- Technology and the Millennial Generation
- Advisor Education and Development
- Investment Costs
- Planning Techniques
- Improved Regulation
- The Career – Industry or Profession?
Decades ago, the technology that advisors had at their disposal was aimed at simply selling products since the industry was structured around commissions and sales revenue. Technology has been disrupting industries for the better across the board and financial services is no different. Perhaps no generation understands the importance of integrating technology more than millennials. Will technology replace today’s human advisors? America’s youngest generation is often projected as having little interest in human interaction and would rather work with a computer versus a human. Despite a common framing, “Millennials” just may be the most socially connected generation yet. Despite some negative effects on society, we cannot deny that social media has allowed civilization to become more connected with each other and the youngest generation has embraced this human interaction. A recent study found that today’s group of tech savvy millennials is more likely to engage working with a financial advisor than prior generations. Millennials are the future of wealth management and this generation is more open to working with a financial advisor than prior generations in the past.
The next wave of financial planners must be tuned into this connection between America’s rising generation, their value of human interaction and how technology can streamline this process. In prior discussions, we’ve touched on how much data is readily at our fingertips. Social media is the obvious driver behind these new channels of human interaction and advisory firms have been rolling out ways to connect and communicate with their client base on multiple levels. The below chart depicts some quantitative measures of the online interactions between clients and their advisors.
Perhaps the biggest change coming from the FinTech world has been the fact that size no longer provides a competitive advantage. Smaller advisory firms can now provide services to their clients that were once reserved for the largest players in the industry. Financial services industry expert Michael Kitces provides an updated “Financial AdvisorTech Solutions Map” on his website helping advisors visualize the breadth of options available to help them service clients. Below is a screenshot of this map; clearly, the FinTech industry is alive and well…
Advisor Education & Development:
Looking back in time, in order to make a career in financial services, you had to sell…..period. If you didn’t meet quotas at the older brokerage houses you wouldn’t cut it. Applicable knowledge and skillset to help clients was not the primary focus, bringing in firm revenue by selling products and securities was. Imagine if dentists focused on getting patients in the chair before learning how to drill on a cavity……yeah…no thanks!
Fortunately, over the years firms have created career development programs to help younger advisors learn about planning concepts first, then providing advice to clients and creating solutions as their skillsets progress. In 1987, the CFP Board registered 25 institutions to offer financial planning education programs to further educate young advisors1. In 2017, the CFP Board celebrated the milestone of reaching 80,000 CFP professionals in the U.S.
As of December 31, 2020, the milestones include2:
- The number of female CFP® professionals increased to an all-time high of 20,633 – 23.3% of all CFP® professionals — reflecting growth of 3.1% since 2019.
- The number of Black and Latino CFP® professionals increased in 2020 to 3,688 – a percentage growth of 12.6% over 2019’s number of 3,274. This increase is nearly five times the growth rate of all CFP® professionals.
- Black CFP® professionals – 1,493 (1.68% of CFP® professionals)
- Latino CFP® professionals – 2,170 (2.46% of CFP® professionals)
- Biracial Black and Latino – 25 (.028% of CFP® professionals)
In 2000, the first Ph.D. program in financial planning emerged at Texas Tech University. The University of Texas – Austin recently rolled out their Financial Planning Certificate Program. Below is a program overview directly from the UT Austin website:
Programs such as these are allowing young college students the opportunity to prepare themselves for a career in financial planning. The pool of talented young graduates with a fundamental understanding of basic financial planning concepts has never been more robust. The early stages of a financial planners career can now focus on building knowledge and skill compared to the past where sales figures were the only focus.
Investment Vehicles & Costs:
Gone are the days of having to call up your broker to buy or sell stock in your account. Decades ago, investors only had a few options with regards to tapping into the capital markets. The first publicly available index fund was introduced in 1975 by a fellow named John “Jack” Bogle. Mutual funds have been around for decades in the U.S. but it wasn’t until 1993 when they were joined by exchange traded funds (ETFs). Over recent years, the introduction of passive investment vehicles, increased competition, and the lack of outperformance from traditional Wall Street money managers has pressured firms to lower their fees year after year. A recent article from Morningstar noted that the average expense ratio paid by investors has fallen by more than 50% since 20003.
“Jack did more for American investors as a whole than any individual I’ve known. A lot of Wall Street is devoted to charging a lot for nothing. He charged nothing to accomplish a huge amount.”
– Warren Buffett, 2019 CNBC Interview
Trading costs are also falling and have been ever since May Day back in 1975 when the SEC unfixed commissions on the NYSE.
In 1975, for instance, brokerage commissions accounted for nearly 50 percent of all Wall Street revenues; by the end of 1984, the Securities Industry Association estimates that this had fallen to less than 23 percent4.
Over the decades, lower costs and easier access via the internet have given American investors the ability to partake in the wealth creation of capital markets.
Along with declining overall transaction costs and management fees, FINRA has provided investors with a publicly available tool that aids in analyzing fund management costs over time. The tool is called Fund Analyzer and can be located here.
There is clearly a need for advisors to offer holistic wealth management to address the anxieties of everyday U.S. citizens. For decades, brokers were simply relied upon for investment related advice. As competition grew over time, advisors began to offer comprehensive planning for their clients ranging from tax coordination, estate planning oversight, retirement cash flow analysis, education funding, and insurance reviews amongst many various related topics.
Serving a Need:
Today’s advisors are more equipped with the knowledge to not only provide investment advice on building and managing portfolios, they must also possess expertise in other areas such as taxation, estate planning, insurance, college funding, and retirement cash flow planning. Below are some images from planning software we utilize at Silicon Hills Wealth called eMoney. This software allows us to dissect a clients financial planning profile on an intricate level. Advisors as using tools like cash flow analysis, Monte Carlo analysis, and estate flow charts to help answer client’s questions regarding their future financial outcomes.
Cash Flow Reports:
Estate Flow Chart:
Monte Carlo Analysis:
Since the Great Financial Crisis, regulators have clamped down on Wall Street and its many avenues of revenue generation including wealth management. The adoption of the fiduciary duty when working with clients is becoming more and more common in today’s environment. Michael Kitces has a great visual from a 2020 writing where he provides a summary of the 3 components of the Fiduciary Duty that the CFP Board applies to licensed professionals.
Investors are beginning to use tools such as FINRA BrokerCheck to perform due diligence on their advisors.
An Industry or a Profession:
An industry provides a specific product, service or engages in a specific business activity; whereas a profession requires specific knowledge / skill sets, designations / licenses, and job titles which allows society to distinguish them apart from other professionals. There are many types of attorneys; however, we know that they have all experienced similar academic coursework and have been upheld to specific standards such as passing the Bar exam and being licensed by the American Bar Association within the states they practice in.
Unfortunately, the financial services industry has yet to require those that hold themselves out as advisors to pass a specific exam such as the CFP exam or go through a particular education program prior to calling themselves an advisor to the open public. The industry is evolving as more clients are screening out advisors without these designations and backgrounds. Below is a timeline showing the history of the CFP Board as it grows and transforms the industry into a profession5:
The profession of financial planning has come a long way throughout the years. Integrations with technology, advancement in investment options, lower overall costs for market access, improved regulation, a higher degree of services offered to clients and more focused / structured training for young professionals have helped push the profession in the right direction. We are confident that in the years to come as America experiences the greatest wealth transfer in her history, financial planning will be at the forefront of America’s vital professions.
4 The New York Times, Is Wall Street Ready for Mayday 2?, Leslie Wayne – April 28,1985
5 The History of Financial Planning: The Transformation of Financial Services By E. Denby Brandon, JR. and H. Oliver Welch Copyright © 2009 by E. Denby Brandon, Jr. and H. Oliver Welch
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