In my 30 years in this industry, I've seen a lot of people try to predict the future. For instance, I remember a keynote presentation at a conference in the late 1980s when Don Pitti, then president of the International Association for Financial Planning, boldly predicted that the advisory world had such a bright future that, perhaps within the next 25 years, all mutual funds would be sold in the context of a financial plan.
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.
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.
Meanwhile, videophone technology will be so widely adopted that distance will become irrelevant in the planner/client relationship. The result will be an explosion of specialization in the planning world, as advisors start to focus on true niche marketing to a degree not possible when confined to a local clientele. There will be an advisor who works with contract software engineers, for instance: helping them craft an effective portfolio, counseling them on the training and education they need to keep their skills competitive, and helping them position themselves to find the best, most lucrative contracts - which the advisor will negotiate on their behalf. Independent massage therapists, personal trainers and plumbers will all have their own specialized advisors to turn to.
Planning advice will become available to virtually every middle-market consumer with a job, through corporate employee benefits or through video planning sessions with large national clinics. As boomers die off, so too will the idea of a "delegator" client relationship. Most consumers will control their own portfolios, and treat planners like "financial doctors," making fee-for-service office visits during life changes when advice is needed. Wealthier people will follow something like the concierge medical model, where they pay an annual fee for a comprehensive checkup plus access to the planner as needed.
Meanwhile, the AICPA PFS credential will merge with the CFP mark so that the profession can rally around a unified credential. The only true professionals will be those with a four-year degree plus the additional credential, and they will belong to an association that only allows credentialed professionals to join - making it much easier for consumers to recognize who is pretending to be a professional while pursuing a sales agenda.
During this time period, the markets will become perfectly efficient, due to computer trading systems scouring microsecond by microsecond, nibbling away at tiny pricing inconsistencies.
2023 & BEYOND
The last retail brokerage operation will be sold to a big dumb bank, and the remaining captive brokers will leak away to join the larger RIA firms.
Crowd-funding, having gone through several evolutionary stages, will emerge as an alternative investment marketplace. Companies will post funding requirements on the Internet, and investors will bid for the privilege of investing, turning the Internet into a superconductor of capital. New companies will emerge to evaluate these investment opportunities, and the increasing number of new crowd-funded startups will take market share from the established, publicly traded giants (much as small RIA firms have taken market share away from the big brokerage houses).
Stocks and bonds will begin to seem old-fashioned, and the traditional investment banking industry will fade from our economic landscape. At the same time, advances in energy technology, food production and on-demand customized manufacturing will raise most everybody's standard of living to levels we can hardly imagine today - and people who have less will still envy those who have more.
Along the way, at virtually every turn in this journey, I predict that we will be constantly surprised by what the future brings us. And I predict with special confidence that the pundits and sages who claim to foresee where the markets are headed will be right almost as often as you or I would be ... if we used the old-fashioned prediction technology called the coin flip.
Bob Veres, a Financial Planning columnist, publishes the Inside Information newsletter and website for advisors at bobveres.com. Post your comments on Financial Planning's discussion boards at financial-planning.com/forums. Readers can also send feedback to email@example.com.
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