Sirianni: Mega Trends: 2020 Predictions
2019 was a great year for astounding predictions coming true, especially at AdvisorHub. Here are my predictions from last year that became fact. (A little prediction advice: try to pick a few easy predictions you know will come true; see below)
LAST YEAR’S PREDICTIONS
This year I will stick with predictions based on the mega trends that are reshaping our industry and sort out some specific impacts for “double deuce”.
- ZeroCom WILL affect you in 2020.
To repeat myself, ZeroCom will affect you in 2020. Most industry leaders, at least publicly, are downplaying the impact of ZeroCom on their businesses. Their rationale stems from the last great commission meteor that struck on May 1, 1975 —Mayday/Deregulation day. The thinking goes, the industry was supposed to come to an end in ‘75 with the introduction of discount brokerages, and all feared that clients would flee full-service advisors in droves. This didn’t happen, and the advisor relationship retained its primacy. Clients stuck with their advisors and the world didn’t end, primarily because clients got what they paid for, and discount brokers gave discount style advice and service. Poor advisors pay and low-quality advisors were the rule for discounters (this has evolved).
We have to acknowledge that things are moving at warp speed today versus ’75. We can’t brush off deregulated commissions history either — it has had, and is still having, a significant impact.
Commission impacts will be felt much sooner in 2020. Any graph plotting commission payouts over time would show commissions cratering. With ZeroCom the new graph charting RIA revenue will look like a hockey stick. ZeroCom takes significant costs out of the RIA equation period. With two businesses occupying the same space, with those disparate graphs, there can be only one outcome.
Industry leadership is caught flatfooted. They are ignoring what happens “over there” as if there’s no connection between our industry channels. Yet, there is more connectivity today than there ever was. It’s called a shared client base! We are one industry with disparate models fighting for primacy, not separate industries — Indy or Wire.
It’s not like advisors who now have zero commission are going to keep it a secret from your clients. Just watch TV. The guys whispering in your clients’ ears this time around are not wearing light blue leisure suits with white shoes; they are every bit as sophisticated as you. LINK TO ARTICLE
- ZeroCom will create a schism in the custodian ranks.
Custodians like Pershing will argue, and they won’t be wrong, that the ZeroCom Custodians will have to make up the commission losses somehow—so expect them to talk about extra fees, costs of cash, interest on accounts, and how the REAL cost of accounts is much lower at custodians that charge commissions. They will also tout best execution on trades and an advisor’s fiduciary obligations. Even if it’s all categorically proven true, it will be a tough argument to make to clients who will only hear zero “commish”.
- ZeroCom will advantage all forms of RIAs in 2020, especially the most recently formed RIAs created by former Wirehouse migrators.
Many of the new burgeoning sophisticated class of RIAs did not pass along commission costs to clients — they wrapped them into their fees — for the simple reason that that was easier for clients transitioning from Wirehouses than trying to explain why they would get a separate bill for commissions. They will now receive an immediate bonus of 10-70% that they can spend on their businesses, recruits, and themselves.
- ZeroCom 2020 will help foster more movement from Wirehouses.
The ZeroCom structure favors new RIA creation by simplifying one of the awkward and complicated parts of the fee for the advice RIA model, and improves the financial metrics for Breakaway advisors significantly.
- IBDs in the crosshairs.
The coming ZeroCom tidal wave will wash first over the IBDs. 2020 will highlight IBD struggles to remain relevant. Many IBDs clear through large ZeroCom custodians and will have a lot of explaining to do to clients regarding their current commission models.
2020 will see IBDs actively switch custodians and clearing firms. The smart under the radar custody options like Hilltop, Interactive Brokers, and classic commission custodians like Pershing will benefit from IBD movement.
Wires will need to watch closely as the waters won’t stop there. Will savvy IBDs be able to convert to advice models or create products for their commission-based brokerage forces that mimic their current structures? Will the advisors themselves be able/open to making a leap to advice? Will the custodians create a path for IBDs? We will start to see the answers in 2020.
- Homogenization will destroy practices in 2020.
In a recent podcast with Edward Jones’ Penny Pennington she said (and I’m paraphrasing), “If advisors can’t add value versus a robot they deserve to be paid like a machine.” It’s a sentiment I’ve heard echoed time and again by senior industry leaders. The human element they believe, as represented by advisors giving unique advice, is the one piece of the puzzle that can’t be copied or homogenized. I concur.
This is being said against a backdrop of constant pressure from passively managed money products and ETFs, AI/robo advising, and big banks and wires adding discount desks for smaller clients. All of these pressures tend to devalue the advisor and her advice in favor of algorithms and passive investing.
Market volatility will cause 2020 to be the year you earn your pay. A down market will show the emperor has no clothes, and separate the advisors adding value from the machines/do it yourself prospects.
Many advisors have moved to a model where they are salesmen with only a tangential relationship to the financial markets and the products they sell. They have no opinions. They add little value. Such Homogenization keeps industry leaders like Stifel’s Ron Kruszewski up at night. He knows those low value add brokers will not fare well in a down market where less expensive tech driven options outperform them ( he works to make sure they are not at his firm). Because of their complacency, the next down market in 2020 will blow up low advice value practices and likely increase movement of burned clients to tech driven advice. Don’t expect your clients to stay with you if you can’t beat the machines.
The Europeanization of our industry will continue unabated in 2020. You know you’re a European Broker when…. your firm drops out of protocol, your firm hides punitive language about garden leaves and client ownership in HR docs they force you to sign, your pay begins to morph in unsettling ways with bonuses for behavior modules, you are on a large team with a Fredo/Judas foisted on you by your manager, your firm spends more money on broker lawsuits than broker retention, you sign a sunset agreement, etc.
- A Big Wire will go RIA.
They are all sniffing around it, trying to figure out the least painful way to accomplish it. One will announce how it will do it in 2020.
- RIA balance sheets will be used against them.
RIAs will be held more accountable for their ownership structures in 2020. New firms pushing into the space backed by larger, many times publicly traded entities, (B Riley, Thrivent etc.) who will raise questions with potential recruits over just who owns what portion of any single RIA aggregator. With equity becoming an important lure in building a brand and business, larger RIA aggregators with true un-leveraged balance sheets, will push advisors to ask their competition for transparency in ownership stakes, which will reveal for some the true vulture/venture nature of their aggregators RIA flip the firm plans. #wolfinsheepsclothing
10. Disturbing trend to watch— Millennials.
There has been 0% growth in millennials working with advisors over the last 3 years, in spite of the fact that their parents continue to die, and they continue to inherit. 95% of inheritors leave their existing advisor relationships for new pastures upon inheritance. These are bad numbers for you.
Millennials are prison educated. Just like a convict who spends time in the prison library to improve himself, but remains surrounded by nincompoops all day—the prisoner may read the word punctilious, but has never heard it used in a sentence, and is unlikely to hear his cell mates or guard use it, so he asks you to have a punctilious good morning each day.
Millennials use the internet as their prison library, and are amazingly gullible about what they read online. They, also are surrounded by nincompoops all day, who pontificate online about passive investing and evil brokers.
We need to find a way to explain to them that trying to learn about markets online is like trying to learn to play golf online. It’s impossible without experience, and it’s only once you hook your first tee shot, that you realize you need some lessons (read ADVICE).
I have my eye on a few more mega trends for “Double Deuce” that I will save for next month’s articles. Happy New Year!