On a crisp Friday morning in early April, a dozen savvy wealth managers met in Leawood at the Towne Center Plaza offices of Northwestern Mutual Financial Network to chew over the state of their industry. There was much to discuss.
Co-chairing the event were Matt Melton of Northwestern Mutual and Jay Beebe of Creative Planning, the two organizations that co-sponsored Ingram’s 2016 Wealth Management Industry Outlook.
Together, they led a wide-ranging discussion that explored potentially dra-matic impacts from new regulation, seismic shifts in investor demographics—and the demographics of their own industry—challenges with the immediacy, volume and quality of information reaching investors, and even the changing American attitudes toward wealth creation and entrepreneurship.
As an opening question, participants were asked to cite either the most press-ing challenge or the greatest opportunity facing the profession. Tracy VanDyke of Northwestern Mutual has been a wealth management adviser for 24 years. For her, “changing regulations” are a con-stant concern, now as much as ever given the promulgation of new rules from the Department of Labor, and more on these shortly.
“Media can be a challenge as well,” VanDyke added, “with so much informa-tion available to clients so fast, faster than 25 or 30 years ago.” Trying to sort through that information and discern what is right for the clients takes time.
“The No. 1 concern and opportunity has always been serving clients well,” said Bill Koehler, CEO of FCI Advisors. “This is still a business about fear and greed,” he added. “What we have to do is help people with some discipline and keep them from chasing performance.”
For KC Mathews, chief investment officer of UMB Bank, a number of issues need to be confronted. The regulatory environment is high on that list. The need to understand investors’ risks is another. Other concerns include technology, the transfer of wealth to Millennials, and finally, human capital.
“Look around the room at old guys like me,” said Mathews, who is a decade or so younger than some of his colleagues at the table. “How are we going to serve these young guys as investors when a lotof the wisdom in this business is getting older and older and going to be sent out to pasture?”
Said Mark Henke of Creative Planning, “One of the things in my mind is whether our country will continue to produce enough meaningful employment opportunities for our children and our grandchildren, and I hear that from fami-lies we serve.”
Jamie Battmer, chief economist and portfolio manager at Bukaty Financial, observed that the regulatory environment was forcing wealth advisers to be more efficient and to better serve the best inter-est of their clients.
“But as we go more and more into the digital age, the age of short-termism and sound bites,” Battmer added, “trying to get clients to focus on long term and not on the news, not on the noise, is a challenge.”
Kevin Zimmerman of BOK Financial agreed. He cited as the most pressing challenge “managing client expectations in an instant, editorial society, and try- ing to keep them in the market when they feel like they need to shift every quarter.”
Eric Ireland of Commerce Trust Co. shared that opinion. “The biggest chal-lenge we have is keeping people on track for the long term,” said Ireland, “and not letting noise and volatility distract them from that.”
“Energy is a crazy world,” said Kevin Birzer, who is in a position to know. Birzer is CEO of Tortoise Capital Advisors, a firm that focuses on energy infrastructure investing. “Energy demand, you’ve got to have it. Energy supply right now is crazy, but it’s an opportunity, and we built a company around it.”
As this article was being prepared, the Department of Labor was finalizing a ruling that could have far-reaching effects on the wealth-management industry. In essence, the rule defined who has a fidu-ciary relationship to a client, and what the responsibilities of that individual are.
“A person is a fiduciary,” said the DOL, “to the extent he or she engages in speci-fied plan activities, including rendering ‘investment advice for a fee or other com-pensation, direct or indirect, with respect to any moneys or other property of such plan.’” The ruling goes into effect on April 10, 2017.
The question was raised as to how and why the Department of Labor absorbed a regulatory function that would seem the more natural preserve of the Securities Exchange Commission. Said Bob Rippy, “The SEC was not for it.”
Added Jamie Battmer, “It was ERISA-driven,” ERISA, of course, being the Employee Retirement Income Security Act, which is overseen by the Department of Labor. Battmer believes the DOL kept the rules vague on purpose because when the rules are specific, firms can figure out ways around them.
“Enforcement is going to be difficult,” said Bill Koehler. He is confident every major organization will have to add com-pliance officers. He believes too there will be “all kinds of unintended consequences.”
“The amount of commission business has been declining and the amount of fee-based business has been increasing,” Koehler noted. “I think this was a solution in search of a problem.”
One unintended consequence, said Jay Beebe, is likely to be “an additional layer of complexity” between clients and their advisers. He cited the possibility that an adviser may have to negotiate two sets of rules for clients with both taxable assets and IRAs. “It’s going to be messy; it’s going to be expensive,” said Beebe. Still, he thought it “a step in the right direction.”
Even if in the right direction, KC Mathews countered, “You don’t need the government to get involved.” When Mathews started in the business thirty years ago, one could get an 8 ½ percent front load on the sale of a mutual fund.
“You talk about compression,” said Mathews. “That’s been happening for the past thirty years. Why do I need the government telling us we have to be fee sensitive and do what’s in the best interests of the clients? We’ve been doing that on our own for thirty years!”
“The market’s been driving it anyway,” agreed Tracy Van Dyke.
“With the industry we’re in, most people don’t understand what’s going on,” said Beebe. “I think that’s one reason why the government decided to step in.”
“It was political low-lying fruit,” said Battmer. “Like Health-care reform: They pass it, then figure out what they’re going to do with it.”
Bill Koehler noted that there are reported to be seventeen states looking at providing state-sponsored retire-ment accounts, California being one of them. “There is a school of thought that people will go to an exchange, almost like Obamacare,” said Koehler. “So if you’re in California, you’d be in Secured Choice.” The catch, he speculated, is that these state exchanges are not subject to the same fiduciary standards.
For the record an ETF is a marketable security that tracks an index, a commodity, bonds, or a basket of assets. Unlike mutual funds, an ETF trades like a common stock and its price fluctuates accordingly. As might be expected, ETFs are typically more liquid than mutual funds.
Participants expressed a range of opinions about their effect on the market. “Our view is that the ETF is probably creat-ing volatility,” said Kevin Birzer, “but that volatility can be an investor’s best friend if they have a long-term buy.”
As KC Mathews noted, the ETF was a fairly simple investment when first intro-duced in that it mimicked the S&P 500. With the proliferation of ETFs, however, “They’re now very complicated.” In the MLP (master limited partnership) space, Mathews noted, some products have introduced leverage in ways that the average investor may not understand. “To us,” said Kevin Birzer, “simpler is better.”
Jamie Battmer believes that ETFs serve a purpose in a diversified strategy, but as he noted, “Innovation outpaces regulation.”
“We use ETFs for our customers and clients,” said Eric Ireland, but it’s looking at a particular customer and where the need fits in. Sometimes it doesn’t fit in at all.”
“Tax sensitivity is going to be one of the biggest benefits,” said Tracy VanDyke. Much depended on a client’s tax bracket, his time horizon, and his sensitivity to having a managed portfolio.
Jamie Battmer observed that ETFs can drive down cost. One example he cited was large cap blend space. “We have an active sleeve and a passive sleeve,” he noted. “Our passive sleeve costs seven basis points—0.07 percent. That’s a tre-mendous way to help compress fees to provide greater outcomes over a long period of time.”
“Seems like a lot of things have been done in the market to make them more efficient, and speed is one,” said Jay Beebe. He wondered whether speed has been good for the investors or “have we created another prop for people to hurt themselves?”
“I think it’s been very positive,” said Mathews. “The more liquidity you can have, the better. The speed of trading, the cost of trading, over my career, that’s come down quite a bit.”
“It’s a mixed bag,” said Battmer. “When things get volatile, when the markets need liquidity, there’s a risk that [the exchanges] can pull the plug, magni-fying movements up and down.”
The participants had mixed feelings about “robo-advisers,” automated systems designed to facilitate portfolio management.
“I think the term ‘robo-adviser’ is a misnomer,” said Bill Koehler. He lobbied for the term, “robo-allocator.” As Koehler noted, “I don’t see that robo-advisers are equipped to give advice, like ‘If I inherit a farm in Marceline, Missouri, what should I do with that?’”
Eric Ireland agreed that these programs had value. He uses one himself for budget-ing, pulling in balances, checking accounts and the like, but no program, he argued, can provide the kind of “holistic services” a wealth adviser can.
“We find it potentially helping those investors who are very tech-savvy,” said Matt Melton. “We don’t think advice is going away by any means. Potentially, [robo-advisers] will enhance and get more people to plan for their financial future.”
“We think of it as a great addition to the industry,” said Jamie Battmer. He thinks these programs have particular value for smaller accounts in that they provide “great opportunities to still effectively service that client base without having an onerous amount of time spent on an account.”
Kevin Zimmerman believes that the robo-adviser will have particular appeal for Millennials. “They don’t want to do anything face-to-face,” he observed. “They want to do it on their hand-helds.” Small investors can also benefit from them. “They can get in, find a model portfolio, get the money started.”
KC Mathews believes the robo-adviser is here to stay, but he expects to see an increase in litigation. When clients who have been largely robo-advised face a downturn in the market, they may begin to question just how seriously their wealth adviser took his fiduciary responsibility.
“The guy with five to ten thousand in a robo-advisor fills a niche,” said Mathews, “but when you have this big wave of wealth transfer, and they start to accumulate sizable wealth, they’re going to call one of us.”
Jamie Battmer compared using a robo-advisor instead of a wealth manager to using a program like Turbo Tax instead of a professional CPA firm. “As your situ-ation becomes more complicated, you need to bring in professionals to work on your behalf.” The value of these pro-grams, Battmer believes, is that they can streamline the operations part of the process.
The Future of the Profession
Matt Melton questioned whether there were too many wealth advisers chasing too few wealthy entities.
As Bob Rippy observed, the average age of an advisor has never been higher in the industry, and many advisors are soon to retire. “My opinion going forward,” said Rippy, “more advisors are going to be needed, not fewer.” Rippy added that most firms have excellent succession plans as advisers retire. The team concept helps ease the transition.
“I don’t see other people in my gen-eration making the same move,” said the thirty-something Jay Beebe. He believes, however, that as the baby boomer advi-sors retire, his peers will begin to see the opportunities available in wealth manage-ment. “Suddenly it’s going to be the place to be again,” said Beebe. “If it’s gone for long enough, eventually it comes back in style.”
“There’s a great deal of consolida-tion,” said KC Mathews. “Do we really need 110 analysts following GE?” Mathews argued that he and his col-leagues can reach and serve more clients due to technology, especially commu-nication technologies like Skype and FaceTime.
“That is where the generational tran-sition shift is taking place,” said Jamie Battmer. “Older investors want to receive that phone call, whereas a lot of our younger clients are comfortable with an explanation via an e-mail commentary.” Battmer believes the consumer patterns are undergoing the greatest transition since the industrial revolution, and the wealth management industry has not quite yet adapted.
Eric Ireland cited an additional gen-erational challenge. “You have kids on various coasts. How do you build rela-tionships with them?” This is an issue his firm has been trying to figure out. “How do we provide the same level of service when they’re not sitting here. What’s the best way to continue to provide that?” The bottom line for Ireland is this: “We’re very much in the relationship business, that’s the key to it.”
“How people get into the business is going to change,” said Tracy VanDyke. She believes that millennials are used to being part of a team and are not inclined to go it on their own. “How they get into the business and how they build a business is going to be much different than ten or twenty years ago.”
“It used to be that everyone came in and they were their own independent little business,” Bob Rippy elaborated. “The vast majority of people we bring in now we train to be a part of a team.” The days of a desk and phone are over. He believes that the multigenerational team concept helps the firm retain a family’s business from generation to generation.
“It’s too hard to learn everything you need to learn in this business and make a living, building your own clientele,” said VanDyke. She noted that firms make promises to their clients that they have an obligation to fulfill. “We have to bring in that next generation to continue that promise.”
As Kevin Zimmerman observed, one real challenge today is retention. He believes that making younger col-leagues feel like they are part of a team, “like they are part of something,” helps considerably.
KC Mathews argued that if a young colleague is recruited to sell, it is less likely he or she will stick around. “Everyone I’ve brought in to the investment management business is still there,” said Mathews. “They’re just passionate about being an investment adviser. There’s no sales, or very little sales bent to it.”
“That’s why the universe is trending toward us instead of the getting on the phone for that smile-and-dial brokerage model,” said Battmer.
The question was raised as to whether Americans had the same attitude towards property ownership and wealth accumula-tion that they did a generation ago.
Jay Beebe believes that attitudes have “really changed.” He believes that younger people want to remain more mobile and are thus less inclined to own property and start families.
“They’re very transitory until that first baby comes,” said KC Mathews. He noted that in 1960, the average age of a woman getting married was 20 years old. Today it’s 27. “I think it’s just delayed,” said Mathews of home ownership. “Once that baby comes, it’s business as usual.”
“The intergenerational issue is just becoming a larger issue all the time,” said Bill Koehler. In his experience, the senior generation in a family is not always keen on sharing all of its financial informa-tion within the succeeding generations. “There’s going to be some altering of busi-ness models to address this,” Koehler said, “not just on the technology side, but in the way businesses are affiliated.”
One variable that affects generational attitudes, said Bob Rippy, is debt. Those coming out of college now have “an incred-ible debt burden, on average, compared to what other generations have had.”
These students loans, Jamie Battmer observed, “create the acceptance of debt as part of your life just when you’re start-ing off, and that’s tragic.”
KC Mathews believes that the best value in the U.S. today is the acquisitionof a relevant skill from a trade school. The individual would be able to support a family and have a nice house. Unfortunately, he added, “There’s some type of stigma we’ve put on it.” Middle-class parents don’t want their kids to be plumbers, despite the fact that many small private plumbing companies do very well.
“One thing that hasn’t changed is the need for financial advice,” said Matt Mellon. If anything, the financial world is more complex, not less. With the turnover in the profession, he believes that wealth manage-ment “could be a great career the next ten years for people coming out of school.”
“I might add,” said Mark Henke, “that from my perspective at Creative Planning, my colleagues and our clients are very excited about the quality of opportunity that continues to exist in America.”