No civilization that has ever experienced a worldwide pandemic has emerged without suffering significant changes. The same is true today in the U.S. after the year-long lockdown due to COVID.
In the financial services industry, these changes are still emerging as investors adjust to their compensation, savings rate, workplace situations, job prospects, and changes to their long-term financial goals, including retirement.
These changes have affected every investing demographic differently. For example, older workers faced different concerns than younger ones. Wealthy investors became less risk-sensitive. For instance, a Schroeder’s study of worldwide investors found that a third of investors (35%) raised their exposure to higher-risk investments after the COVID lockdown. Women also had a different result from the lockdown than men.
Similarly, a new report from L.T. Trust found that since 2020, women have become more risk-averse and are savings less than men in their 401(k)s.
L.T. Trust reviewed the 401k’s of 59,000 American workers across all 50 states and found that this rising discrepancy was caused by differences in investment decisions over the past year. In the last year alone, 78% of men increased their retirement portfolio of stocks compared to only 51% of females.
New Opportunities for RIA Re-Branding
The global economic shock that accompanied the COVID pandemic was undoubtedly disruptive and caused a worldwide economic, political, and social ripple effect. But for some nimble financial firms, the re-arrangement of investing priorities among different client segments (grouped by sex, age, investing goals, risk tolerance, wealth) presents an opportunity. Astute firms can appeal to clients in new ways that address their new post-COVID financial and lifestyle concerns.
On the positive side, financial firms will continue to rely on inexpensive social media to provide a platform for making their case about how they are different from other firms while also focusing on a target audience. If you cannot make a case about why your firm is different in the post-COVID environment, now is the time to develop a new theme.
A study by Asset and Wealth Management found that more investors, especially younger ones, are more interested in social responsibility (Environmental, Social and Governance, ESG) funds and the other non-financial aspects of investing, as opposed to pursuing alpha and posting superior net returns against a benchmark. ESG investing also could open the door to new ESG fund offerings, as well as touting your firm’s social responsibility activities locally or globally.
If a firm chose this re-branding path, they would have to re-structure their investment philosophy to some degree to reflect a heightened social awareness (to a cause or charity, for instance) that is widely accepted by the firm. Similarly, if a firm wants to make a social commitment in any way, it should be visible, transparent, and communicated to everyone the firm touches.
New Opportunities for Growing Your RIA Business
Investing in a Low-Interest Rate Market
In addition to direct COVID ramifications, financial firms and their clients also operate in a historically low-interest-rate environment. Low rates change fixed-income return patterns and impact risk-averse clients, such as those approaching retirement, as well as investors who shy away from market volatility. More conservative investors have exited equity markets in this volatile equity market environment in favor of more predictable and low-return short-term bonds and even bank deposits.
The low-rate environment has also prompted some banks to expand their wealth management services in search of higher returns, diversification, and lower earnings volatility. This helps explain why in 2020, Bank of America Private Bank, JP Morgan Chase, Goldman Sachs, and Morgan Stanley all devoted more resources to their advisory businesses. This trend should continue as banks seek to seamlessly merge their banking and advisory businesses.
Working From Home
Another problem is that more people are working from home, a trend that may last well past a return to post-COVID normalcy. As more people work from home, they will face pressure to be more productive in an increasingly digitized environment. This situation could mean they have less time to focus on their financial planning needs. Similarly, advisory firms are also seeing more staff members working outside the office. This may mean new management skills, higher expenditures on software and cloud resources, reliance on new technology, and training.
Similarly, traditional advisory firms are facing more competition from robo-advisors. Robo-advisors boosted their AUM after the 2008 market shock as more people decided they wanted the convenience of investing from home, accompanied by a distrust to some degree in the financial system.
Dealing With Robo Advisors
The 2020 COVID pandemic has also accelerated the rise in robo-firm AUM. A study by DigitalInTheRound found that the robo industry is expanding dramatically. The site predicted that the total robo adviser market in 2020 had $987 billion in AUM. This market is estimated to reach a $1.367 trillion AUM sometime in 2021.
How is a traditional financial advisory service different than a robo-advisor? Of course, there are many reasons, but do your clients know the difference? If not, it’s a missed opportunity for re-branding or at least making your case about why the human touch is beneficial in financial planning.
Gaining Strategic Advantages Through M&A
Robo-advisors focus on asset management, but there is also a connection between robo-advisors and the larger financial technology (fintech) revolution. Fin-tech includes automated payments, cashless transaction services, mortgages, insurance, banking, e-payments, and retail e-commerce. This helps explain the second half of 2020, which saw “fintech investments more than doubled from the first half of the year, aided by higher M&A activity in the US. U.S. deals accounted for nine of the top ten global fintech M&A deals in 2020,” according to a report by KPMG
What’s driving the fintech M&A activity? Convenience, changes in demographics (a younger audience more comfortable with cashless transactions), and greater ease and availability. There may also be signals here for the financial advisory business as a younger, more tech-savvy audience expects more from a human advisor regarding services or product offerings.
Acting on Opportunities
A noted earlier, no society has ever emerged unchanged after a pandemic. The same is true today. But, the pandemic has changed the direction and accelerated the pace of changes that were already underway. This applies to the financial services industry.
However, these trends, including fintech and ESG investing, will be accompanied by demographic changes in financial advisors, their clients, and a shift that will make advisory firms look more like fintech operations.
Looking ahead, astute and opportunistic financial firms have already recognized these trends to some degree. The opportunity now is to cautiously ride the wave, identify the best options for your specific firm, and then take deliberate, planned action. Traders know that “the trend is your friend,” especially if you identify it early and follow it to its conclusion. That advice is still valid today.