Wealth Management Industry Outlook

Differing Perspectives

1. Bill Koehler said investors would do well to turn off the 24/7 TV channels and align with stocks issued by companies that show promise for strong growth. | 2. More investors could benefit from conversations with advisers about the real risks associated with owning bonds, said Lynn Mayabb. 3. Without a stock market consistently achieving new highs, said Ken Eaton, there would be no point in investing in equities. | 4. Tommy Taylor’s experience with reluctant investors includes a member of his own family—his farm-owning father.

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Drawing from a diverse mix of specialists in the wealth-management sector, the session started, appropriately, with participants defining what the term meant for their own organizations. For most, that common denominator was the way that holistic approaches to client advisory had become the operating standard.

“It means a very holistic situation where we become stewards of our clients assets,” said UMB Bank’s KC Mathews. “It’s more than just investment management—it’s financial planning, estate planning, insurance. The things we must think about are really multi-generation objectives, and bringing it all together and creating plans to meet or exceed those goals.”

Effective wealth management, said Wells Fargo Advisors’ David Neihart, can’t employ a tunnel vision on investments. “It seems like a lot of people are interested in that one part of their portfolio,” he said, and thus it becomes the adviser’s job to help show a bigger picture of other key aspects, debt being one of them. “If they’re paying real high interest on something, managing debt might be as helpful as making a good investment,” he said.

Despite a lot of background noise about the “1 percent” in this country, the investor class has grown substantially in America. As Scott Holsopple of the Mutual Fund Store noted, “this is the first generation that has sizeable assets that need to be managed.” And because of that, many investors need to be introduced to the concept of envisioning what their retirements might look like, how long they’ll live, and what would be needed to fund that retirement.

At Vantage Investment Partners, said Scott Fletcher, the focus on fixed-income portfolio management presents a different kind of challenge to planning, but ultimately, “we hope to become that trusted adviser for clients, establishing that trust relationship with client and making sure you get them where they need to go.”

The challenge is straight-forward at Tower Wealth Managers, said Bill Koehler: “It’s delivering a good experience. Most investors in the U.S. don’t get a good investment or wealth management experience,
in my opinion.” A good experience, he said, is delivered through accessibility, communication and transparency.

Ken Eaton of Stepp and Rothwell listed four components to successful wealth management as a fee-only comprehensive financial planning service: Setting a strategy and leading the financial team, having an intimate understanding of everything that affects clients financially “so they always come to us for advice first,” providing competent, proactive and unbiased advice, and finally, providing Four-Seasons-level service. “When you get to the point where our clients have gotten in life, they need that kind of service,” which stems from giving everyone in the firm the power and responsibility to ensure client satis-faction at all times.

Bob Rippy of Robert W. Baird & Co. cited one metric for gauging success as an adviser: It’s when “your clients come to you on a matter that you’ve never talked to them about,” such as a home refinancing. “That’s when you know you’ve become the wealth management professional they seek.”

In the end, said Matt Melton, it comes down to making sure there’s a plan for every client asset, addressing issues of estate planning, gifting, investing and debt management and then, he said, clarifying the goals. “That’s really when the comprehensive nature of wealth management comes together.”

Investor Sentiments

So what’s keeping investors up at night in the current financial environment?

“I think it’s the noise,” said North-western Mutual’s Tracy VanDyke. “There’s so much noise and so much readily available information.” That’s where advisers provide vital services, she said, helping sort through it to determine what information is most relevant to meeting their own goals.

KC Mathews said a primary concern of investors is outliving their assets, a concern common to almost any investor. But there’s a new one emerging: Health-care costs, he said. “They seem to be skyrocketing out of control. Right now, I may be 65 and healthy, but what if I get some type of cancer? Would I have enough assets? What happens to my family, and how do I pass on the assets if something happens to me sooner than anticipated?”

Older investors, said Bob Rippy, the ones who survived the high inflation of the 1970s and early 1980s, always view their overall wealth in terms of purchasing power. With current levels of deficit spending from Washington, “they’re very afraid that this leads to inflation at some point, with the money coming off the printing presses running right now.” Dana Abraham of UMB Private Wealth Management suggested that current fears might be different from those that investors exhibited a year ago, but KC Mathews saw a common thread. “It’s uncertainty,” he said. “There’s no certainty out there because Congress doesn’t do what it’s supposed to do; they don’t act.” 

Brian Kaufman of Prairie Capital Management said the negotiations that resolved much of the fiscal-cliff furor at year-end had eased some of the tension and calmed investor waters but Mathews saw that outcome as limited to one investor class. “That’s true with some of the wealthier folks,” he said, “but in general, no.”

Rippy cited the prolonged drag on interest rates, which only now are stirring after a long flirtation with historical lows thanks to the Fed’s monetary policy. Not only have bondholders had to deal with reduced yields, he said, but those who bought more to help balance those reduced returns could have put themselves in a difficult position. “You’ve got a little ticking time bomb” in the effect of higher interest rates, he said, “and we’ve seen a little bit of that happen in some investors who have a much longer maturity port-folio than they probably should be having with the current risk situations.”

As rates tick back up, he said, there will be “a shock to the system to a lot of people unaware of the risk.” Anticipating that potential outcome, he said, Baird had been working with clients to alert them to the dangers.

Too many investors, especially those burned by the 2008–09 market downturn, stayed away from equities even as the stock market tacked on nearly 9,000 points from its recessionary lows. Now their options are limited. “You’ve got investors who don’t really know what to do with new money. They feel very paralyzed,” said Scott Fletcher. The recent adjustment in interest rates, where 10-year
Treasuries have added a full point with a matter of months, wiped out two years’ worth of gains for some bondholders.

KC Mathews sees the bond quandary as a serious issue for wealth managers. “I think a lot of investors have unknowingly taken on an incredible amount of risk as they sought out alternatives in the fixed-income space,” he said. But after a bull run of three decades in the bond markets, “when that party ends, the question is, will they be handed the broom?” he asked. “That’s a big issue for us as advisers to be thinking about and how can we advise clients to manage their risk in fixed income.”

Success, though, is still possible in that environment, Fletcher noted, with structural changes, changes in duration, and a keener understanding that some bond issuers are both providing decent rates of return and have the stability to provide peace of mind, if not a guarantee. In other words, not every local government in the municipal bond market, he said, is a Detroit or an Illinois.

The duration of the bull run had predictable results with many investors, said Lynn Mayabb of BKD Wealth Advisors. “Historically, they think there’s no risk, or very little risk. You have to have that conversation with them about what is the real risk in their portfolio and are they willing to assume it.”

That’s important, said Tracy VanDyke, who also noted that not all bonds are created equal. Too many people, she said, “feel good, they’ve got 50 percent of their money in intermediate-term bonds and don’t realize that they’ve got to diversify those bonds and make sure they’re not overexposed to any one sector, any one type of bond or interest rate.”

Fletcher, as well, noted that there’s more than one way to play bonds. “You maybe give up a little on the front end in terms of income,” he said, but with a properly diverse bond portfolio “you can participate in a rising rate environment and replace income over time.”

The Fear Factor

The other major investment vehicle for many, stock ownership, has produced two kinds of investors, wealth managers say: Those who fear major corrections, and those who are new enough to equities to ignore the inevitable downside of any long-term run-up.

Despite this year’s surge in the Dow Jones Industrial Average, “we’re working through a fear bubble, in our view,” said Bill Koehler, a prolonged reaction by investors burned in what he called the “greed bubble” that burst in 2000 and again in 2008. “As long as we’re working our way through that fear bubble, we’re going to have questions like ‘What keeps you up at night?’ “

Koehler said that in conversations with clients—aside from telling them to turn off the TV—he asks what gets them up in the morning. “Working with a trusted adviser and being able to hook yourself up to the productive capacity of the United States” would serve investors well, he said. 

“I think people are still fearful of stocks,” said Tracy VanDyke. “They’re wondering if this run-up is real, and yet they don’t know whether they can turn to bonds because the interest rates are awful, so they’re sitting there saying ‘I have no place to hide.’ ” But again, she noted, financial advisers can help them manage the emotion, not unlike psychiatrists. “I don’t know how many times you all felt like you’ve needed a couch in your office, but that’s what I think a lot of the job is.”

“My Dad is 94 years old,” said Tommy Taylor of Polsinelli, P.C., “and I asked him couple of years ago why he never invested in the stock market. His answer was simple: ‘I don’t understand it.’ An old farm boy, he bought cattle, he bought farmland, and he sat on it. He didn’t realize he was into equities, but that’s what he was into.”

Bob Rippy saw the potential for future gains in corporate America’s response to the recession and slow-growth recovery. Many individuals have sharply reduced personal debt over the past five years, and “corporations have done the same thing—cut the heck out of debt,” Rippy said. “Balance sheets have never, ever been as strong as they are now, cash is absolutely rampant in these companies.”

That has produced a swelling of stock buybacks, increased earnings per share and led to more companies increasing or re-instating dividends. But it’s important to note he said, that “the stock market is not really all that high in historical context.” Based on this year’s trading, the S&P 500 is trading about 15 times earnings, about 18 times earnings since Jan. 1, levels far below what were seen in more speculative eras. 

What will it take to break that cash dam and send that money pouring back into business expansion? “The first thing you have to do is allow repatriation of money overseas” by lowering corporate tax rates, Rippy said. “There are billions and billions and billions of dollars sitting overseas.”

KC Mathews also saw, in reading the numerical tea leaves, the potential for higher gains. In 2000, the S&P stood at 1,527, representing $54 worth of earnings. Today, that same index yields $107 worth of earnings, and potentially $115 next year. But the index is still stuck near 1,700, he noted. “The market is a leading indicator,” Mathews said, “so not only has it kept up, it gives us some insight into future economic growth. We can see 2–3 percent economic growth in 2014, and the stock market will tell you yes, because that’s where we are with earnings growth.”

As for regular news reports on the 24/7 channels questioning whether any given day’s “record” high is sustainable, Ken Eaton said “the fact is that if we don’t keep reaching new highs, you better not be investing in the market, because if all you’re going to do is lose money, it doesn’t make sense to be there.”

Large-cap stocks, said Tracy VanDyke, stand to make long-term gains if the uncertainty over the Affordable Care Act’s health-insurance reforms can be quelled. “As the uncertainly around the health-care bill clears up, I think that you’re going to see unemployment get a little better,” she said. “Large-cap stocks, over the last 12 to 24 months—actually since 2009—we’ve seen a lot of growth.”

The Small Business Challenge

Ingram’s Publisher Joe Sweeney said the magazine’s frequent dealings with other small businesses had shed light on an under-reported phenomenon: That of small-company owners quickly approaching retirement age at the worst of times. Many have struggled to maintain their business’ valuations over the past five years, but others have seen those valuations plummet. What, he asked, are the consequences for them? 

Succession planning, said Matt Melton, was indeed becoming a greater issue as owners consider not only whom they should sell to, but when, and how the deal should be structured. “I’m starting to get a feeling from clients that that’s really the thing they’re thinking about all the time,” he said.

Lynn Mayabb said her office was trying to get entrepreneurs and business owners to start pondering those questions as much as five years before a potential sale. That time frame, she said, would meet their need to plan an exit strategy. “That may be upgrading equipment to make their company more attractive to sell, it may be deciding that they’re not going to do certain things because they know they’re going to sell at a discount, but would rather do that than put money into it.” Regardless of whether a sale is achieved through owner financing, in-stallments or bank financing, she said, it was vital that those clients know that “they can’t wait until six months before they’re ready to leave and go, “Well, I’m now ready to sell my company.’ ”

Bob Rippy said his office had seen family takeovers or larger companies buying the smaller companies and ab-sorbing them when there’s no younger generation to take over, or in some cases, the owners will sell to key employees. Mayabb noted that venture capitalists were sensing opportunities there, too, buying and restructuring businesses with the intent of selling within five years—if the growth potential is there.

But in some cases, she acknowledged, Darwinian principles prevail. “You do have some owners who just have to realize they’re just going to have to shut down,” she said. Some can’t find a buyer, or it’s
not a profitable business.

The same issues have confronted those businesses for years, Melton said, but the urgency is greater today. “That’s a large opportunity we have to provide some value there in that succession planning and how to help them through that.”

As Ken Eaton noted, though, the same cautions about ownership of stocks or bonds apply to business ownership. “It all goes back to the old buzzword, diversification,” he said. “You’re saying that basically what happened was they just continued to invest all of their money back into the business, and obviously, that makes it a lot more risky.” Owners who take some of that money off the table a little at a time, he said, aren’t asking that question at this point. “You understand why they did it,” he said, but refraining from putting all the eggs into that basket wouldn’t make it a retirement-planning conundrum.

Social Security 

How, participants were asked, are they advising clients, particularly the younger ones, on the best way to approach Social Security as a component of a retirement plan?

“Most of them don’t believe they’re going to get it,” said Bob Rippy.

“They all have their own ideas about whether or not they’re going to get Social Security,” said Ken Eaton. “I think that’s just a decision they have to make, and we can use that as one of our assumptions.”

Lynn Mayabb said that at BKD, “if we’re running a plan, we’ll run it without Social Security first to see if it will work without it being included, and try to run the most conservative estimates we can.”

Why, wondered Tommy Taylor would any investor today rely on Social Security? “If that was the only check you had, could you live on it?” he asked. “I don’t think you can. Social Security is an extra, a bonus, in my mind.”

Exactly, said Tracy VanDyke. “It’s the gravy that’s going to pay for some unexpected costs,” she said. “Just plan on it being the gravy that will help address some of those needs, but don’t count on it. Especially if you’re under 35.”

The bigger concern for those younger investors, Ken Eaton said, was health-care costs. It’s easy to see from a Social Security benefit calculator what the loss might be in a worst-case scenario. “But when it comes to health-care costs, everybody knows that there’s no limit, and that at some point, that camel’s back is going to break,” he said.

Scott Fletcher said the benefit of running multiple plans for clients is the education they derive from the process. “There’s no one plan that’s going to come true in 30 years,” he said, “but showing them that with and without Social Security, with longevity at different rates, somebody knows what happens if they do live for 30 years into retirement and don’t have Social Security.”

Again, though, Ken Eaton noted, frequent consultations with clients help avoid the long-term train wrecks and surprises. “You don’t do it one time and let them go on about their business for 10 years, because they’re going to have three kids in the meantime; there are always different things that are changing all the time.”

An Industry in Transition 

Multiple factors, participants said, are transforming the industry many have known for three decades or more. Among those are technology, which Scott Holsopple said was allowing a level of client service previously unknown to those below the highest levels of personal wealth.

“Technology presents a great opportunity,” he said. “As we bring more technology in, we become more efficient, and that lets us expand services traditionally reserved for the high-net worth client. Now you have the ability to do some of the more in-depth planning with some lower balances.” The Mutual Fund Store’s embrace of centralized research teams, he said, was made possible by technology, and can serve advisers nationwide.

“You can get a lot more done with fewer people and fewer resources, and that’s huge,” said Scott Fletcher. “And where you see challenges in this industry, you’d better be smart enough to see that as an opportunity, as well.” Considering the wealth transfer that will take place over the next 35 years, he said, much was at stake—roughly $18 trillion in assets now held by the Great-est Generation and the Baby Boomers.

That will make finding clients among a smaller Gen X investor class crucial. “There are studies that say around 17 per-cent of people who inherit wealth will use the same adviser their parents used,” Fletcher said. “That is certainly a challenge, but also an opportunity.

Another industry challenge is the age of financial advisers; Bob Rippy estimated that the average was now in the mid-50s, and Dana Abraham noted the vital role that the delivery team provides in retaining and recruiting clients—those team members often need to look like the prospective clients, she said.

A final challenge is declining num-bers of professional planners. While that trend is matching up for now with a smaller investor pool expected over the long term, the potential for technology to bring services to many more smaller investors would bolster demand for trained manpower. Some of that need is being met with college-level courses tailored to financial planning certification, and some, as Abraham half-jested, by those in the room “stealing talent from each other.”

Overall, she said, the things that prudent wealth managers are doing now “put us in a better position to retain more than 17 percent” of the client base in the parent-child dynamic cited by Fletcher.