Industry AUM Hits A Wall As Investors Get Frustrated: Liberate Yourself From Market Moods

TD Ameritrade says leading advisors captured a lot of clients last year but asset growth keeps lagging. There’s a better way to scale than following Wall Street’s random walk.

After the worst year in a decade, investors are having a hard time recovering their nerve and advisors whose value proposition still rises and falls with the market tide are feeling the pressure.

People are passing the latest growth numbers from TD Ameritrade around. They look a lot like retirement portfolios: far from apocalyptic but far from great.

What’s interesting is that TDA blames the market for preventing these accounts from expanding at their usual rate. Admittedly, two corrections in the same calendar year is tough, but I’m tired of using “the market” as an excuse.

That’s why we’re so passionate about exploring ways advisors who want to succeed can uncouple themselves from the market whenever they can. Offer other solutions. Outsource the portfolio and focus on relationships.

Our guide to that process is HERE for free download. Here, I want to drill down into what market-independent advisory practices can look like and how they play into the TDA numbers.

More than AUM

The advisory industry evolved around the market. If you invested people’s money in the right stocks and bonds, they’d do well and your value proposition was obvious. You justified your fee.

Over time, additional services and solutions like planning and trusts have gotten bundled into that value proposition, but until recently it never stopped being all about the market.

Advisors portrayed themselves as constantly staring at trading screens. Office TVs are tuned to the market channels, even if the sound is turned off.

But when you and your reputation are tied to the market, you become the market’s prisoner. If your results weaken relative to the market, there’s less value to communicate.

And if you and the market have a bad year in absolute terms, clients pull away. We saw that in 2018, when the best and most ironclad strategies only delivered a few percentage points of income.

Even now, the recent micro-correction shows that investor patience has eroded. Your clients may be serene, which is great. Believe me, other high-net-worth families are frustrated and even a little frazzled.

That’s the story TDA sees, too. Clients keep coming in. The average RIA firm widened its book by 7.5% last year, which is about on track with what we saw in 2017.

However, these are smaller investors or at least smaller allocations. New accounts are shrinking and as a result AUM growth lags client acquisition by 1.6%.

According to the established industry theory, a few good years in the market will generate additional wealth from appreciation and accumulated dividends, not to mention any further capital these clients care to place.

I’m not so sure that rising tide will keep lifting all the boats. A lot of mature accounts are somewhere between the distribution stage and a generational transfer.

Those accounts aren’t aggressively growing. They’re shrinking. Or at least, they’re being drawn down faster than the market can replenish in a bad year.

And the new accounts coming in to replace them are starting small. Nurturing them for longer time periods can deliver huge strategic rewards, but how do you keep them away from the robos in the meantime?

Control what you can

What I’m seeing in the TDA numbers is a world where fees no longer scale with market footprint. They noted that RIA revenue jumped 14% last year, double the rate of new client adds and nearly triple AUM gains.

That new money wasn’t being charged on a pure AUM basis. And since it roughly kept up with per-producer revenue, it tells me that it reflects a shift in the way these firms are allocating human resources.

Junior advisors coming to firms today aren’t handling all the details on simpler portfolios and then scaling up. They’re really there to manage relationships and work the prospect list

They aren’t picking stocks. In a way it’s a reversion to the old brokerage system where trainees didn’t choose the securities they’d be selling on any given day. It’s why they called it the sell side.

When there’s an ulterior motive to sell those particular stocks, client outcomes can suffer. But now that a basic portfolio can be constructed from off-the-shelf parts and customized as the client desires, the junior advisors no longer need to know why one stock or fund makes the cut and another doesn’t.

The central authority has already signed off on every selection. Sometimes that authority is internal. In other scenarios, the entire role gets handed over to outside managers.

Those managers can perform better or worse than the market as a whole in any given time period. It’s their responsibility. If their asset class or the market hits a bump, they’re the ones who need to explain and beg forgiveness.

Meanwhile the advisors on the ground are out there working with the people who ultimately pay the bills. They’re not competing directly with Goldman Sachs or any other asset manager. They’re not even evaluating themselves on the same basis.

An advisor who is focused on the client side is free to schedule meetings during the market day. Fed decisions come and go, taking the yield curve up or down but sticking to a broad long-term trajectory.

And at the end of the year, your clients’ portfolios might roughly match the market or at best outperform a little on the downside. You’re not being judged on that basis any more.

You’re being judged on how well that portfolio matches the client’s tolerance and long-term needs. You’re being judged as a person the client trusts to give them the best experience, wherever financial life leads.

No robot can do that. I come back to the TDA numbers. These new accounts feel like the kinds of investor who could just as easily look to a robot for portfolio strategy, but doesn’t.

These are investors who want a human in their corner. And they’re paying a premium for the privilege.

Those are the clients you want. If you haven’t done it already, take your eye off the trading screen and download our guide to outsourcing the portfolio. You’ll have more time to work with people. Maybe you’ll even get some sun.


More Articles