Advisors: Regs Choking Our Business Model

One-third of U.S. financial advisors say they plan to sell their practices, merge with another firm or retire from the industry over the next three years due to new regulation and the industry’s changing economic models, a new survey found.

But U.S.-based advisors can take some solace in the thought that they are not alone: regulation is taking a toll on their peers in Asia, Canada, Europe and Latin America, the survey by Natixis Global Asset Management found.

The survey, which polled 300 financial advisors in the U.S. as part of a larger global survey of 2,500 advisors in 15 countries and territories, found that 27 percent of U.S. financial advisors were planning for big changes over the next three years.

The survey also found that 37 percent of U.S. advisors said they would “disengage” with, or drop, smaller accounts. Eighty-six percent said meeting stricter disclosures were among the biggest challenges to the growth of their business.

“U.S. advisor (results) are consistent with what we see globally,” said Dave Goodsell, executive director of the Natixis Durable Portfolio Construction Research Center in Boston.

Many of this year’s survey answers were consistent with what Natixis saw several years ago when the U.K. was going through its Retail Distribution Review, which raised the investment advice thresholds for financial advisors, Goodsell said.

A U.S. Department of Labor rule expected to take effect in April is also designed to raise investment advice standards and the Securities and Exchange Commissions is expected to issue its own fiduciary rule in the coming months.

Implementing the rules will raise the cost of doing business for financial advisors and investors while narrowing revenue options for advisors, advisors say.

“The challenges facing financial advisors are tougher than ever, as they are asked to do more with less in an environment that seems to put low fees ahead of all other considerations, including risk management,” said John Hailer, CEO of Natixis Global Asset Management for the Americas and Asia, in a news release.

Investor Expectations

Apart from dealing with new regulations, financial advisors in the U.S. and globally have found that managing client expectations can often be as challenging as facing down regulators, Goodsell said.

Investors expect a return of 8.5 percent annually above inflation while advisors say investors should get used to returns closer to 5.6 percent.

Nor are investors above telegraphing contradictory signals in that they believe an 8.5 percent rate of return is realistic while prioritizing caution and safety.

Investors around the world are “locked in” to their desire for safety over performance, but the discrepancy between investors’ and advisors’ expectations are lower in the U.S. than they are in other countries, Goodsell said.

Natixis researchers said the No. 1 reasons people leave their advisor is because of returns that fall below expectations. The No. 2 reason is inadequate or poor communication between the advisor and an investor.

And while financial advisors have little control over market returns, advisors own the communications process: the more advisors communicate with clients, the higher the chances of retaining them – a phenomenon seen across national boundaries, Natixis experts said.

Roboadvisors a Force for Good

The survey, published last month, found that 84 percent of U.S. advisors believe automated advisory models will provide more access to investors with smaller balances.

In addition, 86 percent of advisors aren’t concerned that automated advice algorithms, or roboadvisors, will relegate the flesh-and-blood advisor model to the sidelines

The computer-toting 25-year-old scion of a high-net-worth dynasty, for instance, could rely on an advisory firm’s roboadvisor arm while his or her parents regularly meet face to face with the advisory firm’s senior partners.

“Many see automation as a way to keep smaller clients,” he said. “It’s a good way of bringing people along into the system.”

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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