Growth of planning redefines key issues

By Benjamin Thornley, in New York

For my final contribution to Money Management from New York, a review of the big-picture trends shaping the US financial planning industry seemed a logical sign-off.

Enter three of America’s most seasoned observers, Boston-based Cerulli Associates consultant, Dennis Gallant, president and chief executive of Undiscovered Managers in Connecticut, Mark Hurley, and California-based managing partner with Tiburon Strategic Advisors, Chip Roame.

We begin with the themes identified by Cerulli as particularly critical at a symposium held this week in Massachusetts: financial planning and fee-based pricing; recruiting; and autonomy.

Perhaps most fundamental in the US is that financial planning has emerged as its own discipline, not just insofar as the expertise is being recognised as unique and institutionalised as such, but that customers are seeking it out and service providers are delivering it. Hence the dramatic arrival on the scene of the country’s largest national broker/dealers, accounting firms and even discount shops like Charles Schwab.

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My last column highlighted the staggering growth in brokerage wrap accounts tying investments to advice and charging a flat asset-based fee. Nowadays most of the top-tier reps at US wirehouses (New York’s Merrill Lynch, Salomon Smith Barney, Morgan Stanley, Prudential and UBS PaineWebber) use only fee-based wrap accounts and around 12 to 13 per cent of total assets in the firms are underwritten by fees rather than commissions. Make no mistake, the move to fee-based pricing is less about any ambiguous ideological claim to independence than it is a straight business case. Brokers are desperate to shore up steadier streams of income.

It follows then, according to Gallant, that with representatives required to master a wider variety of products, again a reference to the demand for a more holistic advice, this has put pressure on staffing.

“Many firms realise they need to train and educate, but it’s difficult to grow a seasoned rep,” he says, noting that the average recruit at wirehouses is now 36 years of age, although they arrive with a richer pool of prospects.

The issue of autonomy is also related. Given the technological, staffing and other challenges faced by independents on the one hand, and the move by larger firms to hand over a greater share of profits to reps on the other, even offering them franchisee or contractor relationships, the growth of pure independents is reaching its peak, Gallant explains.

Tiburon’s Roame does not necessarily agree, pointing to growth in the accounting space and noting that only 13 to 14 per cent of independents come from wirehouses. Still, his list of trends is similar to Cerulli’s.

It includes burgeoning competition, the special challenge of managing, selling, benchmarking and recruiting for independent practices, alternative investments like hedge funds and private equity, the demands of servicing wealthier clients, and the move to fee-based pricing.

While Roame emphasises excellent long-term prospects, highlighting the $US17 trillion pool of investable assets in the US, only 30 per cent of which is serviced by an adviser, and pointing to the needs of an aging population as retirement funds mature, Hurley is decidedly less optimistic.

He says the market correction of the past 18 months will only serve to hasten a “massive restructuring of the industry”.

Hurley argues that with market returns not likely to exceed five to seven per cent over the next decade, clients will begin questioning large asset-based fees, not to mention shortfalls based on unreasonably upbeat expectations.

“With costs going up, fees coming down, accounts shrinking and in an environment in which it is more difficult to win clients, a lot of guys are going to become employees,” he says, noting that already larger firms are seeing more difficult times as an opportunity to grow their businesses exponentially. He suggests that flat fees-for-service will become a reality for advisers in the near future.

Hurley also points to advances in technology he believes will inevitably facilitate bundled services, whether advisory, legal or accounting, and favour economies of scale.

Despite Hurley’s ominous predictions, particularly for smaller US advisers, evidence certainly points to a rosier future.

Think Vanguard’s new online advice capability, Charles Schwab’s move upmarket, E*Trade’s deal with Ernst & Young to provide advice to US clients, and Morningstar’s reinvigorated focus on intermediaries and it is hard to imagine that all boats won’t rise.