Why the traditional adviser may soon be obsolete
Exchange-traded funds and fintech are shaking up sector, Martin Pelletier writes.
The wealth management industry is transforming at a pace that many in the business may be underestimating at their own peril, particularly given that the growth of exchange-trade funds has commoditized the investment process and also democratized it, meaning fees are rapidly falling with the expanding supply of financial products.
But this transformation is no longer just a story of passive versus active, as Vanguard has expanded into the active mutual fund space by providing access to managers that were once only available to either institutional investors or at significantly higher management fees. The investment giant is now taking this a step further by moving into the private-equity market through its recently announced partnership with Harbourvest Partners.
Put all this together with the proliferation of fintech solutions that has allowed asset allocation solutions to scale out and the traditional value proposition of the stock-picking adviser will very soon become obsolete.
For example, it was reported this month that the Universities Superannuation Scheme, one of the biggest pension plans in the United Kingdom whose investment arm oversees assets worth about 75 billion pounds, is closing its entire internal developed-market equities team and will instead focus on a more thematic strategy.
For those wondering how investment advisers can adapt, Mckinsey & Co. provides some excellent insight in its January report: On the cusp of change: North America wealth management in 2030.
The report highlights that advisers during the next decade will have to shift their focus from being investment managers to being “more like ‘Integrated life/wealth coaches’ who advise clients on investments, banking, health care, protection, taxes, estate, and financial wellness needs more broadly.” By 2030, Mckinsey estimates that at least 80 per cent of advisers will offer goals-based advice, thus “shifting away from risk-based portfolio construction to outcome-based planning across multiple dimensions.”
After spending the greater part of the past year and a half studying the registered investment adviser (RIA) model in the United States, we couldn’t agree more. Unfortunately, Canada has a lot of catching up to do given that a third of our advisers still offer commission-based stock-picking services.
That said, there could be a huge first mover advantage for those willing to adapt to this new model, especially since only 39 per cent of affluent consumers have a written financial plan.
A great first step is to deploy the same approach as pension plans and other institutions and outsource the investment process to expert asset allocators and outside managers, including the use of both active and passive pooled strategies.
In the U.S., there are plenty of turnkey asset management programs, or TAMPS, that RIAS can utilize, while in Canada we’re in the early stages of this and using a scaled-down version often termed unified managed accounts.
It’s equally important for the adviser to integrate their investment process into the client’s financial plan. Older advisers — and Mckinsey reports that 75 per cent of advisers are older than 44 compared with 66 per cent a decade ago — should then consider a succession plan for their practice, perhaps while transforming to this new planning lead model, complemented by some new technological solutions.
As in other sectors, disruption ultimately benefits the end consumer. Clients get a custom-built portfolio designed to manage risk while achieving specific goals and objectives derived through an advanced planning process. Soon, this expectation will become the norm, so advisers can either choose to be disrupted themselves or benefit from it like their clients.
Financial Post
Martin Pelletier, CFA, is a portfolio manager and OCIO at
Trivest Wealth Counsel Ltd., a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.