Pandemic means changes for advisers’ firms and their clients

If the COVID-19 pandemic has taught us anything, it’s that the unimaginable can become reality practically overnight. Negative oil prices? Seemingly impossible, but it happened. So did the sudden idling of entire thriving industries, creating Depression-era joblessness just two months after record-low unemployment. 

For the financial advice business, the pandemic could well lead to changes just as unlikely, unforeseen and perhaps unpleasant. 

To be sure, for advisers serving those in the highest wealth tiers — a group numerically tiny, but one accounting for the largest, and growing, share of the nation’s wealth pie — little may change. As has been the case for generations, estate and tax planning, along with services related to philanthropic giving and family legacies, will continue to be important for the truly wealthy, who rely on advisers for help preserving the fortunes they have.

WEALTH RANGE

Building a nest egg, however, is the chief priority for the bulk of advisers who serve clients considered mass affluent ($100,000 to $1 million in liquid financial assets), high-net-worth ($1 million to $5 million in assets) and very high-net-worth ($5 million to $30 million) clients. These clients, particularly the more sizable numbers at the lower end of the wealth range, are those who will be most affected by the changes COVID-19 will bring about, and whose needs most likely will shape the future of the financial advice business. 

Since most advisory clients and prospects seek professional advice chiefly to help fund the education of their children and to ensure a comfortable retirement, the chief post-pandemic challenge for advisers will be meeting those goals amid economic and investment environments that are unlikely to be favorable.

Most economists expect that it will be several years before economic activity returns to pre-pandemic levels. That means higher unemployment, slimmer wage gains and lower corporate profits for some time, which translates into lower dividends and perhaps lower stock prices. Fixed-income investments may be equally disappointing. Aggressive monetary policy efforts to keep credit markets open are likely to result in razor-thin or even negative interest rates, especially if foreign markets fare worse than those in the U.S.

SLIM RETURNS

If equity and fixed-income investments offer slim returns, where will advisers find solutions, and the income, to meet their clients’ needs? As some leading retirement experts told InvestmentNews’ Mary Beth Franklin, answers may lie in encouraging more clients to annuitize at least a portion of retirement assets, to delay claiming Social Security benefits for as long as possible and to tap the equity in their homes through a reverse mortgage. None of these is a new solution, of course, but they currently are outside the bounds of many investment discussions and venture into areas that some advisers find uncomfortable.

But advisers are likely to face many discomforting discussions as the new economic and market reality unfolds. They will have to discuss clients working longer than they had planned, drawing down less annually from retirement savings, downsizing homes, sending children to community college before a four-year school, and belt-tightening in other unexpected ways. 

RETHINKING BUSINESS MODEL

Along with discussions of new and perhaps less satisfying income and spending options, advisers may be pressed to rethink their compensation and fee structure, the ways they interact with clients (will Zoom become the new norm?) and their business model itself as broker-dealers and custodians consolidate and reconfigure their service offerings.

As much as advisers and others would like the world to return to a 2018-19 version of normal, COVID-19 and the reactions to it have made such a return impossible. The challenge in the coming new normal will be devising solutions for an environment that has changed, often in ways that neither advisers nor their clients may like. 

Related Topics: Client Servicing, editorial