These 4 trends will form the future of financial advisement.

The world of finance is constantly changing, and financial advisors must change with it. Demographics change. Market trends change. Technology changes. And all of those impact how advisors conduct business.

On top of all this, take into account the fact that we’re in the middle of a pandemic that no one was prepared for – one that has caused widespread economic shutdowns across the globe and the most severe market crash we’ve seen in recent history.

Suffice it to say, the financial advisory business looks different than it did even a year ago, and its future looks even different still. 

Here are 4 of the major trends we’re watching shape the future of wealth management as of 2020.


Fees are shrinking

In the wake of unprecedented market volatility caused by COVID-19, many financial advisors have been working overtime in an effort to pivot strategies and stave off disaster for their clients. The problem is that they’re not getting paid for the increased workload. In fact, for some, the opposite is happening.

Back in the day, financial advisors would often charge a commission on trades made for clients, but these days most advisors operate using a fee-based model. In other words, they get paid a transaction fee, as well as a small percentage (usually 1-2%) of their clients’ portfolio gains. In other words, their bottom lines are directly correlated to how much their clients make – or lose.

And if you’re a financial advisor who’s been using this fee structure during COVID-19, your clients might still not have fully recovered from the market crash – not to mention, any future negative headlines about the virus could cause further volatility.

As a result, it’s possible we may start seeing more and more financial advisors migrate to a hybrid model (a combination of fees and commission). Doing so would allow them to work with smaller clients and still turn a profit.

Also, wealth management firms are likely to start tailoring their current services, or adding more (for instance, crisis management), to address the post-COVID-19 marketplace, as well as any possible regulatory changes.


Client funds are turning over

For decades, the financial advisory business has largely been dominated by baby boomer clients. But that’s beginning to change.

As of this year, one-third of the population is 65 or older. As these investors enter retirement, their investment strategy is changing. They’re no longer investing as much for the long term. Instead they’re more focused on things like healthcare, long-term care insurance, and a modest income. Their investment strategy is likely preserving – and even pulling – capital in order to support and sustain their post-retirement years.

Additionally, as the millennial generation transitions from “starting out” to financially stable, they’re beginning to enter the markets en masse.

And it’s becoming clear that millennial investors have different values than their boomer predecessors. Specifically, they value well, their values. According to a MorganStanley report on sustainable investing, millennial investors were twice as the remaining respondent pool to invest in names that serve social and/or environmental causes (with 77% of affluent millennial investors currently involved in ‚Äúimpact investing‚Äù). Some 86% of millennial investors express interest in the sustainability space – up from previous years. Subsequently, the market has seen an uptick in sustainably motivated investment decisions (38% in 2017 vs. 32% in 2015).

Millennials are also reporting interest in customization – the ability to tailor their investments to suit their specific needs – as well as paying back student loan debt and saving for retirement (investing in their 401[k]s and other retirement investment vehicles). Research also shows they’re much more skeptical about the market than the previous generation of investors.


A new focus on holistic, unbiased advice

The millennial desire for investment customization is a corollary of a new market mindset. In an era marked by change and uncertainty, investors have begun migrating to a “holistic, goals-based” approach to investing. In other words, they’re no longer interested in beating market benchmarks. They’re interested in investments that support their values and/or help them meet specific goals (like purchasing a home, for instance).

Additionally, they’re moving away from a desire for human advice and starting to look for model-driven, research-based advice based on their specific preferences. That, combined with the lower cost, has led to a rise in robo-advisors.

Financial advisors will inevitably have to adjust their service offerings to meet the needs of a changing investor demographic.


Digital is taking over

In an age where you can check your bank balance or transfer money with the few taps of a fingerprint, it’s perhaps unsurprising that the financial advisory business is heading in that direction – especially with the surge of first-time millennial investors hitting the market.

Refinitiv and Aite Group recently joined forces to conduct a survey of leading wealth management firms across the U.S., and one of the key findings was that these companies are prioritizing digitization in the near-term:

  •     86% of respondents said they considered it “highly important” to offer digital client services
  •     46% said they weren’t happy (or were only partially happy) with their current digital services
  •     61% said they were prioritizing providing transparency through data analytics services within the next 12-18 months
  •     And 65% believe it’s very important to scale operations to serve more clients more efficiently, with fewer financial advisors. (Presumably, this will take the form of digital services for many.)

Digitization has already taken hold in dozens of other industries-in order to keep up, financial advisors will have to make sure their digital offerings are competitive (or, ideally, best in show). 

Plus, now with the option of robo-advisors, financial advisory services must try even harder to keep up.

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