The mood at the TD Ameritrade Elite Advisor Summit in Miami last week was upbeat. And why not?
The 160 registered investment advisers in attendance come from some of the most successful firms in the industry. They are big (on average, they manage $700 million in assets), they are independent and they have survived the worst financial crisis in several generations.
Although the mood was positive, financial advisers know that the panic of 2008 left a lasting impression on investors and had forced them to face some difficult questions about their advisory businesses.
Many are convinced that their fee-only fiduciary model will continue to gain market share. But they are also aware that their costs of doing business are rising, competition is increasing and that as an industry, they are aging and are woefully unprepared to ensure the survival of their firms when they retire.
Four leaders of major firms took time out from the conference to meet with
InvestmentNews to discuss three major issues that the industry faces: the need for scale in the post-financial-crisis environment, the uncertain regulatory landscape and the need for better succession planning in the industry.
The recovery of the stock market has gone a long way toward easing the anxiety of investors, but they are far from recovered from the trauma of the financial crisis.
“There's still a lot of fear out there,” said Jeffrey McCallum, senior vice president with Valley Forge Asset Management Corp. “People want to sleep at night, and they can't afford another hit like they had during the crisis.”
Not surprisingly, these advisers said that they spend a lot more time communicating with their clients.
“We've been reaching out to our clients a lot more often since the financial crisis,” said David Barton, chief executive of Mercer Global Advisors Inc. “We've also developed a strength-of-relationship metric to assess how well we're servicing them.”
Tom Muldowney, founder of Savant Capital Management Inc., which has $2 billion assets under management, undertook an effort to identify which of his clients fared better in the crisis and why.
“People want to hear how others managed through the crisis,” he said. “They managed because they had balanced portfolios and because they lived within their means. I think our clients are bracing for another such crisis, and there will be less panic if it happens again.”
Whether the adviser community can handle it is another matter.
“I know an adviser who had $800 million in assets in 2007, and he took a 60% hit. His assets fell to $350 million, half his clients fired him and he was left with the same infrastructure,” said Ric Edelman, president of Edelman Financial Services LLC, which has $6.5 billion in assets under management.
An enduring consequence of the crisis is that the infrastructure costs from a technology and regulatory perspective are increasing and smaller advisers will be hard-pressed to make the necessary investments, the advisers explained.
All the advisers anticipate more consolidation in the industry and place a priority on expanding their businesses.
“I don't think firms with two founders and eight advisers managing $350 million will survive,” said Mr. McCallum, whose firm manages $2.6 billion in assets. The firm was purchased by Susquehanna Bancshares Inc. in 2000.
“The regulatory burden alone is so heavy. You need scale,” Mr. McCallum said.
Mr. Barton, whose firm manages $4 billion in assets, agreed.
“Organic growth is important, but we're also looking for tuck-in growth, whether it's from breakaway brokers or Mom-and-Pop advisory shops. If it fits with our firm, it's a great time to bring in new business.”
The question of fiduciary responsibility is also top-of-mind for these advisers.
Of course, it's been widely reported and debated that the Securities and Exchange Commission may apply to broker-dealers the same fiduciary duty that governs financial advisers.
And given that a major selling point for RIAs versus brokers is their status as fiduciaries, they are ambivalent about the regulators' plans.
“I think the definition of a fiduciary will be dumbed down,” Mr. Muldowney said. “It's an admirable goal to which we aspire, but it will be dumbed down to a minimum threshold.”
Mr. Edelman disagreed. He suggests that the definition is unlikely to be changed but that the SEC will grant exemptions from its application.
“It's a legal term that the courts maintain. The regulators will exempt practitioners and carve out exclusions from it. It will make the standard irrelevant,” he said.
“The broker-dealers are sales organizations, and applying a fiduciary standard to them would be like applying the Hippocratic Oath to car dealers,” Mr. Edelman added. “As long as the consumer understands the game and has full disclosure, it won't matter if an adviser is a fiduciary or not.”
Perhaps the single-most-important issue for the financial advisory industry is succession planning and ensuring that firms have talented professionals ready to take the reins when the older leaders retire from the business.
The fact that so many firms are not prepared on this front could be another major factor driving consolidation in the industry.
“Most advisers are not running businesses as much as [solo] practices,” Mr. Edelman said. “When they leave, their clients will scatter. They are kidding themselves if they think their entity will survive them.”
Not surprisingly, TD Ameritrade Institutional devoted a good part of the conference agenda to sessions on how advisers can recruit and develop young talent in their organizations and how they can prepare their clients for their inevitable departure from the firm.
The four advisers agreed that in general, advisory firms are not moving fast enough on the issue.
“As managers of large firms, we have to focus on a lot of things. But if we don't solve the succession-planning issue, our industry is in serious trouble,” Mr. Muldowney said.
E-mail Andrew Osterland at [email protected].
