Top five takeaways for RIAs and fee-based advisors
by Craig HawleyMr. Hawley is head of Nationwide’s Annuity Distribution, and a regular contributor to our pages.
Looking back, 2019 has been another year where uncertainty was on the rise and mixed signals prevailed. Markets hit record highs and interest rates were slashed to new lows—but confidence wavered as volatility persisted with a vengeance. Lawmakers at home and abroad continued to dominate the headlines, impacting portfolios and raising concerns of advisors and investors alike. Increasing competition, commoditization and the downward pressure of fee compression continued to change the way advisors work.
Turbulent markets brought fear—but also buying opportunities. Lower interest rates were a double-edged sword. The yield curve’s inversion hinted at recession. As investors’ financial outlook declined, even among the HNW, the demand for holistic planning and guided advice was strong. In 2019, RIAs and fee-based advisors changed the way they created “safe havens” for their clients, reshaped their value proposition and revised their approach to building a more profitable practice. These were among insights revealed in our fifth annual Advisor Authority Study of more than 1,600 RIAs, fee-based advisors and individual investors. Here are five top takeaways from 2019 that advisors need to know:
Volatility was top of mind—and drove demand for advice
Stocks were on rebound in this year, but much of this growth was to regain ground lost the year before. As 2019 comes to an end, most major indexes are now finally back to where they began in 2018. Many advisors and investors struggled to understand how markets continued to move higher while corporate profits slowed, trade wars flared up, and partisan politics were anything but usual.
Concerned that these factors would derail the decadelong bull market, more than half of investors and advisors feared a bear market, while two-thirds of investors and more than half of advisors expected volatility to increase, according to Advisor Authority. Investors said volatility was among the top three macro factors adversely impacting their portfolios, and protecting assets was their number-two financial concern. Investors also said that volatility was the number-one challenge that would increase the likelihood they would work with an advisor. And in volatile markets, investors said the number-one benefit of having an advisor was to keep them focused on long-term goals.
The vast majority of RIAs and fee-based advisors were prepared, with nearly nine in 10 having a strategy in place to protect clients’ assets against market risk. You can learn from highly successful advisors who used fixed annuities, fixed index annuities, liquid alternatives and smart beta ETFs to help mitigate downside, capture upside and protect clients’ portfolios. You can attract and retain more clients by becoming a trusted counselor on volatility, to protect clients from short-term reactions by keeping them focused on their holistic plans and long-term goals. You can position your clients and your practice for success with tools for risk management, risk monitoring and portfolio stress testing.
The “Retirement Income Challenge” created concerns—even for the most affluent investors
As 10,000 Boomers a day made the move to retire in 2019, outliving retirement income remained one of their biggest fears—and generating reliable income in retirement was still one of their biggest unknowns. In 2019, only 28% of Boomers believed they were doing—or had done—a good job preparing for retirement, and only 25% believed they would have enough money to live in retirement, according to the Insured Retirement Institute. Even among the most affluent, more than one-fourth of High Net Worth investors and one in ten Ultra High Net Worth investors didn’t know or weren’t sure which solutions they should use for generating retirement income during periods of market volatility, according to Advisor Authority.
To protect clients against the risk—and the fear—of outliving their savings, the most successful RIAs and fee-based advisors incorporated insurance and annuities into holistic financial plans. This included variable annuities with living benefit riders, qualifying longevity annuity contracts (QLACs) and contingent deferred annuities (CDAs).
A growing category of fee-based annuities, can help you provide clients with a more durable solution, to fund a retirement that could last three decades—or more. You can help clients pursue additional tax-deferred savings after maxing out qualified plans, allow clients to participate in the market while protecting them against downturns, and protect part of clients’ portfolios with a guaranteed income floor, so the rest could be invested more aggressively to protect against longevity risk.
Tax Reform 2.0 Drove New Approaches to Tax-Advantaged Investing
The 2017 Tax Cuts & Jobs Act was the most dramatic tax reform package in nearly three decades, and drove many investors, especially the most affluent, to seek guided advice. But as the reality of these new reforms took hold, the RIAs and fee-based advisors who said that their clients would benefit from tax reforms declined ten full percentage points this year—to 69% in 2019 from 79% in 2018.
In fact, taxes continued to be investors’ number two-financial concern—and the number-one concern for both the High Net Worth, and the Ultra High Net Worth. The vast majority of RIAs and fee-based advisors took action to address clients’ concerns, with 75% adapting their approach to tax-advantaged investing in response.
You can help your clients prepare with a year-end tax planning strategy that includes leveraging the power of tax deferral by using fee-based Investment-Only variable annuities (IOVAs) once clients max-out qualified plans, optimizing tax-inefficient investments with an asset location strategy to increase returns without increasing risk, managing mutual fund distributions, “bunching” itemized deductions and harvesting losses.
The “Race to Zero” raised the stakes—making specialization, holistic planning and technology key
The pricing war raged on in 2019, as the industry’s three largest custodians—Charles Schwab, TD Ameritrade, and Fidelity—eliminated fees for trading stocks and ETFs. Combined with the continued commoditization of asset management, as more investors demanded advice that is in their best interest, more lawmakers advocated for change and markets grew more volatile, this year advisors recognized that they can’t win on performance alone.
Success came to RIAs and fee-based advisors who differentiated through holistic financial planning, unbiased advice and the competitive advantage of a unique customer experience. A more dynamic approach to fees—moving beyond the basic fee for AUM model, with fees for specific services, retainers, hourly fees and flat fees—helped advisors serve a diverse range of clients, across different generations and levels of net worth, offer more customized and holistic planning, and use new categories of products. Technology was an important driver of success as it continued to become more efficient, integrated and intuitive, creating new categories of products and services that never existed, expanding access in ways that were never expected, and providing greater transparency and simplicity.
Become the quarterback of your clients’ financial life, to ensure their long-term success—as well as your own. Offer holistic financial planning, including tax planning, estate planning, risk management and insurance planning. Become a subject matter expert, focused on a specific generation, profession or lifestyle. Combine high tech with the human touch to build a more efficient and more scalable practice, attract and retain more clients—and create a competitive edge. Re-tool your practice and keep costs low, passing savings back into clients’ portfolios—or straight into their pockets. But remember that even the most tech savvy investors continued to say that when working with an advisor, nothing can replace face-to-face.
Adapt—or Be Left Behind
As this year comes to an end and we look to the year ahead, be prepared to manage turbulent markets and alleviate clients’ top concerns by controlling what you can. Sit on the same side of the table as your clients with holistic financial planning. Keep costs low, approach the “Retirement Income Challenge” head-on and minimize the impact of taxes. Make technology your ally—not your adversary—as innovation advances exponentially and fees race to the bottom. Optimize outcomes for your clients and your firm with a focus on specialization and the competitive advantage of customer experience. Uncertainty was on the upswing and mixed signals set the course for 2019. And one thing is clear in the year ahead: you must adapt—or be left behind.