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The Changing Face of the Wealth Management Industry

Terry Mullen
Jan 10, 2017

If you have been in the wealth management and financial planning business for many years, you have already seen enormous changes. From rising and falling tax rates to different attitudes on saving and investing, you have seen it all come and go. 

The future promises to be just as exciting as the past, with new ways of doing business. New approaches to investment success and a whole new generation of clients. Here are just a few of the changes the wealth management industry will be dealing with for the foreseeable future.

The Shrinking Role of Pensions

You do not have to be a financial planning professional to recognize that the face of retirement is changing rapidly, or that the most significant shift has been away from traditional pensions and toward 401(k) plans and other defined contribution arrangements. While the majority of American companies used to set aside money for the future retirement of their workers, a shrinking number of firms are still willing to make that long-term commitment.

As recently as 1980, fully 60% of American workers were covered by traditional pensions1, and less than 20% relied on defined contribution plans alone to prepare for retirement. By 2006, the retirement planning board had completely flipped, with just 10% of American workers still having access to a traditional defined benefit pension plan.

Just as startlingly, fully two-thirds of American workers were entirely dependent on defined contribution plans like 401(k) and 403(b) programs. The retirement planning landscape has changed enormously in just under three decades, and the trend away from pensions and toward 401(k) plans continues to accelerate.

In some ways, it is no surprise that so few 1980-era workers relied on defined contribution plans to make ends meet in retirement. Until the 401(k) plan was created in 1978, such plans were almost nonexistent. What is clear, however, is that the decline of traditional pensions has continued since then, and in a few short years the defined benefit approach to retirement may be all but gone.

The shift from traditional pensions to defined contribution programs like 401(k) plans has created both challenges and opportunities for financial planning professionals. The fact that two-thirds of American workers are now wholly responsible for their retirement has created enormous opportunities for financial advisors and the owners of wealth management firms. While some employees are confident and knowledgeable enough to make their investment decisions, far more are likely to seek advice and guidance, and that is good news for financial professionals and the owners of wealth management firms.

The shift from defined benefit to defined contribution has also created challenges for the owners of financial planning firms. From increases in workload to increases in industry regulations, these challenges are just as enormous as the opportunities, and they have changed the way many industry professionals do business.

The Caution of the Next Generation

Every generation puts its unique twist on saving and investing, but the Millennial generation has taken things to a whole new extreme. So far, Millennials are taking a far different approach to investing for the future than their baby boomer elders, and that is helping to change the face of wealth management.

Compared to their Baby Boomer peers, those in the Millennial generation hold twice as much in cash and cash equivalents2. Even though they have a much longer time horizon, and a far greater ability to ride out the inevitable bear markets, they are still extremely cautious about the stock market.

Given the circumstances of their birth and the experiences of their generation, this stock market reticence is easy to understand. Keep in mind that many Millennials came of age just as the Great Recession was gaining steam. They watched the investments of their parents and grandparents plummet in value, the equity in their family homes decline sharply, and the risk of foreclosure and disruption in their lives rise just as sharply.

Many in the Millennial generation were personally affected by the shifting sands of the financial industry, and personally disgusted by what they saw as unwarranted bailouts and special treatment for the bankers who had brought the economy to its needs. Given these circumstances, it is no wonder Millennials view the stock market, and the financial planning industry, with some skepticism. 

The reluctance of Millennials to invest has created some real challenges for the financial planning and wealth management industry, especially since financial professionals will be relying on this generation for their future growth prospects. The owners of some financial planning and wealth management firms have reached out to Millennials via social media outlets in an attempt to reach them where they live.

Others have tried to reach the next generation through their parents, encouraging their offspring to set up financial plans and even gifting them with financial planning sessions. The current rebound in the stock market and stabilization in the housing market may encourage more Millennials to join the investment class, but for now, their future as wealth management clients is very much up in the air.

The Retirement of the Baby Boomers

While the cautious attitude of the Millennial generation has created problems for financial planning professionals, so has the retirement of their Baby Boomer peers. The sheer size of the Baby Boomer generation has created challenges for wealth management firms, with spikes in demand for their services and a huge need for client education.

While some in the Baby Boomer generation are well prepared for retirement, others were caught flat-footed, often by circumstances beyond their control. Older workers were hit particularly hard by the layoffs of the Great Recession, and many were unable to find good paying jobs even when the economy recovered a few years back. 

As a result, many Baby Boomer clients have had to tap their nest eggs earlier than they thought, and they rely on wealth management firms to help them make their savings last. Even seemingly well-prepared Baby Boomers worry about running out of money, and they are increasingly relying on their financial advisors and wealth management firms to guide them through the transition from dedicated saver to new retiree.

The Shift to Passive Investing

The shift away from actively managed mutual funds and individual stock picking has also created both challenges and opportunities for those in the wealth management industry. While actively managed mutual funds and other investments are still in the majority3, the gap is shrinking with every passing year.

Many investors have embraced the passive investing concept, with its smaller fees, higher returns, and enhanced simplicity. That shift has left many in the wealth management industry looking for new ways to differentiate themselves, and some have had greater success than others.

There are many ways successful wealth management firms have differentiated themselves and responded to the move toward index funds and ETFs. Some have shifted their operations to a fee-only basis, accepting fees only for investment advice and giving clients access to lower cost institutional-class index funds. Others have placed a stronger focus on stock picking and market timing, in an attempt to help their clients sidestep the next bear market. Still, others have doubled down on client service, providing top quality advice and guidance and helping future retirees enter their golden years fully prepared. No matter which path they take, the owners of those wealth management firms are responding to the growing shift toward passive investing.

The Uncertain Role of Regulation and Tax Changes

The future is always uncertain, but the present moment seems more uncertain than most. Most wealth management firms are busy getting ready for the full implementation of the Department of Labor fiduciary rule, slated to take effect in April of 2017. At the same time, some in the industry predict that the rule will be changed, or even repealed altogether, by the incoming Trump administration and the new Republican-led Congress.

The future of taxation is also very much in doubt, although the majority of experts expect rates to go down, especially for the highest earners. The owners of wealth management firms are already seeing the effects of future tax speculation, with clients putting off stock sales in an attempt to shift capital gains to future tax years - and hopefully a lower tax rate. 

Only time will tell what the future holds for taxes and regulation, but wealth management firms will still need to prepare for the changes. From the possibility of lower taxes to changes in pending regulation, the future promises to be a very interesting place for wealth managers and other financial professionals. 

Click here for more articles related to: Practice Management

1 economix.blogs.nytimes.com/2009/09/03/pensions-1980-vs-today/?_r=0

2 businessinsider.com/millennials-cautious-investors-2016-5

3 etf.com/sections/features/3743-index-funds-a-etfs-gain-market-share.html


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