatory scrutiny will continue to accelerate...consolidation as advisers and firms question whether they are affiliated with the right broker-dealer.”— Dan Arnold, President, LPL Financial
“Advisers will spend a lot of time in 2016 managing emotions, hand-holding clients and helping them understand the long-term perspective,” said Tash Elwyn, president of Raymond James & Associates'. private client group. But most financial advisers expect the U.S. economy to continue operating pretty much as it did in 2015, or even to do slightly better.
About 41% said the economy will stay on par with last year, 40% expect it to “slightly” improve in 2016 and 5% foresee significant improvement, according to the survey. About 14% think a recession is likely this year, compared to 11% who held this view at the start of 2015.
Many analysts forecast U.S. equity markets will perform better this year compared with last, when major indices closed at nearly the same point at which they opened on Jan. 2, 2015. But few expect results to come in as rosy as 2014, when the Dow Jones Industrial Average rose 11% and the Standard & Poor's 500 rose about 15%.
Financial advisers are largely recommending that clients keep the same mix of investments in 2016, though about 43% of advisers who recommend alternatives said they'll suggest a boost in that asset class, and 40% will counsel investors to increase international equity exposure this year, the survey found. About 30% of advisers will recommend a decrease in U.S. fixed-income investments, likely due to rising interest rates.
“Next year isn't going to be that much different for us, investing-wise,” said Winnie Sun, founding partner of Sun Group Wealth Partners. “We will continue to add more heavily into equities because our clients have a long time horizon.”
Her advisory firm will continue to use a combination of active and passive investment strategies this year.
Three-quarters of advisers expect active management tactics will outperform passive ones this year, suggesting the easy gains that passive strategies have enjoyed during the long equity bull run may not be possible in 2016.
Advisers appear more enthusiastic about their own business prospects in 2016.
(Related read: 2015 was ugly for IBDs; will 2016 be any better?)
About 50% of advisers are somewhat optimistic and 24% are very optimistic about their outlook for growth in their book of business this year, the survey found.
This enthusiasm translates into a majority of advisers planning to increase spending in 2016 in two categories: technology and marketing or business development.
Mr. Edelman said technology is the area advisers most need to stay on top of because of how fast new innovations develop. Technology also infuses every aspect of an adviser's practice, from data security and finding investment opportunities, to executing transactions and client service, he said.
“Advisers who ignore technology will discover soon that their practices, and themselves, will become obsolete,” Mr. Edelman said.
(Related read: Best business apps advisers used this year)
This year about 22% of financial advisers plan to hire a NextGen adviser, and 11% said they already did so in 2015, according to the survey. A majority of those hiring young advisers said they expect these hires to have an immediate impact on servicing clients and finding new ones.
David Canter, executive vice president of practice management and consulting for Fidelity Clearing & Custody Solutions, said advisory firms need to have young advisers to ensure the wealth held by their older clients stays with the adviser when it's passed down to the next generation.
“They need to hire and develop NextGen owners so that those future leaders of the firm are connecting to NextGen clients — and not just new prospects, but also the children of their older clients,” he said.
With January just getting underway, 2016 promises to bring change for the advice industry, but advisers largely appear to anticipate the shifting landscape will result in more opportunities than trouble during the interesting new year ahead.
(Related read: What's on tap in 2016 for adviser regulation?)