Covid-19 is Changing the Business of Financial Advice
By Samir Vasavada, CEO of Vise
Financial advisors entered 2020 like the rest of Wall Street: on a wave of cautious but bullish spirits. With stock indices having been approaching all-time highs and little prospect of a slowdown to global growth, money managers felt prepared to confront and capitalize on major industry trends, from new financial technology to a growing emphasis on fiduciary standards.
Then the coronavirus happened. The global crisis shuttered entire industries overnight, causing a near 30% market crash in just weeks. The collapse was severe and unprecedented – even for experienced brokers and money managers. The subsequent recovery has been equally puzzling. With the pandemic continuing to rage, no one knows how markets will perform through 2020 and beyond.
Amid this uncertainty, financial advisors are in greater demand than ever. People of all ages, from millennials to baby boomers, want smart counsel during times of market volatility and economic uncertainty. Investors want to know they’re doing everything they can to protect and grow their wealth. At the same time, tectonic changes to the wealth management industry were already underway before Covid-19 hit. The pandemic is accelerating some of these trends, while reversing or simply changing the nature of others.
Advisors will continue to go independent
For years now, advisors have been leaving large wirehouses in droves to create or join independent registered-investment advisor (RIA) firms, a trend that’s picking up steam. A 2019 survey from TD Ameritrade found a sizable uptick in breakaway sentiment among brokers at large financial institutions; in 2018 alone, independent RIAs saw a net gain of 3,184 advisors.
Higher earning potential is the primary driver for advisors going independent. The same TD Ameritrade survey finds that two-thirds of advisors believe they’ll earn more as independent RIAs. Enabling this new generation of independent RIAs is a host of advisor-focused fintech companies founded in the wake of the 2008 recession. With technology lowering barriers to entry, the assets controlled by independent advisors may surpass the assets held by all the major brokerages combined in 2020, predicts research firm Cerulli Associates.
The coronavirus pandemic will help more advisors realize that independence isn’t as daunting as it once seemed. The normalization of work-from-home and virtual communication is rippling across the private sector. Like many professionals, advisors are realizing they can perform their jobs from anywhere; the next logical leap is advisors realizing they don’t need the infrastructure of a large financial institution to service their clients.
Passive investing will continue to gain traction, but with touches of active management
The triumph of passive investing over active management has been the most fundamental shift in the investment management world over the last fifteen years. Stock pickers managed about 75% of all U.S. equities (about $3 trillion) in 2007 -- now index funds oversee more assets than active managers, and no wonder: only 23% of active funds beat their passive rivals over the 10-year period ending June 2019, according to Morningstar.
The pandemic has complicated the active versus passive debate. Some hedge funds and active managers foresaw the March downturn and were able to turn a profit for their investors, while nearly all index funds crashed as part of the broad market sell off and flight to dollars. Markets have since recovered, but the March crash is a painful reminder that active management does sometimes outperform, and in a big way.
Advisors know as well as anyone that pure passive investing is built for bull markets, and that clients of all types need a degree of personalization in their portfolio construction and management, with a focus on sufficient downside protection. While clients are demanding the low costs of passive strategies, they also want the personal touch associated with active portfolio management and ownership of individual stocks. Advisors, aided by fintech platforms, are in a unique position to satisfy investor demand for ‘personalized passive’ strategies.
The recent market crisis also gave advisors the opportunity to do what they do best: assuage client nerves during volatile periods. Investors who listened to their advisors and didn’t dump their positions in March will be thrilled; those who panicked and offloaded at the market bottom will be kicking themselves and wondering why they didn’t first speak with a money management professional.
Zero-fee trading will continue unbundling the mutual fund as investors demand personalized portfolios
When Robinhood brought commission-free stock trading to the masses, there was scant indication that zero fees would become an industry norm, but that’s precisely what’s occurred. Leading brokerages like Charles Schwab, TD Ameritrade, and E*TRADE have all eliminated fees and commissions on stock trading.
Zero-fee trading has undermined the value proposition of mutual funds. Historically, if the average person had a few thousand dollars in savings and wanted to get some diversification, mutual funds were a relatively inexpensive way to get it. But in a zero-commission trading environment, mutual funds are a more expensive form of portfolio diversification than building a personalized portfolio of stocks and bonds.
The pandemic has brought into focus the importance of not only portfolio diversification, but diversification that’s done on an individualized basis. For instance, imagine being an investor who works at a company in hospitality, retail, or travel. Employees with stock options at those companies should not have IRAs or 401ks with exposure to those industries. Those investors are already heavily exposed through their employment and stock options. Individualized portfolio construction has never been more important.
The substantial under- and out-performance of certain sectors and individual companies due to Covid-19 will deepen investor demand for personalized portfolios. Combine that with the broad pivot to zero-fee stock trading, and the wealth management space can anticipate growing long-term demand for more personalized portfolios.
Covid-19 reminds us that the future of finance is human
Economic uncertainty is scary. When stock markets crater by over 25% in a single month – as happened in March – people don’t want to receive generic responses from chatbots about what to do with their life savings. They want to speak with a person whom they know and trust, and who intimately understands their unique situation and investment objectives. In times of economic crisis, people want to talk with their financial advisor.
Even with the rise of roboadvisors and index funds, the financial advisor category has defied expectations and grown handsomely at a rate of over 15% per year over the last decade. Financial advisors are equipped with a unique super-power: the ability to educate clients and look after clients’ best interests.
After months of sheltering in place, Covid-19 is reinforcing the desire for human communication and connection, and financial advisors will benefit from that social trend. Sure, the occupation of the financial advisor will take new forms and be conducted through new channels as tech savvy Millennials and Gen Zers begin investing and inheriting wealth, but the human desire to speak with an expert about money is timeless.
Samir Vasavada is the Co-Founder & CEO of Vise, a venture-backed startup using Artificial Intelligence to revolutionize portfolio construction and management for RIAs. Vise gives investment advisors the ability to provide tailored financial advice to each of their clients powered by proprietary Portfolio Intelligence, making them smarter and more efficient.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.