Oops.
There's a good reason why we have such a mixed track record when it comes to forecasting the future. Change happens as a result of many unpredictable events, inventions, insights, trends and ideas - all mixing together in unpredictable ways, and then interacting with the most unpredictable element of all: actual people. Any rational observer would have predicted that Betamax would win out over VCRs; that people would be turned off by the idea of texting when it is so much easier to talk on a phone; or that, after a series of hair-raising scandals, consumers would refuse to do business with the oft-offending brokerage houses. Clearly, there are forces at work that we don't totally understand or are hardly logical.
I've made my own predictions over the years, with mixed results. As the limited partnership industry was collapsing in disrepute (and, sometimes, in garden-variety fraud), I predicted that the AUM business model was going to replace tax-shelter sales. So far, so good. Yet at the same time, I would never have predicted that the limited partnership industry would rear its head again, as it seems to have done with the non-publicly traded REIT industry.
I predicted that, as the AUM model took hold, it would dramatically cut into the revenues of the independent broker-dealer community. Then along came 94-44, and other rulings from the NASD (now FINRA), which told the broker-dealers that they should in fact be supervising activities that were already regulated by the SEC. This handed the B-D community a convenient regulatory justification for taking a piece of their reps' AUM revenues in the name of supervision, and for controlling who they could clear through and custody with. My prediction failed to come to pass.
With those caveats out of the way, I'm willing to try again. This time, I'll break down my forecasts into five-year increments, so all of you readers will know when to start holding me accountable.
2013-2018: CONSOLIDATION
I expect the financial planning profession to go through a transition to ensemble firms from solo practices, largely through hundreds and perhaps thousands of mergers among firms of roughly equal size. A couple of factors will drive the trend: Advisors will want to create more scale in anticipation of greater staff and regulatory costs, and more mature advisors will want to build a firm large enough to let them hire a diverse "portfolio" of potential successors.
The added scale will make it possible for them to afford to hire a full-time COO or administrator to take the day-to-day management chores off their shoulders. This, I predict, will extend the careers of many advisors who have put off succession planning to the dangerous last minute, and bring a great deal more professionalism and scale to the profession as a whole.
During this period, I expect FINRA will once again lobby for regulatory authority over the RIA community, despite recent comments by FINRA's leaders. But I think it will become clear that the real goal was to keep the threat of FINRA regulation alive to help the group's member firms fight attrition; they simply wanted top-producing wirehouse brokers and dually registered advisors to think twice about jumping to a fee-only model that might fall back under FINRA's regulatory reach.
The simmering pot allows brokerage and B-D executives to continue telling their reps: "Why make the change when you're just going to wind up regulated as salespeople anyway? Trust me, FINRA is going to come down twice as hard on you if you go outside our compliance system."
2018-2023: NEW MODELS
The global economic landscape will be rocked by another scandalous brokerage firm-created crisis. My best guess is that it will involve massive hidden derivative bets on interest rates, which will come due when Treasury yields and inflation both rise off the floor at speeds and to degrees not anticipated by the quant models. Brokerage firms will be overextended, institutions that thought they had purchased insurance will rediscover counterparty risk and the bull market of 2009-2020, visible only in hindsight, will come to a crashing end. I predict a new round of congressional hearings and bailouts, along with advisor soul-searching over whether they should have seen it all coming and used more advanced, complicated, tactical investment models for their client portfolios.
