The value of advice

New research from InvestmentNews and Cambridge Investment Research shows how advisers can take a new approach to fees, M&A and succession planning to help accelerate the value of their services – and ultimately their businesses.

The following is an excerpt from a new research study, “The value of advice.” To download the full report, click here.

The pace and velocity of change in the advice industry over the last 18 months has forced many advisers to rapidly re-evaluate their business strategies and outlooks.

Regulatory, technology and investment pressures are re-shaping the business of advice – seemingly in real- time. Coupled with a large wave of advisers approaching retirement in tandem with their baby boomer clients, this uncertain outlook accentuates the shifting landscape facing many advisers.

On the surface, the DOL's fiduciary rule changes the economics of the advice business for many advisers whose revenue streams have relied heavily on commissions. The rise of so-called robo advisers and low-cost digital investing platforms has introduced new pricing and service dynamics to many investors and clients – while also shaping expectations for the digital experience individuals now have with financial services firms. At the same time, strong, relatively stable equity markets and the subsequent appeal and performance of passive investment strategies have altered the way many investors view active investment management and advice.

There is a common thread that runs through each of the external forces: Value. From different directions, each shines a light on pricing or performance – and ultimately, the relationship between the two.

More than ever, financial advisers are being asked to demonstrate and validate the value of the services and results they provide to clients. We believe that the advice business is at an evolutionary inflection point, with substantial changes to the industry's landscape already underway. To better understand the way advisers are responding to these tectonic changes, we conducted a survey of financial advisers in the second quarter of 2017 – shortly after the June 2017 implementation of the DOL fiduciary rule – and corresponding analysis that focuses on the “value levers” advisers can pull to re-position their businesses and potentially accelerate growth.

Specifically, we focused on three levers throughout our research: fees, mergers and acquisitions, and succession planning. Throughout each, we sought to understand value in several ways, including the literal value of services provided by an adviser directly to clients, an adviser's perceived value, and the actual overall value of a financial advisory firm.

In our research, we uncovered that many advisers are aware of the disruption and sources of change in the advice industry. However, there is only a small portion of the adviser universe that is focused on proactively managing and altering their overall value structure – with a number of advisers taking a more passive position on growth and accelerating their future value. A few key findings from our research of particular note:

1. 80% of firms surveyed indicated that they believe their business will be worth more three to five years from now, and they are citing organic growth and market appreciation being the primary drivers
2. Surprisingly, only 31% of advisers feel that their core business will change over the next five years
3. 39% of advisers believe their firm needs to refine their pricing model to more clearly align with the specific services they provide – and notably, only 30% agreed that their model needed tweaking.
4. When it comes to mergers and acquisitions, there are currently seven times as many buyers as there are sellers represented in our survey
5. 27% of advisers say that the regulatory environment is accelerating their retirement from the business, or a sale of their business – a 50% increase compared to the 18% who said the same in our 2012 InvestmentNews Succession Planning Study
6. On a scale of 1-to-10, advisers score their own retirement “preparedness” at an average of 6.9
7. About two-thirds (64%) of advisers currently have a succession plan in place or are “planning to plan” – meaning they are considering, if not acting on a potential transition. That is a marked shift from our 2012 InvestmentNews Succession Planning Study when just 50% of firms had or intended to develop a succession plan

To download the complete version of “The value of advice,” click here.