What Will It Mean to Be an Independent Financial Advisor?

By Ellen Uzelac

June 01, 2008 at 04:00 AM

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With baby boomers moving into self-funded retirement, the advisor will need to become expert at risk analysis, risk management and financial life planning. There will also be some new faces at the table: career counselor, wellness and fitness expert, health care specialist and psychologist, among them. In wide-ranging interviews, more than a dozen industry thought leaders describe a dramatically changed role for the advisor — a shift that is already beginning to take place.

"New roles are emerging," observes Chet Helck, president and COO of Raymond James Financial. "I think we are witnessing the emergence of a true profession."

One thing is certain. More will be expected of the independent advisor than ever before — much more. With baby boomers moving into self-funded retirement, the advisor will need to become expert at risk analysis, risk management and financial life planning. There will also be some new faces at the table: career counselor, wellness and fitness expert, health care specialist and psychologist, among them.

"There's a whole new set of benefits the advisor has to provide. Roles and responsibilities will broaden and deepen, requiring training in new areas as well as a different understanding of current areas," notes Elvin Turner, managing director of Turner Consulting and an expert in retirement-related issues.

One predictor of what lies ahead: a new Fidelity Investments study that says a couple, age 65, retiring this year, will need about $225,000 to cover medical expenses in retirement. "That puts reps in the wellness business," Turner adds.

Other trends that will emerge: The cost of advice will go down and advisors will no longer have preferred access to products. "I'd be shocked if any of today's products exist in 30 years," says Clifford Jack, chief distribution officer of Jackson National Life Insurance Co. and chairman of NAVA. Jack believes products in the future will be packaged to offset one another from a risk standpoint. As a result of bundling, prices will come down. "A lot of people say simplified products work well. In my mind, you want to go in the opposite direction: the most complex and sophisticated product you possibly can have with full transparency in a simplified package," he says. "The advisor gets paid for that complexity."

In an era where disclosure and transparency have become de rigueur, a likely next step could be the clear separation of the service and sales models — not unlike the separation of doctors and pharmacists in the 19th century. One professional dispenses advice, the other product.

"The service model will go much deeper than it ever has in the past. I believe it will be regarded as the very highest professional calling a person can aspire to," says George Kinder, president and founder of the Kinder Institute, which trains advisors in financial life planning skills. "There cannot be a hint of sales in the model for it to be really successful. Transparency today is the closest we have come, but we will be going much, much further. And great salespeople who really know their product will never be supplanted, particularly with the complexity of the kinds of products that the industry will continue to offer and develop."

Consolidation will continue at a rapid clip, experts say, causing two outcomes: the emergence of nimble niche players and, arguably, the demise of the solo practitioner.

"Risk management will be paramount in the future and it will cover both the business and personal levels. The result is the single-person practice, even the small group practice we know today, will likely vanish," according to David Macchia, founder and president of Wealth2K, a software and media company focused on financial services. "I'd be surprised if there hadn't been a significant winnowing process to occur before 10 years pass."

One other factor driving the trend: While the solo practitioner represents the vast majority of registered rep practices today, most will migrate to a team model.

"It's inevitable that solo practitioners become partners and partners become associates in a business," says John Simmers, CEO of ING Advisors Network and a former chairman of the Financial Services Institute. "Where they were solo in the past, they've gravitated toward the technology phase and now they're moving, interestingly to me, from entrepreneurs to technologists to more of a business manager. We're already seeing signs of this. It's not coming, it's here."

A New Business ModelGoing forward, according to experts, the team concept will dominate as independent advisors build businesses that look like law and accounting firms. The position of general manager is likely to emerge. Advisors will be classically trained in academic settings. And the role of sales assistant, a staple in practices today, is likely to diminish.

"What I see changing over the next 10 years and beyond is that firms will continue to refine their business strategies. Right now, a lot of reps have the same offering, the same target client, the same kind of staff. They're all really kind of doing the same thing. One registered rep practice looks pretty much like another," according to Rebecca Pomering, a principal at Moss Adams.

That will change as specialization comes to the fore.

"As the registered rep community gets larger, you will see firms merging that work with families in transition or who work with gay pilots or who work with a really targeted client base," she adds. "And as firms' strategies evolve, we'll see roles and responsibilities change."

Instead of sales assistants, independent practices will develop second-generation advisors. They will also add counselor-type positions as more and more clients retire.

"You need people who can help clients when a spouse dies, for example, or when you first enter retirement. You need someone who can say: 'Let's get you acclimated to managing your own finances. Let's figure out who you are now that you're not working any more.' Psychologists and health-care specialists are going to be a huge need of the client base of the future," says Pomering. "I don't think the registered rep will be the first to add these positions. I think RIAs will be ahead of them. But they will have to do it to keep up with their clients' needs."

Turner says that reps are already sensing the "uneasiness" boomer clients are feeling as they face the retirement income challenge. He foresees a time when there could be "wellness advisors" who specialize in wellness and investment management.

"There could be a real change in teams over the years as the industry comes to grips with what boomers actually need," he adds. "Boomers will continue to change the industry as they have done with every institution they've encountered."

Laura Varas, a research partner with Financial Research Corp., says financial services firms are already beginning to ponder client-driven questions like: Are you going to be fulfilled in retirement? How will you spend your time? One firm, she says, is even studying the subject of depression in retirement.

"What we're witnessing is the personalization of retirement. Retirement is on our shoulders now. That changes the work the advisor needs to do. Similarly, there is this continued pressure to become more holistic," she says. "It's tempting to think advisors will step in and solve these problems."

Joe Deitch, CEO of Commonwealth Financial Network, expects the emerging independent advisor will have a resume that looks something like this: Marketable talents and specialties. Technical and technology expertise. Investment expert. Entrepreneur. Financial architect, meaning a mastery of the art and science of dealing with real people in the real world. Psychologist.

"What advisors bring to the table will have to evolve. People want someone who can help them navigate life. If this was merely all about technical expertise, it could be automated," Deitch says. "But we're talking about real people — not just with complicated decisions to make but with complicated lives and psychological and emotional considerations. We call it financial planning. But it's really a life plan.

Role of Broker-DealerWith 5,200 independent broker-dealers in existence, it's not a stretch to imagine far fewer in the future.

Bill Dwyer, president of LPL Financial, Independent Advisor Services, expects five to 10 top players to emerge along with boutiques that will become increasingly specialized.

Macchia agrees. "There are way too many broker-dealers and too few of those will be able to provide enough of a unique experience to justify their existence," he says. "The larger and stronger firms will grow larger and stronger."

Unlike in recent years when independent advisors have tried to disassociate themselves from their corporate home, it will be all about institutional brand going forward.

"It's driven on one hand by the tremendously aggressive advertising of big brand operations as well as by the realization by individual advisors that they can't compete on the basis of recognition or handle liability risk individually," Macchia added. "There's a desire for them to have a stronger partner standing behind them. We have always had in the U.S. a bottom-up advisor-driven culture. As time goes on, I think the culture begins to shift to one that's more top-down, primarily because the management of liability risk is more effective when it's done that way."

With an oversupply of clients and an undersupply of advisors, Mark Tibergien, CEO of Pershing Advisor Solutions, sees independent broker-dealers in an ideal position to leverage their resources.

And 15 to 20 years out, he says it wouldn't surprise him to see an affiliation fee replace today's override. Pomering, as well, believes some of the fundamentals involving incentive compensation and overrides will change as broker-dealers adapt to the new climate.

As she puts it: "Right now, it's really hard for reps to act like businesses in a broker-dealer structure and that's going to have to change or the broker-dealer model will suffer. It's really going to have to do with how much the regulators allow broker-dealers to provide resources to advisors in a way that lets advisors run a good business. Right now, they're forcing reps to act like insurance agents from the 1950s — and it's not the broker-dealer's fault. It's not an entirely broken model, and I don't think it will disappear, but the way they position themselves is going to change."

Many observers also believe that ten, 20 and 30 years from now, the landscape will be level — and that advisors will pretty much look the same, no matter how they are paid.

"I see a leveling playing field coming as it relates to regulations that support each of the models," notes Helck. "I don't think fee-only, commission or fee and commission will be all that different."

Lou Harvey, president of the consulting firm, Dalbar, takes it a step further. He thinks that in 10 years, being a fiduciary will be the norm.

"It's the independent thinkers that are the thought leaders and they have had to walk away from the traditional brokerage environment to one where they could build their business independently. That is only true because the current structure didn't let them do it," he says. "As we move forward, the practices that occur in the independent model will become the norm. Wirehouses will move to be fiduciary, and you won't be able to distinguish one from the other. They will change, or perish. It is the independent model that will prevail."

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John Simmers, CEO of ING Advisors Network

What do the last 30 years tell us about the next 30?This reminds me of some thinking I did a year ago about what's happening with the advisory profession and the IBD profession. First, let me say I don't think the core elements of our industry change very much over the years. When you think about our business, we have customers who want to build their investment portfolio. They want to grow it, they want to preserve it and then they want to transfer it. That doesn't change. What's happening is some of the tools that we use in our industry are getting better and the products are getting better — and there are more of both. There's more choice. So I don't think the fundamentals will change that dramatically. It's the secondary and tertiary issues that change. The core elements aren't at risk.

Look back 30 yeas ago and the independent business was in its infancy. The broker-dealer part of it has grown from the small, stand-alone, not well known or well regarded organization to one today that is well established with strong roots in communities and a strong base in the industry. It's been able to provide stable operating environments for its registered representatives and it has invested in systems, technology, people, training. It's a better organization than it was 30 years ago.

Do I think the model is going to change? I don't think the independent broker-dealer will be out of business anytime soon. Already, we're starting to see platforms develop that offer advisors tools and training at a faster rate than ever before. We're seeing consolidations. We're seeing trade associations cropping up to give advisors recognition. I think there's more of that coming: more professionalism, more consolidation, better interaction between the profession and service providers.

Independent broker-dealers will always be responsive. As a group, the independents have always been an innovator and quick to respond to change. In many cases, they are trend leaders. That role will continue. It goes, hand in hand, with the label of independent.

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Chet Helck, president and COO, Raymond James Financial

How will the relationship between the IBD and the individual advisor evolve over time? Advisors will need a heavily resourced partner like a broker-dealer because it's not just about access anymore. At one time, you had to have a broker-dealer to execute transactions. Today, you need due diligence, research, technology, intellectual property. That's more expensive than any individual practitioner can afford. Most doctors don't own their MRI machines, right? The terminology, IBD, may change and the relationship may change but a deeply resourced partner will still be part of the equation. It has to be.

You're also going to see teams develop and fewer solo practitioners. You'll accomplish some of those objectives by relying on a partner like a broker-dealer. Those who want to provide a more comprehensive practice will build out more of the capability within. You'll also see more referrals and people who specialize in 401(k) planning, rollovers, trust and estate work. And you will work collaboratively on business from anywhere on the planet. And, of course, you have to be of a certain scale to stay competitive. There may be fewer broker-dealers, but there will always be new players emerging.

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Joe Deitch, CEO, Commonwealth Financial Network

Will the computer supplant the advisor in the next 30 years? First of all, the big jumping-off place is the fact that the velocity of change is increasing. Just think of all the stuff that's come out in the last five years; there will be even more in the next five. The 10-year trends will include nanotechnology, bio-engineering. Basically, we will be making computers the size of dust that fly over Iraq or into the caves of Afghanistan and sensors will report back on what's going on there. There's no place to hide — let's put it that way.

Another thing that's absolutely fascinating is one of the biggest revolutions in 50 years. When I was growing up, if you had a secret — you had a secret. We were brought up to be private. Now, not just with the Web but Facebook, MySpace, blogging and cell phones taking pictures of everything, it's all so real-time. The huge revolution has been people going public. This isn't a fluke. This is the trend. If you look at where computers and communications and networks are trending, we are going to get much more connected and we will be networked in real time.

Segue now into financial services. With the advent of the Web years ago, people thought that since all this information was going to be accessible to everybody all of the time, you wouldn't necessarily need advisors all of the time. What we've learned is that information overload, coupled with all of the overload in the rest of your life, in reality just creates more confusion. Jump to the medical model. You can look at WebMD and you can read about what ails you, but what it comes back to is the desire and the need for a trusted advisor who is both experienced and intelligent and who knows your situation. The advisor, in fact, becomes a luxury in life.

What we yearn for is to have an enjoyable life. Doing it all yourself sounds more like work overload, not life enjoyment. It's estimated that 20 to 30 years from now the computer will be as intelligent as we are, more intelligent. But I think advisors will be here for a long while and valued for a long while. I think the evolution will move in the direction of coordinator/implementer, as it has always been, and away from very specific tasks which computers can do. For the advisors who adapt, that's a good thing.

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Freelance writer Ellen Uzelac is based in Chestertown, Md.; the former West Coast bureau chief and national correspondent for The Baltimore Sun, can be reached at [email protected].

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