Fearless Forecasts for 2022

The virtual reality will trigger entirely new levels of recruiting competition. The more progressive advisory firms are realizing that they are no longer confined to hiring people in their immediate vicinity and are expanding their talent searches from local to national. This is starting to give Gen Y and Z staff a lot more opportunities to improve their employment situations – and that, in turn, will open new fronts in the recruiting wars for talent. Where, before, recruiting was largely confined to new college graduates and career changers getting into the business, in 2022 firms will compete for experienced advisors and back-office talent anywhere in the country.

This competition will create dramatic changes in how advisory firms manage their staff talent. The firms that aspire to keep their current staff intact and attract experienced A-level team members from other firms will become more attractive destinations for talent. Everybody reading this knows what that means: a clearly defined career ladder, a commitment to internal mentoring and training, allowances to attend national conferences and receive outside training, and policies that facilitate career enhancement all the way up to partnership level. Those are the things that many founding advisors have never found the time to implement and practice management consultants have been hectoring them about for the past couple of decades.

In 2022, a flood of articles and conference presentations will provide nitty-gritty specifics on the best practices for facilitating staff career enhancement. Indeed, our own Insider’s Forum conference hosted several such sessions. One of the most well-attended featured the principals of Morton Capital in Calabasas, CA, who unabashedly spoke about creating a ”staff-first” work environment. Their firm sets aside work hours each week for each employee to engage in internal continuing education, meet with peers to set goals and hold each other accountable, and develop their own personal career plans.

Virtual marketing

If advisors can recruit nationally in our new virtual reality and work with remote staff, why can’t they also market their planning services outside their immediate communities? Clients are increasingly accustomed to remote meetings, which means that geographical proximity is becoming a meaningless constraint. Advisors can work with clients who live all the way on the other side of the Mississippi – or on the moon, for that matter. In 2022 and beyond, remote client marketing will lead to a profession-changing free-for-all. Advisory firms will all be competing everywhere for clients.

Who will come out ahead in that competition? There are only two ways to attract clients when the contest goes national: You can either offer lower fees than everybody else or better service and advice. The first option will not be tremendously attractive to most advisory firms. So how do they gear up to win clients based on superior service and advice?

In this environment, firms that specialize in a niche will have a distinct marketing advantage over their peers. Let’s imagine that a successful real estate agent, whose income is highly variable depending on the market and on sales success, is looking for an advisor. A web search turns up an advisor who happens to work in the same building, who offers “full-service fee-only financial planning and asset management.”

The search also turns up an advisor who specializes in successful realtors, who understands how they have to carefully manage their cash flow in their feast-or-famine business, who also incorporates the realtors’ own real estate holdings into the overall portfolio reports and can give specific advice related to the real estate industry’s particular business challenges.

This second advisor’s physical presence is on the other side of the country, but today she’s just a Zoom call away.

Who do you think that realtor would choose?

It won’t be long before advisory firms realize that marketing a generic, general-practitioner-type of service will be unpersuasive even within their own community borders. Firms that traditionally served anyone will start looking for a niche to focus their marketing efforts on, even if they don’t give up working with their existing clients.

Better advice, new revenue models

In our white paper on the advisory firm of the future, Matthew Jackson and I have pointed out that advisors who specialize will be offering much deeper, more focused advice than generic planners. Over time, this specialized advice will become orders of magnitude more valuable to the end client – a huge shift from where we have been for the past 20 years.

Meanwhile, advisors who specialize in increasingly narrow client profiles will quickly discover that not all of them are wealthy enough to support an AUM revenue model. I predicted in the 2021 article that advisory firms would be increasingly experimenting with flat-fee, hourly and subscription models, and that prediction carries forward into the coming year.

But there’s a difference.

Right now, those alternative fee structures could fairly be described as side hustles; that is, advisory firms are still primarily charging AUM, but making exceptions when they encounter an attractive client who hasn’t built a $1 million portfolio. I’ve argued elsewhere that the AUM model is not the future of the profession, but it has persisted in large part because AUM fees are not “salient;” that is, people don’t realize how much they’re paying (1% of the portfolio sounds much less expensive than $25,000 a year) and are not confronted with writing a check every month or quarter.

Saliency is only an issue when there is uncertainty about the value of the service and advice – you match uncertainty about the value with uncertainty about the price. But when advisory firms are offering increasingly valuable, specialized advice, clients will be far more willing to pay directly for it. I’m not predicting a wholesale shift from AUM to other, more salient models as early as the coming year, but as firms become more specialized, they will encounter less resistance to their fees. For many firms, this newfound appreciation for their specialized advice will become visible by this time next year.

At the same time, of course, the asset management aspect of advisors’ value proposition will have declined almost to the point of irrelevancy – indeed, we are seeing that trend now. The more far-sighted firms will charge their newer, younger, nichier clients by the hour or a flat fee, while maintaining the AUM model for their aging Baby Boomers who will eventually die off along with the AUM model. That’s a prediction for – who knows? 2025? 2030? I should mention that fee structures have become a sneaky popular topic for articles in the consumer press (Google "financial advisor fees and costs" to see what I mean), which will further drive consumer demand for alternatives to AUM.

Thinking partner services

Will it be possible to survive as a general practitioner in the new free-for-all national marketing environment? The answer is “yes,” provided that those advisors make an important adjustment to their service model.

In the past two years, many advisory firms deepened their connection with clients by simply being there to talk through some of the new questions that most of us have been asking ourselves in light of 820,000 loved ones lost to COVID, home schooling challenges and being cut off from travel. Is this the life they want to live? (Who else do they have to ask these questions of but a sympathetic financial advisor?)

For the advisory firms that remain general practitioners – and there will be many of them, at least initially – 2022 will be the year when the generic planning firm’s value proposition shifts from a focus on the numbers to serving as a thinking partner.

What am I talking about? In the last century, the local doctor made house calls and became a wise counselor about issues that often strayed beyond strictly medical questions. Then, of course, the medical profession started to become oh-so-efficient, and doctors evolved to the point where they now pop into the patient’s sitting room for a brief word or two before they’re on to the next engagement. There was also a time when the local attorney filled that wise counselor role in a community, before the legal profession shifted to a more efficient model.

The most service-oriented financial planners have been serving in a similar wise counselor or thinking partner capacity for more than a decade, but they make up a relatively small minority of the profession. The pandemic woke up the financial marketplace to what is important in many planner-client relationships: the ability and willingness to explore the ever-changing big picture and serve as a wise thinking partner during a client’s constant barrage of potentially life-changing decisions. Clients who are simply getting numbers-based advice are going to start exploring other options, and with Zoom links, those will be plentiful. My hope is that the planning profession never allows itself to become as efficient as doctors, lawyers and many accountants; and that general practitioner planners will remain in that wise counselor sweet spot and not give it up to the next profession that comes along.

Virtual versus in-person conferences

What about the conference scene? The 2020 conference schedule was decimated, as many conference organizers cancelled altogether, while others shifted to virtual presentations. The virtual conference experiences, by and large, were not nearly as successful as remote work or virtual client meetings.

Attending virtually rather than in-person meant missing the opportunity to visit an attractive location and (more importantly) the opportunity to network with peers. The only attractant was the actual content of the presentations – and this has interesting implications for 2022.

The 2021 spring conference season was wiped out just like 2020, and a number of the larger fall conferences opted out of in-person as well. I expect the 2022 spring season to offer a full schedule and fall 2022 will seem like business as usual.

Seem like? When the virtual conference scene was competing purely on the quality of the presentations, at reduced prices, advisors were able to sample smaller meetings from the convenience of their (home) desk – and many of them must have noticed that there was a disparity in content. The larger meetings (FPA national, Schwab) are much like advisors who try to cater to everybody; they offer relatively generic content, which means that many experienced planners have gotten in the habit of walking out of sessions mumbling ”I could have presented that material better than that person did” – and be entirely correct. Just like the advisors who are targeting niches, the smaller, more specialized conferences (T3, the NAPFA spring and fall meetings, FPA Norcal, the Insider’s Forum, XYPNLive) have been offering content directly relevant to different subsets of the community.

Going into 2022, we will see the same dynamic in the conference scene that is starting to play out in the advisor profession. Just as many clients will be able to find specialized advice catered to them, advisors will realize that there are meetings that address their issues directly. This will cause the big, national, generic meetings to lose market share, and the more focused conferences to gain it.

Meanwhile, there will be shifts in the economics of the conference scene. The virtual exhibit halls, attached to the virtual versions of conferences, were a disaster across the board. We learned what we knew already: exhibitors need to have direct interaction with attendees to justify the investment of an in-person conference.

Out of disaster has come experimentation. Exhibitors have always desired a chance to tell their story to the audience – but some conferences have resisted the ”pay to play” model. The lack of in-person opportunities led a number of would-be sponsors to bypass the conference scene directly and offer their own virtual content.

The situation reminds me of the early 2000s, when a small number of mutual funds started repurposing their research and sending it out in the form of white papers to the advisor community. It wasn’t long before advisory firms were drowning in fund white papers, and their marketing value diminished accordingly.

Today, a small trickle of CE-bearing webinar opportunities is rapidly turning into a flood; in 2022, it will be possible for advisors to spend all day, every day, attending webinars and piling up CE credits by the thousands.

The 2022 budgets have repurposed exhibitor fees to webinars, which will reduce the revenues for conference organizers. I expect to see fewer exhibitors, and perhaps more of them behind the lectern, in 2022. After that, we may see a return to the conference scene, as the CE webinar scene burns itself out with oversaturation.

PE exodus

Fearless prognosticator that I am, I’m going to go predict that more private equity money will flow into planning firms, and that there will be more consolidation in 2022.

Too easy? Well, I also think this new source of funding will dry up sometime in the next 12 months.

The people I talk to in the M&A space are telling me, off the record, that a lot of the PE investment flows could be fairly described as “dumb money” – not that the PE principals are dumb, per se, but they are so flush with cash that they have to invest it somewhere. Why not in a profession where people complain if their profit margins fall below 25%?

But what happens if the markets go down for a sustained period of time? The economics of an advisory firm with an AUM revenue model are surprisingly delicate; they look robust when the markets are rising, but if there’s a 20% pullback (the definition of a bear market), suddenly the company principals are reaching into their own pockets to make payroll.

In other words, the PE firms will discover that those 25% profit margins are an artifact of an unusually benign business climate, and that in inclement weather, those investments don’t look quite so attractive.

There are two categories of situations to consider. The first are the advisors who sold part of their firm to one of the rollups, where the acquiring entity has essentially paid for first dibs on a big percentage of the firm’s revenues. If there is a significant market downturn, those advisors are going to find themselves working long hours just to pay their new minority shareholders their agreed-upon piece of the action. The principals of those firms are going to take a severe pay cut and may have to cut staff at the worst possible time.

The private equity firms, meanwhile, will see their investments revalued at much lower levels when the markets sink. The first, immediate impact will be a cessation of new money into the profession – and anybody who waited to cash out of their solo practice at a tempting multiple will rue the decision to wait. The longer-term impact will be write-downs, cash calls and larger firms having to buy back their ownership.

This unhappy dynamic could be healthy for the profession. I cannot stop thinking about the fact that accounting firms, law firms and medical practices have strict rules against accepting outside ownership – and the financial planning profession, if it aspires to be a profession, should have long ago adopted similar rules. Driving out PE money via a bear market will cause us to rethink whether those investments should have ever been accepted in the first place.

Brokerage exodus

The exodus from the brokerage model – so-called breakaway brokers – will accelerate in 2022 to a degree that will catch everybody by surprise.

I’ve been told that thousands of wirehouse reps and teams have been biding their time during COVID, noticing that as they work from home, the support they receive from their member firm was not as essential to their operations as they previously thought. Why (they might wonder) am I allowing the firm to collect 60% (sometimes more) of the revenues I generate in return for – what? Contacting clients and customers via Zoom at my kitchen table…?

In addition, all this time away from the watchful eye of branch managers has given these brokers and brokerage teams plenty of opportunity to openly talk with recruiters, independent broker-dealers, and independent custodians, gathering data on what life would look like in the fee-only or dually-registered worlds. One of the reasons for the terrible customer service that advisors have experienced recently at Schwab and TD Ameritrade (and to a lesser extent at Fidelity) seems to be the result of an unprecedented number of brokers looking to shift their allegiances – and this is the first trickle before the flood.

Crypto-confusion

Like it or not, cryptocurrencies are now a legitimate topic for advisors to discuss with their clients, even though I don’t think the creators of bitcoin ever intended it to become an investment/asset class. In 2021, most advisory firms were completely unprepared to have those discussions. This will be the year that advisors begin to explore the crypto-universe and start reporting on those ”assets.” It’s going to be interesting to see what they say about virtual assets that are maddeningly volatile, whose existence can be fairly compared to ghosts that haunt the blockchain circuitry.

The support ecosystem is already gearing up to support those conversations. Equity Advisor Solutions is the only custodial firm that allows advisors to custody bitcoin on behalf of their clients, but others will surely follow. Addepar/AdvisorPeak is the first of many portfolio management platforms that will allow advisors to pull crypto holdings into their rebalancing and reporting activities. Onramp Invest provides a trading and reporting platform that allows advisors to buy coins and integrate client crypto holdings with portfolio management systems, and Flourish Cash now offers crypto management. Even Schwab, arguably the stodgiest of the independent custodians, has recently published a white paper on how to buy and sell crypto for clients.

Some (younger, more tech-oriented) clients are going to gravitate toward firms that are willing to advise on crypto, which presents both a marketing opportunity and a huge danger for advisors who recommend a portfolio allocation to assets whose future returns may ultimately be predicated on the greater fool theory.

Political planning

Is crypto the most difficult issue facing advisors as we move into 2022? I think not. My nomination for the most vexing challenge in the year ahead is navigating our increasingly polarized political environment.

Wherever you stand on the great divide between right and left, vaccine or no vaccine, Black lives or blue lives matter, 2022 will be a pivotal election year, and people will be even more excited and angry about the perceived evils of the opposite side. I came of age in the 1960s, when it seemed like the younger and older generations were constantly at one anothers’ throats. But the level of hostility today makes the politics of 1969 look like a cocktail party.

For the past few years, advisors have managed to keep politics as far away from their professional discussions as possible, and really, how does a person’s voting record matter to how that person handles his or her finances? But in 2022, clients are going look much more closely for clues as to their advisor’s political beliefs and make decisions about whether they want to support their advisor based on what they’re able to glean. We all may look back at 2022 as the year when it became no longer possible to walk that fine line between Republican and Democrat, or to dismiss politics as a compatibility issue with clients.

In 2022, we will, for the first time, see breakout advisors, a few at first, be more up-front and outspoken about their political leanings. They will gain and lose clients accordingly, and the rest of the profession will be watching them closely to see if the gains outnumber the losses. Many advisors are tired of the constant pressure to walk this tightrope, and some will welcome the chance – if they could make it work from a business standpoint – to exclusively serve clients who share their political perspectives.

Beyond all that, my most confident predictions are that the markets will go up and down and up and down again in unpredictable ways, and that there will be important events in 2022 that were unforeseen by all of us. Planners will continue their long, painfully slow progression toward becoming a true profession, and brokerage firms will incrementally lose market share to less conflicted service providers, more rapidly than before as the breakaway exodus takes hold.

The pandemic will recede into the background but continue to force conference organizers to space out the audience chairs and do away with buffet dinners. Many of us will still be wearing masks on airplanes and in crowded spaces. Either the Democrats or the Republicans will win the House and Senate majorities, and either way, there will be perplexing changes to our tax laws that will force all readers of this article to put in extra work on behalf of their clients.

And the sun will continue to rise in the morning and set in the evening, until the Almighty decrees otherwise.

Happy new year!

Bob Veres' Inside Information service is the best practice management, marketing, client service resource for financial services professionals. Check out his blog at: www.bobveres.com.

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