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19 trends to watch in 2019

December 11, 2018 2:53 PM

Advisors have bigger problems on their hands at the end of this year than the client or friend who cornered them to ask if they should get into cryptocurrency in 2017.

In the broad scheme of things, avoiding a global recession fueled by overheated equity values and fears of a trade war with China certainly falls in front of the partygoer’s sparkling conversation. The same goes for the Fed’s interest rates, which will have a much bigger impact next year than Bitcoin.

On top of the day-to-day economic headlines, advisors will be watching to see which firms are embracing the independent movement — and which ones are suing them to try to hold on to their books. With tens of thousands of advisors switching firms each year, it’s no small matter.

This recruiting movement takes center stage in an industry where the balance of power continues to shift away from brokerage firms and toward advisors. The quandaries of hybrid RIAs and the Broker Protocol, to name two examples, display how independence threatens firms’ business models.

Likewise, millions of clients' relationships with their advisors may or may not change under the SEC’s Regulation Best Interest proposal, which is expected to be issued at some point next year. Of course, the clients may never even know about these issues or notice anything different when all is said and done.

Democrats set to take charge of the House of Representatives will command clients’ attention, though, as the industry grapples with the implications of a divided Congress. The consensus view holds that there will be partisan gridlock — but President Trump’s time in office has been nothing if not surprising.

One thing is for sure: This ever-evolving industry will not stay the same in 2019. Scroll through our slideshow below for what trends could shape wealth management.

What else will firms take off advisors’ plates?

Firms under pressure to show their value to advisors are trying to help them with the tedious administrative, operational and managerial tasks of running their businesses. Advisors can spend more time with clients and, theoretically, less time hating their firms and leaving them.

The services offered by firms to advisors this year include outsourced portfolios, lead generation, marketing services, streamlined account opening, personalized greetings, automated research, investment-related content for social media posts and remote assistants from the home office.

In 2019, look for broker-dealers to find new offerings aimed at making advisors’ lives easier and less consumed with mundane chores.

How many more advisors will go indie?

Wirehouses and other BDs should read the numbers and weep: The number of breakaway RIAs has soared by 59% in the past five years to 238 in 2017, according to an analysis by Schwab Advisor Services.

Nearly 27,000 advisors — 9% of the industry’s more than 310,000 advisors — have changed or will switch their firms in 2018, Cerulli Associates says. About two-thirds of representatives who said they would like to go independent expect to do so with fully independent RIAs.

Experts say the independent movement is only gaining momentum — with no sign of letting up anytime soon.

How much will fee models shift in 2019?

Advisors are also adjusting how their clients compensate them for their services.

More than half of advisors have altered their fee structures in the past four years, more than a quarter have added planning fees and retainers and more than a third have tweaked their pricing in other ways, according to a study released in July by the SEI Advisor Network.

More than 60% of advisors said they had not modified their practice’s fees for at least five years in 2015, the company’s prior survey found. Robo advisor competition and the now-vacated Department of Labor fiduciary rule spurred the changes, SEI says.

The study shows “transparency is improving, consumers are becoming more fee-savvy and the industry is transitioning to a traditional professional service model — one that resembles the legal and accounting professions that command respect and are viewed by clients as true fiduciaries,” SEI Head of Practice Management John Anderson said in a statement.

Can IBDs stanch losses with hybrid channels?

The hybrid RIA model presents a third way for IBDs eager to maintain advisors’ affiliations, even if most of their advisory assets are held outside the corporate RIA.

More than 30% of IBD advisors — some 27,400 of the sector’s roughly 87,000 — work in hybrid RIA practices, according to Cerulli. In fact, hybrid RIA practices have boosted their assets under management at a faster clip than their indie peers, by some measures, the firm also found.

If LPL Financial’s move to loosen its corporate RIA requirements for incoming advisors is any indication, firms will opt to retain the advisors even if they lose some of the advisory revenue. The next year will feature more firms struggling with how best to address this hybrid question.

Who’s No. 1?

The title of the largest IBD and the largest headcount in the wealth management space may be up for grabs next year.

LPL Financial ramped up its recruiting this year— on top of adding some 1,850 advisors from the acquisition of the assets of National Planning Holdings. Last year, though, the longtime No. 1 IBD outpaced Ameriprise in revenue by just $21.5 million. Ameriprise has also had a strong year.

The major employee brokerage Edward Jones surpassed LPL in headcount in the second quarter, when its number of representatives reached more than 16,100. Edward Jones has also stated a goal of reaching a force of 20,000 advisors by 2020, while LPL has never been specific with a headcount goal.

As small BDs sell to bigger players, LPL faces more rivals with scale in an increasingly competitive sector.

Wells Fargo earnings chart showing advisor head count decline / attrition

Can Wells Fargo turn the corner?

Wells Fargo Advisors lost more than 1,000 reps in the past two years as an array of compliance failures and investigations hit multiple areas of the bank.

Regional and independent rivals are picking up teams from the firm in droves, but Wells Fargo CEO Tim Sloan said in the bank’s third-quarter earnings call that his team is focusing more on productivity than headcount.

The firm has combined its bank brokerage and wirehouse units, consolidated its ultrahigh-net-worth and private bank and even unveiled plans to open RIA offices next year. However, the question remains whether the firm can dig itself out from the multiple scandals.

Bloomberg News

What’s next in wirehouse compensation?

Regional and independent firms have proven so adept at attracting breakaway brokers that wirehouses are letting go of their previous annual ritual of payout tweaks.

UBS kept its compensation grid the same for 2019, and Morgan Stanley is leaving its payout intact while adopting account-based awards. Merrill Lynch kept its grid but slashed 3% off monthly production credits as part of a carrot-and-stick approach.

Wirehouses may look to make radical changes for incoming brokers in future years, though, according to recruiter Mark Elzweig.

“For new advisors, I think the evidence is clear that wirehouses are moving toward a salary-plus-bonus compensation model,” Elzweig says.

An illuminated sign hangs above the entrance to the UBS Group AG headquarters in Zurich, Switzerland, on Thursday, July 6, 2017. Switzerland is tightening capital requirements for PostFinance AG, Raiffeisen Schweiz and Zuercher Kantonalbank, three systemically important domestic banks, forcing them to set aside more funds to absorb losses and avoid government bailouts. Photographer: Michele Limina/Bloomberg

Michele Limina/Bloomberg

Will Broker Protocol exits, lawsuits hurt advisor movement?

Exits from the Broker Protocol by Morgan Stanley and UBS have not curtailed the number of advisors switching firms.

In fact, 390 teams left their firms in the first three quarters of the year, compared with only 302 over the year ago period, according to Echelon Partners. On the other hand, UBS, Morgan Stanley and Protocol member Merrill Lynch have also lost fewer advisors amid recruiting pullbacks this year.

Non-solicitation lawsuits against advisors who did leave firms like Morgan Stanley have followed in the wake of the companies’ moves to get out of the Protocol, though. In 2019, watch to see whether firms will increase their litigiousness and try to impede more breakaway moves.

Clients should consider new strategies to reduce their tax bill as there is no guarantee that the Trump administration’s proposal will receive approval from Congress.

A vehicle passes the U.S. Capitol building in Washington, D.C., U.S., on Friday, March 24, 2017. House GOP leaders are hurtling toward a vote Friday on their embattled health-care bill without knowing for sure whether they have enough support to pass the measure, after yielding to Trump administration demands to act now. Photographer: Andrew Harrer/Bloomberg

Andrew Harrer/BloombergNews

Will a divided Washington yield results or gridlock?

Democrats will regain control in the House of Representatives next year, raising the prospect of partisan gridlock and newly powerful committee heads aiming to shape financial policy.

Rep. Maxine Waters, D-Calif., an outspoken opponent of President Trump, will likely take over the gavel on the Financial Services Committee. Rep. Richard Neal, D-Mass., who favors automatic IRA enrollment for employees with no 401(k) plan, is in line to lead the Ways and Means Committee.

The new majority in the House will offer high-stakes hearings and bills. However, the question remains whether President Trump and the Republican majority in the Senate can find common ground with Democrats on issues like retirement policy, taxes, budgetary spending and other issues.

Diversity of financial advisors in the United States Bureau of Labor Statistics September 2017

When will the industry reflect the country’s demographics?

The CFP Board, several professional organizations and an array of companies are working to boost the diversity of advisors and clients — but they still have a long way to go.

Only 23% of CFPs are women and fewer than 3.5% are black or Latino, according to the CFP Board. Full-time financial advisors who are women also made only 59 cents on the dollar made by their male peers, in terms of median weekly earnings, according to the U.S. Bureau of Labor Statistics.

The issue is leading to more open discussions on how best to move forward, such as the CFP Board’s first-ever Diversity Summit in October. Companies and advisors shouldn’t simply conclude they should be “hiring black folks to serve black folks,” FPA President Frank Paré warned in one session.

“Firms should have a value proposition that serves all,” he said. “Like-for-like allows people to remain in their comfort zone, their isolation — and for lack of a better term — racist ideology.”

SEC Chairman Jay Clayton has asked staff to build upon a proposal that was nearly adopted before the 2008 financial crisis, according to people close the matter.

Jay Clayton, chairman of the U.S. Securities and Exchange Commission (SEC), speaks during an interview at the Securities Industry And Financial Markets Association (SIFMA) annual meting in Washington, D.C., U.S., on Tuesday, Oct. 24, 2017. Photographer: Andrew Harrer/Bloomberg

Andrew Harrer/Bloomberg

What will Reg BI do and what won’t it do?

The SEC’s proposed Regulation Best Interest won’t have as far of a reach as the now-vacated fiduciary rule, but experts say it should come into its final form next year.

Critics — including those in support of the proposal — have questioned whether the SEC regulation will reduce clients’ confusion about their relationship with their advisors or help guide advisors wondering if there will be a formal definition of a client’s “best interest” in the rule.

The answers to those queries could follow if the SEC unveils the regulation next year, as expected, with full implementation by 2020. In a speech on the regulator’s agenda for next year, Chairman Jay Clayton called Reg BI “a key priority” in 2019.

Will states throw their own fiduciary rules into the mix?

States’ major role in securities regulation could loom even larger next year if a few of them follow through on plans for their own versions of the fiduciary rule.

In October, the office of Democratic New Jersey Gov. Phil Murphy announced a proposal to require a fiduciary standard for clients of all investment professionals in the state. Industry trade groups have warned that such efforts could subject advisors and firms to a patchwork of new rules.

The next year should tell us whether New Jersey or another state — such as Nevada, California or New York — will usher in a new stage in the ongoing fiduciary saga.

Tech Survey: Tech that will change wealth management 2018

Will fintech investments pay off?

Americans have grown used to sending text messages, logging into apps and websites easily and using automated services — even if they haven’t always been able to do so with their advisory firms.

Regulatory requirements for recordkeeping, data privacy and other capabilities make any technology enhancement a challenging task for the entire industry. This year, however, firms have been picking up the slack with planning tools, updated platforms and, yes, texting with clients.

Look for firms to keep rolling out new software aimed at advisors and clients, whether through integrations, acquisitions or in-house development. With the financial services industry far behind Silicon Valley, some may opt to buy the tech rather than trying to build it.

The Twitter Inc. mobile application icon is displayed on the screen of an Apple Inc. iPhone 6s in this arranged photograph taken in New York, U.S., on Tuesday, Feb. 9, 2016. Twitter Inc. is changing its timeline to display popular tweets first, instead of the latest posts, a long-anticipated step thats likely to anger its most passionate users. Twitter is scheduled to report quarterly earnings results following the close of U.S. financial markets on February 10. Photographer: Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

Will regulators streamline social media rules?

The use of social media networks relates to FINRA guidelines around records, supervision, suitability and even “fair and balanced communications,” to name a few areas, according to the regulator.

It’s no wonder, then, that advisors and firms struggle with how best to approach social media. FINRA last issued guidance on the topic in an April 2017 regulatory notice. The time may have come for regulators to go further with updated rules for social media, SIFMA CEO Kenneth Bentsen said at an event last week.

“It’s hard to keep up with the pace of technological advancement, and that’s no fault of the regulators,” he said. “A lot of the rules weren’t designed for the time of Facebook and LinkedIn, etc. and so I think regulators are aware of that and trying to figure it out.”

Can the industry meet the malware threat?

With cryptocurrency like Bitcoin drawing interest from clients, advisors would do well to warn them about a type of malware attack known as “cryptojacking,”according to The Chertoff Group.

The security firm predicts criminal organizations will deploy “invasive methods of initial access and drive-by scripts on websites” related to bogus crypto offerings and services in 2019. Malware posted to open-source websites used by developers or affecting the vendors themselves is also on the rise.

“Such back channels can bypass traditional protective and detection capabilities in place to prevent externally-based incidents and infecting the corporate network,” Chertoff Group said recently in a list of cyber trends to watch next year.

The Vanguard Group headquarters are seen in Malvern, Pennsylvania on Friday, September 4, 2003. Vanguard Group, the second-largest U.S. mutual fund company, received a subpoena from New York Attorney General Eliot Spitzer as part of an inquiry into illegal trading practices in the $6.9 trillion industry. Photographer: Mike Mergen/ Bloomberg News.

Mike Mergen/Bloomberg News

Recession, soft landing or full steam ahead for U.S. economy?

Vanguard places the likelihood of a U.S. recession at about 30% heading into 2019, citing monetary and trade policies as possible barriers to a so-called soft landing for the economy.

Economic growth “should shift down but not out” next year, according to the asset management giant, whose forecast calls for 2% growth. Fears of a trade war with China — which flared up again last week and resulted in equity markets’ renewed recent volatility — could alter the picture.

“While we believe the U.S. will avoid recession in 2019, if the impacts of monetary and trade policies spread to financial markets, the likelihood of a downturn will become more substantial,” according to Vanguard’s economic and market outlook for the coming year.

federal-reserve-building-bloomberg-iag-2016

A pedestrian walks past the Marriner S. Eccles Federal Reserve building in Washington, D.C., U.S., on Tuesday, Dec. 15, 2015. Economists and traders expect the policy-setting Federal Open Market Committee to raise interest rates tomorrow for the first time since 2006, marking the beginning of the end for the unprecedented era of easy monetary policy. Photographer: Andrew Harrer/Bloomberg

Andrew Harrer/Bloomberg News

When will interest rates stop going up?

The Fed will hit its terminal interest rate by the summer of 2019, cutting off further upticks at somewhere in the range of 2.75% to 3%, according to Vanguard’s forecast.

Rising rates have made a variety of impacts on wealth management this year, including record sales of fixed-index annuities for two straight quarters and major profit gains for brokerages. They’ve also helped make large firms more attractive to buyers. Additionally, the rates affect loans and yields on fixed-income investments.

For next year, advisors should prepare clients for the macro-level repercussions and keep in mind how it could play out for their affiliated firms. Slower growth and reasonable inflationary rates could convince the Fed to turn off the spigot midway through next year, Vanguard says.

What firms will go up for sale in 2019?

Consolidation has been a constant in the industry for years, but M&A activity is still on the rise: Wealth management is on track to break the record for the number of transactions for the sixth straight year in 2018, according to Echelon Partners.

Practices with advisors looking for succession plans, IBDs with parents eager to let go of the regulatory burden and breakaway RIAs remain the most frequent type of entities to change hands. The growing participation from private equity firms in wealth management is driving up deals each year.

In its latest quarterly report, Echelon called the Fed’s tightening of credit policy a possible headwind but noted it expected “late-cycle consolidation” to continue. Questions for advisors next year will include whether their firm could be up for grabs — and who could be in the mix to purchase them.

Will fee-only annuities take hold?

Issuers and a handful of intermediary organizations are betting that RIAs will embrace annuities shorn of their traditional commissions.

Fee-only products are displaying impressive nascent growth — to the tune of a 200% year-over-year rise in sales of fee-only fixed-index annuities in the second quarter — but the products represent only about half of 1% of all FIA sales.

Next year, advisors will have ample opportunity to decide whether the issuers and insurance networks’ offerings do fit into their service models and their clients’ needs. If so, the fee-only products could alter the rest of the shelf, or at least gain a substantial share of the market.