The sharp falls in US stock markets at the end of 2018, followed by a quick recovery in the opening weeks of this year again demonstrated the unpredictability of the investment management business.
Such volatility in asset prices raises questions about how well financial advisers can navigate the currents and eddies of the markets on behalf of their clients.
Many advisers admit that their greatest strengths lie not in the day-to-day selection of investments but in holistic long-term financial planning for clients. For top advisers, picking a great stock or fund is less important than help with longer-term tasks such as estate planning, curtailing investors’ risks, managing taxes and other complex problems.
Against this backdrop, the seventh annual edition of the Financial Times 400 Top Financial Advisers provides a snapshot of the best professionals at traditional US broker-dealers.
Financial planning is rising in importance in the way top advisers present themselves. This year, 68 per cent of FT 400 advisers identify financial planning as a particular strength, up from 63 per cent two years ago. In contrast, a shrinking portion of advisers see their strength as picking investments or offering clients exclusive investment opportunities such as select hedge funds or initial public offerings.
A typical adviser has more control in overseeing their clients’ financial plans than over investment returns. Client service comes with its own difficulties, however, as smartphone-wielding investors increasingly require more attention and faster responses. This year, 47 per cent of FT 400 advisers say keeping up with client demands is a top challenge, compared with 41 per cent last year.
How clients’ assets are allocated continues to evolve. Even advisers with experience in building investment portfolios will now often outsource that job by selecting one of several dozen computer-aided model portfolios that are chosen based on a client’s goals, risk appetite and other traits. Some 78 per cent of FT 400 advisers use these prefabricated portfolios at least some of the time to determine an investor’s holdings.
At the same time, advisers continue to cut costs for clients by increasing their use of index-tracking passive funds, which generally carry lower management costs than traditional mutual funds.
In this year’s FT 400, the average adviser managed $1.8bn in assets as of June 30. That is 16 per cent higher than the year before, thanks in part to rising stock markets.
Significantly, the national brokerages such as Merrill and Morgan that offer a range of investment services — colloquially known as wirehouses — have the smallest concentration of advisers on the list in its seven-year history: 53 per cent of the FT 400 are from the wirehouses, down from 61 per cent the previous year.
This change is an indication of how many advisers have been leaving brokerages affiliated with Wall Street to run their own businesses.
Many of these brokers become self-employed but use the services of so-called “independent” brokerages such as Ameriprise Financial (12 per cent of this year’s FT 400) and Raymond James (9 per cent).
A big potential change facing the sector is the Securities and Exchange Commission’s proposed regulation, put forward last year, aimed at strengthening the requirements for brokers who offer investment advice.
“Regulation Best Interest”, as the SEC calls its proposed new rule, would require brokers to only make recommendations that serve their clients’ best interests. The SEC has also set out new standards for disclosing when a broker’s commission might create a potential conflict of interest.
Critics say the proposed regulation does not go far enough. Some sceptics see it as a weaker version of the Labor Department’s fiduciary rule for retirement advisers that was abandoned by the Trump administration.
The regulation’s final form is still to be decided — but it could yet prompt many brokerages to change their processes and their product recommendations to better avoid conflicts.
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