Look for competition to heat up as a year of talk turns into action. The regulators are coming. The robots are here. And the market may stop cooperating.
A year ago, nobody knew what was coming. Markets operated on instinct and inertia, while advisors tapped the brake on strategic plans while evaluating how the landscape would change.
We have clarity on taxes now. And we’ve gotten a better grip on the way the Trump administration operates. This is as “new normal” as it gets.
If last year was all about the industry adjusting to a new tide in Washington and a new mood on Main Street, the next 12 months will be all about capturing the opportunities while steering clear of the challenges.
It’s going to be a year of winners and losers. Those who maintain discipline and perspective can get back to work exploiting their competitive position. Those who’ve gotten used to passively riding the wave run the risk of getting crushed.
Let’s walk through a few of the big themes we’re likely to see play out in 2018.
The rising tide: taxes, regulatory relief
Last year animal spirits were enough to keep the economy and the markets moving fast enough to keep investors happy throughout the news cycle.
The numbers cut through the noise: even when political angst reached the boiling point, nobody felt nervous enough to sell the market down more than 4% to 5% before asset prices recovered.
Volatility remained deeply subdued. It’s clearly going to take a lot of truly bad news in the new year to rock sentiment now that Congress has followed through on taxes.
Corporate earnings growth was healthy to begin with. Reducing the amount of profit that goes to the IRS makes it easier for that trend to continue — or even accelerate.
While it’s always possible that a big blowout overseas or some hedge fund’s bad bets will feed back on Wall Street, it will probably feel more like a 1998-scale shudder than a 2000-style crash.
In the meantime, clients will feel a little richer, especially if their advisors guide their planning to unlock the power of the new tax rules and get cash flowing back into their accounts.
The threat here is the fear of missing out. Investors who caught the animal spirit last year are already rolling their eyes at a “mere” 20% return on the index funds. They want more.
They want the thrill of bitcoin.
If their advisors can’t give them that, they’ll be open to overtures from elsewhere. You and I know there’s no such thing as a sustainable free lunch in the market, but all it takes is a lucky couple of years to dazzle a lot of number-driven investors away from more time-tested approaches.
This year we’re going to see a lot of investment products emerge that will ultimately melt down by the end of the cycle. They’ll offer richer payouts and one way or another will entail higher levels of risk.
It’s a great time to educate your clients to see through the obvious holes in competitors’ marketing. Re-run your own projections. Remind them how rich the last year has made them and how safe they are if the bull market stops short.
After all, regulation in Washington is stalled or rolling back, so you’re the front-line defense your clients have now.
And speaking of those regulators, whatever your take on the fiduciary fracas happens to be, 2018 is a good year to play the hand you’ve chosen.
If you invested in transparency and the kind of compliance that would’ve satisfied the Obama DOL, brag about it. Use it as a mark of pride in your marketing materials.
Either way, the regulator doesn’t look like it’ll be coming after you for failing to live up to the rules that gave some people in the industry nightmares for the better part of a decade.
The SEC isn’t going to step up. The shadow has passed. Whatever you were holding in reserve to deal with regulatory overreach can now be redeployed in technology and tools that build your business instead.
Last year we weren’t sure. Now it’s pretty clear.
Of course this is a double-edged sword. The regulators might not go as hard on you, but they’re not going to shut down shaky competitors for you either. Position yourself as the investor’s friend.
Robots and consolidation
The nice thing about robot advisory platforms is that they’re entirely passive from the end user’s point of view. They ride the market. They don’t outperform.
In weak market environments, their big sales point is that they enforce discipline where a self-directed investor would run out of nerve. But in strong markets, their only advantages boil down to convenience and price.
You have access to all the tools the robots use. You can give your clients as convenient an experience as they want — and you can also provide a few frills to justify your fee, not to mention add real value by providing more sophisticated solutions.
Tax-sensitive portfolios are still a little beyond most robots. So are really personalized financial plans, access to alternative investment classes and, yes, the ability to outperform the market through smart allocations and asset selection.
Advisors who try to beat the robots at their own game are doomed. We’ll start seeing the fallout this year as weak and marginal players retire earlier than expected.
Their clients once embraced normal fees. They’ll do it again if they find an advisor who can communicate just how much value that money buys them.
And if you don’t feel like prospecting, there’s always the opportunity to buy a weakened rival at a discount. We’re going to see industry consolidation pick up later this year, once the robots start to hurt those marginal players.
After all, the industry isn’t getting any younger. Those who want to quit are selling out. I want you to be a buyer or at least a strategic partner for firms that don’t have your vision and need help.
Work with a rival. Hire a rival. Hold a joint client event with someone who might be a good fit. Robots don’t cooperate. And they don’t treat their prospects to lunch and conversation.
Same story if a Silicon Valley giant like Amazon tries to muscle in on the business. Be a partner. Get on the platform where the action is.
Don’t worry about the fees. Full-service wealth management survived the birth of discount brokerage and then the online trading boom. It will survive as the robots grind each other down to zero.
All of this applies up and down the food chain, of course. The regulatory environment gives the wirehouses and other big firms a green light to bolt on competitors at any price. LPL has apparently given up on selling itself. It’s going to be buying too.
The regional firms need to make up their minds which end of the deal they want to be on. Consolidation will start in the banks and work its way back to us.
The game is afoot. Be part of it.
New markets, bitcoin, scandal and froth
Throughout all of this, opportunities to differentiate through innovation are going to dominate the year. An advisor who wants an edge can explore new delivery systems, new products, whole new ways to think about the wealth management business.
You can compete around the world, limited only by regulatory requirements and your own ambition. We’ll see “cloud advisors” emerge in the new year. On the whole, they’ll do well.
You can step in to help other compliance-burdened professionals cut through the red tape. Legal recreational marijuana in California and other states is desperate for assistance on turning a cash-only business into something more modern and reasonable.
If nothing else, you’ve invested in your own compliance and can share it. Whatever you can share in 2018, find a way to make the business work and then do it. Turn cost centers into revenue centers. Excess capacity doesn’t make you money if you don’t.
I’m not a huge bitcoin fan personally. I think the bubble is going to rupture in some surprising ways — possibly manipulated by overseas actors, who knows? But if your clients are interested in crypto currency, it’s time to help them get in the game in the smartest way available.
Ignoring the boom was OK in 2017. But in 2018, you can’t go on pretending we still live in a 2016 world. If you don’t like what’s available, tell your clients why. Argue convincingly. And find them an ally if they insist — sending them to a friend who will reciprocate is a whole lot better than forcing them to go to an enemy.
And don’t become the news. We could see the wave of high-profile workplace harassment scandals reach Wall Street, where it never really left in the first place. That’s where a lot of those weakened exits are going to emerge.
Use the news when it opens up opportunities. But 2017 proved that chasing news in itself is a fool’s game that leads to paralysis. When everyone’s paralyzed, it’s OK. But when some are running and others are stuck, you want to be one of the runners.
I’m thinking Washington will lurch back into gridlock until after the November election. The Senate is tighter than ever now. Primary challenges will eat the House establishment alive. Nobody’s going to want to alienate the voting class.
Taxes are done. That’s what you’re running on this year. Let’s get moving!
