Advisors Are Facing A Perfect Storm

Mar. 08, 2017 8:32 PM ET11 Comments
John Lohr profile picture
John Lohr


  • Here are six developments in the investment management world that will dramatically change the Advisor business model.
  • Fees and Fiduciary, along with new investment platforms and investor sentiment, will facilitate change in the industry.
  • Some of the developments are dramatic, catching a lot of attention and requiring Advisors to pay serious attention.

There is a confluence of events happening in the Advisory world that are intentionally disruptive to the traditional Investment advisory business model. Independently and together, they portend a change in the business model going forward. The days of the traditional financial representative hanging an investment advisory shingle out, giving a client a 10-question questionnaire, putting the client in a couple of mutual funds and sitting back and collecting 1% are going, going... gone. I give it two years. I also say "good riddance."

So, what's happening? Let's start with the heavy lifting.

1) Scott MacKillop. Years ago I interviewed him for my radio show, "Legends." The 40-year veteran of the investment management wars is still cementing his Legend status. His new investment management firm, Denver-based First Ascent Asset Management, has made some game-changing business decisions. Start with outsourcing all the back office functions: reporting, billing, account opening, on-boarding. Add in low-cost service with low-cost portfolios. Those portfolios: 10 models that can be blended in sleeves. They are rebalanced annually.

But, the BIG attraction: For all asset management services they charge $500 flat, regardless of the size of the assets managed. The rationale? Simple. Scott says, "Why should those larger accounts pay more than the smaller ones, when the costs are approximately the same? I've always believed that most clients-and most advisors-are paying too much for portfolio management services." Try this one more time, $500 flat.

Designed as a service to be used by Advisors who are independent from the firm (First Ascent has no Advisors), it is beyond efficient on both sides. "Advisors can go on our website day or night, run proposals and open accounts paperless-without having to interact with us," says MacKillop. The client even signs online. "It's a totally automated client on-boarding and proposal generation process." The benefit to Advisors? Why pay for a back office operation? Can you envision an Advisor-Client meeting at 10:00 pm ending with signed agreements?

Sound like a Robo? No, Scott admits it has some of the automatic, paperless benefits of a Robo, but real First Ascent humans - the investment committee - still make the investment decisions, and there is an independent Advisor serving the client.

2) Len Reinhart. Another Legend and former colleague at EF Hutton and Lockwood is orchestrating a re-configured focus at Wealthcare. Quoting former Sheraton President Joe Plumeri, Len says, "Cost is only an issue in the absence of value." Reinhart addresses the challenge of how to add value in an environment where active management pretty much in any wrapper has underperformed passive vehicles. "I think the performance game has run its course for baby boomers who are leaving the wealth accumulation phase. They now are basically looking for defined benefit type investing which our goals driven process can provide."

At the cornerstone of the Wealthcare process is aspirational financial planning. Wealthcare believes helping a client prioritize their goals sounds simple, but it may be the most important thing an Advisor can do for their clients. Says Reinhart, "Once the goals are prioritized and quantified the rest of the process falls in place. Cost-effective investing and low fees remain part of the value proposition, but not the center of it." He concludes, "If the Advisor has the right tools (Wealthcare owns the patented goals-based planning tool, Financeware), the financial life-guidance and goals-driven investing process not only brings value to the client, but becomes a scalable business model for the advisor."

Now, the lighter lifting:

3) The cost of online trading is dropping (through the floor). The Schwab (SCHW) ad with an Advisor meeting clients and trying to come up with an answer about transaction costs and "guarantees" while the Schwab $4.95 per trade banner waves behind him is an attention-getting ad. Fidelity is also at $4.95, TD Ameritrade (TD) at $6.95, E*TRADE (ETFC) $6.95 and Scottrade at $7. Merrill Edge© (BAC) Online: $6.95. So what, you say? They can't compete. Well, all these firms have investor-friendly tools, calculators, investment research and even recommendations for the online Do It Yourself. Not your market, the DIY investor? They're all small-time, low investible asset clients? Maybe some, but do not think for one minute that the million-dollar investor doesn't use the guys. See # 4, below.

4) There is a trend among investors who have accumulated more that $1.5 million in assets by their 50s. According to a Gallup poll, only 39% of investors prefer to get their investment advice from a personal Advisor. The biggest objections to using Advisors are underperformance and high fees. Part of the prevailing opinion comes for this (unnamed) investor, "If it's true that long term market returns are relatively predictable and that there is no value added by active management, it makes no sense to give RIAs a rising income that's turbocharged by the (passive) compounding of inflation and market returns." Advisors can beat their head against the wall trying to convince DIY investors that their investment process or service is worth it, but they have no chance. This is behavioral science at work.

One critical element here is that many of the Advisors in search of added value get so caught up in their own investment process that they just don't listen to investors. With a more financially literate investor, that will change. And investors are getting more savvy. Which brings us to #5.

5) The unintended positive impact of the DOL's convoluted "Fiduciary Rule" was that it raised the attention of anyone who read about it. More and more investors understand the word "Fiduciary." At least investors know that they, as clients, have an interest at stake, and many are now aware that their best interest is what should control the investment decision process. Some investors will demand best interest, and those who are in the financial world to create huge income for themselves at any cost will have poor pickings.

That DOL Rule, by the way, it is gone as we knew it. I remember Investment News in May, 2016 had an article headlined: "The DOL fiduciary rule will forever change financial advice..." No it did not, and it won't. It was more of the same. If we see anything from the DOL (or the SEC, for that matter), it will be so watered down by big Financial lobbying, that it will remain meaningless. Except that those product pushers will have slimmer pickings.

Best interest Advisors will have a HUGE advantage over the brokerage world. Maybe some don't see that advantage as an opportunity.

That will change once things quiet down.

6) Robos: Digital advisory services that use computer algorithms to select stocks and other investments for people based on the information they provide about their risk tolerance and goals are currently used by about 3% of investors. However, 26% of investors, according to that same Gallup poll, use digital sources. Do investors want investment advice untouched by human hands? Maybe those who never go outside and are glued to Facebook, but it's not for everybody.

Some of the largest Robos have introduced a human element, kind of like a concierge service. Betterment, for instance, charges .25% for its Robo investment advice, but also offers access to human Advisors for an additional fee. It's .40% for an annual call with a licensed Advisor (annual!) It's .50% for unlimited calls. Finally, there's an arrangement with CFPs from the Financial Planning Association for some type of personalized advice. OK, so, none of those hybrid arrangements sounds like a great deal. Still, it's the concept that bears watching.

Quick Conclusion

Going forward, the high fee Financial Advisor that sells high-cost products to line her/his own pockets is a penguin - it don't fly. Put this in your pocket, the best interest of the client is not just lip service; it's a way of life.

As Robert Zimmerman (Bob Dylan) said, "The times, they are a-changin'". Move over.


John Lohr

This article was written by

John Lohr profile picture
JOHN LOHR John is widely regarded as a top legal expert on fiduciary responsibility relating to the investment management profession, John is a founding father of the investment management consultant's profession and has personally trained over 100,000 financial professionals. Additionally, he has counseled major Wall Street firms and associations in various aspects of managed account programs, and has trained and consulted to firms on corporate legal, compliance, fiduciary responsibilities and business development issues specific to the investment management industry. A former Banker and teacher and college adjunct, John started his securities representation in 1983, joining EF Hutton in 1987 where he served as the director of Portfolio Management Programs and General Counsel of the Consulting Group. Later, he started his own law firm, specializing in employee benefit, ERISA law and securities law. In 1995, he co-founded The Lockwood Group of companies, where he served as Chief General Counsel and Corporate Secretary, as well as President of Lockwood Financial Services, Inc. Upon retiring from Lockwood in 2002, John devoted his efforts to Howling Wolf Enterprises, a training company and a publisher of books and articles on Investment and Financial issues as well as fiction. In 2011 with partners known in the Investment management business he founded The Learning Network, whose mission is to improve Financial Literacy globally for financial professionals and investors. His current mission is The Ethical Treatment of Somebody Else’s Money, found at In 2010 the Money Management Institute designated him an "architect of the managed solutions industry" awarding him their Pioneer award for Lifetime Achievement in Wealth Management.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I render legal and compliance advice to Wealthcare. All information herein is obtained from personal sources, including interviews, and is not to be construed as a recommendation or endorsement of any methodology described.

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