Advisor Authority

Unexpected, Unprecedented and Undeniable

For the advisory industry, seismic shifts and transformative trends ahead

by Craig Hawley

Mr. Hawley is a leader of Nationwide’s advisory solutions business. Visit

For RIAs, fee-based advisors and their clients, 2017 has been a year of the unexpected and the unprecedented. Over the past 12 months, powerful trends inside and outside the advisory industry have been shaping the products you use, the portfolios you build, and the very nature of financial advice itself.

In 2018, many of these trends will gain even greater momentum, and new forces will exert greater influence. Be prepared for a massive shift in the advisor market, presenting challenges – and opportunities – to transform your practice in the year ahead.

2017: A Year in Review

The year started with all eyes on the nation’s capital, and lawmakers have continued to dominate the headlines. Washington politics was rated among the top three trends impacting investing strategies in 2017, according to our third annual Advisor Authority study of roughly 1,600 RIAs, fee-based advisors and individual investors nationwide.

At a time when politics were anything but usual, gridlock in Washington became the new volatility, taxes remained top of mind, and both advisors and investors made it clear that a fiduciary standard matters – regardless of the status of the DOL Rule.

In 2017, the ongoing Bull Market passed a major milestone, becoming the second longest on record. Over the past 12 months, the S&P 500 and other U.S. markets have roared, performance has been strong, and account values have continued to rise, aided by promises of tax cuts, and the prospects of greater de-regulation and increased infrastructure spending. Volatility has been low, aided by ultra-low interest rates and greater liquidity at a time of solid economic growth. Today, those who bought and held, and didn’t panic during the financial crisis, have recovered nicely.

But despite the market’s unprecedented highs, advisors have felt the pressure of three converging trends in 2017. First, the commoditization of financial services continues. Few things illustrate this better than the growing use of robo-advice by an increasing number of advisors, including the most successful, as well as DIY investors at every level. Second, fee compression creates downward pressure as low-cost gains greater favor. This is seen broadly across the entire industry, and most notably in the explosive growth of ETFs. Third, consolidation is reshaping the industry. As scale becomes increasingly important, the biggest firms swallow the competition – and the largest firms have become even larger.

2018: Outlook for the Year Ahead

The cost of mainstream investment products will continue the “Race to the Bottom” in 2018. As passive index funds and ETFs will continue to dominate, their prevalence will pressure all manufacturers to develop simple, low-cost, transparent products. Likewise, larger firms are poised to continue minimizing prices by achieving greater scale, and this will pressure advisors of all sizes and every level to re-engineer their practice in an effort to compete.

In the face of ongoing commoditization, consolidation, fee-compression and low-cost products, how do you win? Customer experience is a key competitive advantage that is essential for advisors to attract and retain satisfied clients, is fundamental for the growth and health of a profitable practice – and is expected to increase in importance, according to Advisor Authority. More than 9 in 10 RIAs and fee-based advisors – including the most successful who earn more and manage more AUM – say that the customer experience is important to their value proposition. Lead with the customer experience by putting clients’ best interest first, providing holistic planning, customized solutions, and one-on-one relationships built on trust as you take on the following trends set to shape the advisory industry in 2018.

Fee Compression Drives Greater Specialization

As we have seen in recent years, you can’t win on performance alone. To justify their fees, advisors must differentiate themselves. It is critical to take on the role of trusted counsellor, who protects clients from emotional responses during challenging times and transitions. Specialize in serving a specific type of client – and do the work to know their needs better than these clients know themselves. And as studies have shown, while clients say that one-on-one relationships and trust are top priorities, understand that they also demand better risk-adjusted, tax-adjusted, fee-adjusted returns.

In 2017, the ongoing Bull Market passed a major milestone, becoming the second longest on record

Consolidation Drives Greater Opportunity
Roll-ups will continue to advance along the acquisition trail, targeting large- to medium-sized firms first, to achieve greater scale, tap into greater resources, and maximize ROI. This leaves many smaller firms to carve out a niche of their own. And in a relationship-driven business, those that provide a unique customer experience have the best chance to survive. Year-over-year, the most successful advisors are optimistic about the impact of M&A. Buying a firm gives then access to greater resources. Selling a firm allows them to monetize the business they’ve built.

Platform Innovation Shapes Fintech
In the year ahead, the most important innovations in fintech will be less about one particular product – and more about an integrated platform. Consolidating data from multiple sources, will help advisors – and their clients – to monitor changing circumstances, manage holistically, and stay on track with goals. While platform innovation has the power to transform every aspect of your practice, from the front-end to the back office, and make the entire investing, advising and planning process easier, remember that nothing can replace the importance of the one-on-one relationship with your clients.

The AI Revolution Takes Off

Once the domain of big institutions with deep pockets, Artificial Intelligence has become more accessible for advisors, and we’re witnessing the start of an AI Revolution. Artificial Intelligence is the solution to capture and process massive amounts of big data, to gain an edge over the competition by gaining insights into your clients’ behavior and their most important needs. Leveraging AI can increase the human connection with clients, enhance the advisor/client relationship, and help you identify critical moments when they need your help most. It allows you to create the most competitive customer experience by developing holistic plans, customized solutions, and individualized white glove service.

Smart Beta attempts to fill that void between passive and active
Markets have been high, volatility has been low, and passive strategies have prevailed. In recent years, active mutual funds have lost considerable market share to index funds and to ETFs. But as experts warn of an inevitable correction, more advisors are considering Smart Beta ETFs. Smart Beta can bridge the divide between passive and active investing strategies, looking at the market through a different lens, and identifying the most compelling factors to potentially outperform a benchmark while driving cost down.

Tax Reform Creates Uncertainty

The last three decades show how difficult it is to pass tax reform in Washington. Facing a high-level framework for reform, without much detail about the ultimate impact, advisors and their clients need to stay the course, remain flexible, and collaborate with tax experts to stay informed. As we have seen with the most recent proposals, the tax man giveth – and the tax man taketh away.

Some provisions may benefit HNW clients, such as doubling the estate tax exemption, doubling the gift tax exemption and eliminating the Alternative Minimum Tax. Others may have a negative impact, such as eliminating state tax deductions. Waiting may be the best strategy. At worst, the code remains unchanged in 2018. At best, there will be some provisions that will benefit your HNW clients. The only thing certain is uncertainty.

A Unified Fiduciary Standard Creates Clarity

In 2018, consensus will continue to grow for a uniform standard of care. And the pressure will grow for the SEC to lead the effort. Why maintain a different standard for non-qualified assets versus qualified assets? Why support the administrative burdens of different standards within all 50 states, when a single Federal standard can apply across them all? A uniform standard will eliminate complexity and confusion for consumers, for advisors and for the industry overall. ◊