Advisers Should Take a Fresh Look at Investment Strategies, Business Models

Meeting the needs of Baby Boomers and Millennials and addressing investors’ desire for low costs are key to growing business.

During Tiburon Strategic Partner’s CEO Summit on Thursday, Chip Roame, managing partner, outlined five major themes driving the wealth management industry. The first, Roame said, is the continuing importance of Baby Boomers, even as they start to retire, and the emerging importance of Millennials. The second, he said, is investors’ insistence on low-cost trades, products and advice.

Roame went on to say that long-only investment management, hedge funds and many liquid alternatives are dying a slow death—but there are ways to still compete, namely, through factor investing, the use of alternative data and environmental, social and governance (ESG) investing.

Additional important issues facing the wealth management industry, Roame said, include the emergence of women and minorities in the industry, and the continued investment of venture capital and private equity in wealth management firms.

Wealth and investment management firms’ annual revenue growth rate is 10.6% this year, up from 0.7% in 2014—marking substantial revenues and earnings growth, Roame said. “Financial services firms lead other industries in annual revenue growth rates,” Roame said. “Their annual net profit growth rate is 12.2%, up from -5.5% in 2014 but down from 32.1% in 2018.”

Not only that, but wealth and investment management firms have high pre-tax operating margins, Roame said—averaging 25% and 34%,  respectively.

However, it won’t be all smooth sailing in the years ahead, Roame said. “Prior to COVID-19, the high-growth and highly profitable wealth and investment management industry was already evolving due to consumers’ increasing savviness and cost consciousness,” he said. “The future of wealth and investment management is better advice at lower costs, delivered, in part, virtually.”

Roame said he did not think robo advisers would overtake financial advisers, but that there will be a combination of the two: technology-enabled financial advisers. He said that while 95% of advisers charge per assets under management, that could change in the years ahead. Some alternatives include as a percentage of profits, a percentage of net worth, an annual fee, a monthly fee and an hourly fee.

Roame also said that in 2019, assets in socially responsible and ESG investments available in packaged products shot up to $21.4 billion, up from $5.4 billion in 2018, and that he expects that to continue to soar.

Advisers have the opportunity to provide financial planning to the mass affluent in many ways, Roame said: tax preparation, life insurance, college savings, health care insurance, Social Security strategies and retirement income products, longevity solutions and estate planning.

For high-net-worth clients, advisers can help them with liability insurance, tax planning, corporate executive services, small business owner services, estate planning and charitable giving.

Roame said that fee-based advisers, namely, registered investment advisers (RIA), will continue to grow, and that there will emerge nationwide RIAs with $1 trillion in assets. Finally, mergers and acquisitions (M&As) among RIAs will continue at a brisk pace.