How changing investment markets are impacting advisory business models (and how you can ensure your business scales)

Changing economic conditions and the changing regulatory environment will impact advisory business models, but it’s how an advisor responds that can determine whether the impact is positive or negative, according to the manager of Desktop Broker distribution, Tim Sparks.

Keys to go

  • In an environment of global economic and political uncertainty, rising interest rates and inflation, allocations to cash and fixed interest are increasing.
  • Consistent returns of 8-10% per year on equities will be harder to achieve, putting pressure on financial advisory firms that are built around performance-only value propositions.
  • The popularity of managed accounts continues to grow. A growing number of advisors are outsourcing investment management responsibilities to third parties for certain segments of their clients.
  • Desktop Broker is a financially stable trading platform for advisors and can help them save time on investment selection, portfolio construction, compliance and trade execution.

Fear of missing out (FOMO) is a condition of good faith. Not only is it rampant in secondary schools, but it is on full display in investment markets.

This is why people are paying huge sums for dilapidated properties on the outskirts of town and hoarding cryptocurrency at the peak of the market.

But FOMO, at least in investing, is dissipating. The fear of missing out is overtaken by the fear of overpaying and losing money.

This is reflected in low auction win rates in the real estate market and low trading volumes on the Australian Securities Exchange.

For much of 2022, auction resolution rates hovered around 60%, compared to 80% in 2021.

Capital Auction Clearance Rate October 2022 vs October 2021

Source: Corelogic

Similarly, retail equity trading volumes fell 13% in the nine months to September 30, 2022, compared to the prior corresponding period.

Investor jitters are normal, especially in an environment of rising interest rates and inflation, but today’s pessimism looks different from years past.

In a relatively short period of time, caution replaced irrational exuberance and completely bypassed cautious optimism.

This impacts how investors and advisors construct their portfolios.

Investor behavior is changing

In early 2020, when COVID-19 was declared a global pandemic by the World Health Organization and stock markets fell, investors treated volatility as a downside buying opportunity.

For many years prior, a significant number of potential investors stayed away as prices rose higher and higher. In their minds, they had missed the boat once and wouldn’t miss it again. FOMO led them to straddle the recovery.

This time, investors are rightly spooked by a culmination of factors including Russia’s invasion of Ukraine, the resulting European energy crisis and global supply chain bottlenecks; part of the COVID-19 hangover.

Some also worry that high levels of corporate debt could derail growth, especially in developed countries.

Investors are bracing for longer-term headwinds.

Thus, allocations to defensive asset classes such as cash and fixed interest are increasing. According to Rainmaker, bonds with credit and high yield characteristics saw a 13% increase in net inflows for the 12 months to June 30, 2022.

As of March 31, 2022, self-managed pension funds (SMSFs) – a proxy for retail investor behavior – held nearly a quarter of cash and fixed income assets, consisting of 12.2% cash and fixed income deposits. short term, 8.4% Australian Fixed Interest and 2.1% International Fixed Interest.

ARPA-regulated super funds held 27% of cash and fixed income assets.

Table title: Asset Allocation of SMSFs vs. Small APRA Funds

Source: Super Concepts

Why the return of more Ordinary market conditions prompt rethinking of advisory models

After nearly 30 years of uninterrupted prosperity, Australia is entering a long period of heightened economic uncertainty.

Since the 1991 recession, national prosperity has been supported by strong immigration and population growth, as well as a mining and resource boom.

Whether through luck or good management, Australia has emerged from the global financial crisis relatively unscathed and so far the economic impact of COVID-19 has been moderate.

In fact, the COVID-induced fiscal and monetary stimulus has artificially supported the economy.

But the economic landscape and therefore the business operating environment is changing.

This is causing financial advisory firms to rethink their business models, especially those that articulate their value proposition around selecting investments and generating returns.

A key trend in recent years has been the rise of managed accounts.

In 2021, more than half of advisers used managed accounts for their clients, up from 44% in 2020 and 16% a decade ago, according to Investment Trends.

With managed accounts, advisors can customize portfolios based on a client’s unique needs and goals.

They can execute trades and rebalance portfolios at their discretion, consistent with a client’s risk profile and investment strategy. This reduces the number of pending customer approvals and significantly reduces the compliance burden.

However, a growing number of advisers are also choosing to outsource investment management responsibilities to third parties for certain segments of their clients. One such segment is customers with lower investment amounts.

A decade ago, when managed accounts were essentially only used by a small number of mostly self-licensed companies, investment decisions were largely made in-house. Consulting firms have created investment committees of three to four people, sometimes appointing an independent member. These investment committees determined and executed the group’s investment strategy, including strategic and tactical asset allocation.

As a large number of consulting firms have moved away from institutional dealer groups, the trend of managed accounts has accelerated. Older institutional advisers valued the ability to invest in direct assets and make decisions, unhindered by very restricted approved product lists.

Although this model is still relevant and common today, it is under pressure.

Advisory models under increasing pressure

It’s one thing to build and manage portfolios during a period of unprecedented economic prosperity, quite another to do so under Ordinary market conditions.

Over the past 20-30 years, investors have become accustomed to consistent returns of around 8-10% per year from stocks.

With more conservative returns on the horizon, advisers can expect greater scrutiny of their investment philosophy, processes and performance, not just from clients, but potentially from regulators.

Some choose to partner with an independent asset consultant or fund managers to help extend their advisory delivery, manage business risk and ensure their clients’ expectations are realistic.

This approach also allows them to spend more time seeing existing customers and winning new customers.

He has created an efficient and scalable solution for all customers, including relatively low value and low account balance customers.

In most consulting firms there is a long queue of ‘CD’ or low-balance clients who only interact with an advisor sporadically.

With managed accounts, advisors re-engage C&D clients and offer bespoke investment management solutions and ongoing communications and performance updates on a scalable basis using technology provided by trading platforms such as Desktop Broker .

Where advisors can add the most value

Financial advisors add value in different ways. Their role is so much broader than investment management and administration, including advice on budgeting and cash flow management, debt, pensions, taxes, Centrelink, retirement planning, estate planning and elder care.

In an environment where it will be increasingly difficult to beat the benchmark, advisors will seek to anchor their value proposition on something other than investment performance.

The behavior of investment markets and the direction of interest rates are beyond anyone’s control, making it important for advisors to focus on areas where they can add the most value.

This includes areas such as financial education, goal setting and strategic retirement planning. In an environment of heightened volatility, regular communication and interaction with clients is essential to ensure that investors do not panic and deviate from their strategy.

Rethink how you drive investment performance

Desktop Broker is a financially stable trading platform for financial advisors. Our team of experienced advisors can help you save time on investment selection, portfolio construction and compliance.

We can move your consulting practice to solid ground. Simply arrange a time to talk to us about your business needs by clicking here.

How changing investment markets are impacting advisory business models (and how you can ensure your business scales)

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Last update: October 28, 2022

Posted: October 28, 2022