The Slings & Arrows Facing Advisors

The Slings & Arrows Facing Advisors

Challenges, threats and succession are all in a day’s work, on top of the profound pandemic changes.

Reviewed by: Drew Voros
Edited by: Drew Voros

[This article appears in our September 2020 issue of ETF Report.]

First and foremost, financial advisors run businesses based on relationships that are a mix of professional advice and personal attention. Face-to-face meetings are crucial for both advisor and client in forming a trusting and long-lasting relationship.

So when the full brunt of the COVID-19 pandemic was felt across the country, every fundamental activity of sustaining the advisor/client relationship was thrown into a new digital world order. A whole new way of conducting business was required.

“Business development was one of the first areas that I think has required an adjustment,” said Tim Kohn, managing director at Atlanta-based Arcus Capital Partners, a firm with $1.4 billion in assets under management. “There’s no longer, for example, face-to-face meetings of the sort that we used to do. In fact, that’s all but disappeared.”

In the flash of an eye, the business community and the world as a whole shifted quickly into a new way of operating.

“This has required a little bit of a different skill set, in terms of being able to make the connection with a client—especially new clients, bringing them onboard,” Kohn explained. Face-to-face client meetings today are through a computer monitor. There are more phone calls, but technology has bridged a gap that would have been much more difficult to do 15 years ago.

Andy Martin is president of Nashville-based 7Twelve Advisors, which is an institutional advisory firm, and PortfolioIA, a nonrelated retail advisory firm.  He notes more concern on the institutional side, where investors are very much on a personal basis with fund managers they invest with.

“The only side of my business that’s really set off alarms [because of COVID] has been the institutional side,” he said.

No business likes uncertainty, but that’s another challenge ahead for all advisors and the world as a whole. Martin sees the wildly unpredictable nature of the pandemic as something no one has been able to get their arms around

“It’s been fascinating to watch this. Everyone’s been wrong,” he added. “So, no, we have no idea what’s going to happen.”

More Than Just Business Operation Problems
Running a business is a constant battle against forces that could potentially stall or impair growth plans and development ideas. Financial advisory firms are no different. While the pandemic has made an obvious and profound change in day-to-day operations, it hasn’t reduced the other challenges, threats and planning for the future that have always been there for advisors.

Falling bond yields are another particular challenge for advisors catering to income-seeking investors, many of whom are in retirement. That has required, literally, alternative thinking.

“The alternative category has been helpful—from a diversification standpoint, from a correlation standpoint, private debt, middle market lending,” Kohn said. “Investing in bonds, you run the risk of having an income stream that may not keep up with your costs, your expenses. Yes, you have a little more daily liquidity, but it’s also a situation where you have an exceptional amount of volatility.”

But a shift into alternative income investments is not an easy sell, no matter how low yields go.

“It does take a special kind of investor to have the patience to essentially use a private investment or a liquid investment that might make some advanced requirement in terms of how the money is locked up,” he added.

And of course, how the economy performs going forward is a constant question advisors must be ready to answer in some ways for their clients—another tricky hill to climb. Whatever shape the recovery looks like remains a threat.

“The threats are there,” Martin noted. “I think we’re going to have a W-shaped recovery. We’ve made a V so far, and now I think we’re going to make another V.”

Other Challenges & Threats
Bigger-picture worries for advisors were reflected in a recent study of 1,000 advisors by AdvisorStream. Chief among them:

  • Nearly 50% of advisors still struggle with digital know-how
  • Almost 75% are frustrated around sales generation and standing out among peers without the benefit of digital tools
  • 48% are concerned about losing clients in 2020
  • Digital solutions are the No. 1 focus for advisors

In the wake of the pandemic, there will be even more pressure for advisors to up their digital game in all facets of their business.

“If there was ever a moment for advisors to deploy digital solutions, now is that moment,” said Kevin Mulhern, CEO and co-founder of AdvisorStream, a firm that offers automated marketing and communications for financial advisors.

“Our comprehensive research shows that, during a crisis, you can grow as a financial services company if you have and use digital tools properly,” he explained. “The opportunity among advisors to retain and grow clients at this point in critical times is at an all-time high, and digital solutions figure in as the No. 1 area for advisors to focus on in 2020.”

Going Forward
The pandemic has forced advisors to adjust and pivot with their day-to-day operations more than ever before, which will frankly be the normal course of action at least for the short-term future. But at the heart of every advisory practice is making the best investment decisions for clients, which goes back to the relationship between the advisor and client.

Maintaining and growing the advisor/client relationship will always be the biggest challenge, which shouldn’t be lost in the new world order the pandemic has created. Judging from the resilient market activity and new assets flowing into ETFs and other products, people are continuing to invest in these precarious and volatile times. Despite the pall lingering from the pandemic, these are good times to be a financial advisor.

A Succession Dilemma
Many advisors are in their 50s and 60s, so their need for a succession plan is an important part of the business. Clients want to know what would happen if their advisor sold his or her business, or retired. What’s the plan, and do clients know it?

In addition, RIAs have become hot properties for investors and competing firms.

“There’s so much interest among other advisors and RIA firms, etc., to acquire additional assets. And on top of that, private equity has really become interested in acquiring RIA firms,” said Vance Barse, wealth strategist and founder at Your Dedicated Fiduciary in San Diego.

“And private equity companies are attracted to the cash flow that many of these RIAs earn, especially in a broader context of where we are in the market cycle,” he noted. “And then, the RIA firm can either sell to another RIA firm or a private equity firm or ultimately to a wire house.

Barse himself acquired an RIA firm from an advisor who was in his 70s and ready for retirement.

“I was attending an industry event, and an advisor and I got to talking. He was interested in implementing a succession plan at some point and finding an appropriate suitor for his practice,” he explained. After a series of meetings over the course of a few months, a deal was struck. “All the clients came over to my firm. It was a very seamless deal,” he added.

Barse expects more consolidation in the RIA space, and more private equity taking minority stakes in RIAs.

“I think that wave will continue and gain momentum as the average advisor in this country matures toward the right-hand side of the age bell curve, and people want succession planning, “ he said. “There’s never been a better time to sell than right now. And sellers are getting very handsome premiums, terms and conditions.”

‘Succession Crisis’ Myth
However, Michael Kitces, head of planning strategy at Buckingham Wealth Partners and author of the Kitces Report and Nerd’s Eye View, says the “succession crisis” is a “myth,” citing the lack of urgency many advisors feel when they get into their 50s and 60s: “I don’t know any advisors who are waiting to collect Social Security and retire.”

He adds that many advisors spend decades building their businesses and want to enjoy the fruits of their labor in the last years of managing their business. Many have little incentive to sell their firms, because they enjoy what they do and are making the best money of their careers.

Nonetheless, a succession plan is also key in retaining employees. In his book “Succession Planning for Financial Advisors,” author David Grau points out that workers are more likely to leave without a plan.

He writes that the root of the problem with the lack of talent in young advisors and the struggles that so many firms have in retaining talent may simply be because the younger advisors see a lack of opportunity in their current situation, because most firms really don’t have an effective succession plan.

“A lot of advisors have shared with me confidentially that they don’t want to let go of an attractive income stream that can be viewed, essentially, as an annuity, because they’ve had these relationships for a very long time,” Barse said.

“They aren’t ready to face retirement themselves, and there’s an inherent irony in that” he added. “Because, as financial planners, we help people prepare for the future, which typically is superimposed upon a successful transition into a healthy and fulfilling long-term retirement.”
— Drew Voros

Drew Voros has nearly 30 years' experience in financial journalism. He was a longtime business editor for the Oakland Tribune and sister papers of the Bay Area News Group, and finance writer for the Hollywood trade publication Variety. Voros' past roles have also included editor-in-chief at and ETF Report.