Get alerted any time new stories match your search criteria. Create an alert to follow a developing story, keep current on a competitor, or monitor industry news.
Don’t forget you can visit MyAlerts to manage your alerts at any time.
5 Big Wealth Management Trends for 2022
Industry Spotlight > Advisors
By any measure, 2021 was a transformational year in the independent wealth space.
This year is shaping up to be even more evolutionary as various macro-trends continue to collide, accelerating change for advisors, clients and the ecosystem that supports them.
Consider these five trends in your strategic planning as you position your business for success in 2022.
Continuing their decades-long advance, independent registered investment advisors continue to take market share from employee-based models. According to the Aite-Novarica Group, RIAs, including hybrids, control over $4.3 trillion in assets under management, including $3.1 trillion in high-net-worth assets.
Both of these types of independent RIAs are enjoying strong growth, with the number of fee-only RIAs increasing by 15% and the number of hybrid RIAs by 8%. AUM grew even faster thanks to market gains, including 22% at fee-only firms and 20% at hybrid firms.
This growth, however, has not been equal, as the 80/20 rule is definitely in play in RIA land. Larger RIAs ($750 million-plus) account for just 19% of the industry, yet manage more than 73% of the assets. As noted in many studies over the years, size matters in delivering scale, efficiency and a broader service set, so the race is on for firms to continue to grow to stay profitable and keep up with the demand for fiduciary advice.
For the asset management and technology industries, RIA growth means that they need to evolve their products and service set to move away from traditional channels and better customize their platforms and practice management advice to accommodate the needs of these clients.
With a highly fragmented RIA marketplace in terms of size, style and geography, this becomes particularly challenging and is not for the faint of heart. But it is absolutely critical to capturing share with this highly desirable marketplace.
Last year also hit another record in RIA M&A transactions, with more than 220 deals consummated, according to DeVoe & Co. And 2022 is expected to continue this frenetic pace.
A perfect storm of advisor demographics, along with market, tax and financing opportunities, combined with high buyer demand, is creating an environment where advisors are almost compelled to sell. The multiples being offered are nearly impossible to resist, particularly at the high end of the market for $1 billion-plus firms.
For better or worse, the continued aging of RIA founders who lack succession plans (only one-third of the industry has one) is forcing them to consider external sale options. The good news is they have more choices than ever. In 2021, there were 88 different buyers, meaning that there was roughly one buyer for every two sellers.
Combined with a flood of private equity financing, record stock market valuations, a slew of voracious buyers, the industry is rapidly consolidating, particularly at the high end of the market. What this means for the industry is that a couple of dozen national RIA firms are emerging with the size, scale, service offering and growth engines that will become difficult for advisors everywhere to compete against.
As a result, midsize and smaller firms will need to make a crucial strategic decision: Build it or join it. Regardless of their decision, the competitive dynamics in wealth management will be forever changed by this “urge to merge.”
How long does it take for two discount brokers to integrate? In the case of Schwab and TD Ameritrade, about half a decade. This is the bizarre trap that two-thirds of the industry finds itself in as the tortuous delays in merging the largest custodian platforms linger late into 2023, with some estimating well into 2024 for a deal that was announced in 2019.
Will the 7,000-plus TDA advisors end up with a good experience becoming part of a huge entity, or will they be shunted into an impersonal call center and DIY website corner that will handicap their business? At this rate, it will take a couple of years to find out.
In the meantime, service issues are increasing on the TDA side as Schwab struggles with the quixotic decision to continue to spend resources for at least the next two years on a company and brand that they will eventually shut down. There is no return on that investment.
All of this opens the door for new custodian competitors to enter the scene and compete for their share of the growing RIA industry. Most notably, a brand-name Wall Street giant is already striking fear in the hearts of custodian executives everywhere.
Goldman Sachs, fresh off its strategic acquisition of the mega RIA-firm United Capital, its FinLife technology platform and the remnants of FolioFn, combined with their world-class capital markets and asset management operations, has all of the components to become an instant player overnight, particularly with larger RIAs.
That said, other custodian competitors, along with a handful of tech-enabled front-ends with a third-party custodian back end, are all gearing up to source disenfranchised advisors, unhappy at this new hegemony of the large custodian players.
Without a doubt, one of the biggest trends in the industry is the continued and beneficial innovation in some of the core technologies that enable independent advisors to efficiently run their businesses, no matter how small or large.
Just as business technology operating systems have evolved rapidly over the years, from DOS to Windows to cloud-based, now we are on to the next generation with cloud-native computing.
According to technologists, cloud-native technologies empower organizations to build and run scalable applications in modern, dynamic environments that utilize the latest software development tools such as atomic design, containers, service meshes, microservices and APIs to deliver speed and agility in developing the latest wealth management applications.
Particularly in bridging legacy systems with multiple-data sources and the latest applications, cloud-native approaches will enable advisors and firms to create their own “digital ecosystems.” By leveraging this approach, firms can create technology they design and host themselves. This allows them to own their own data and integrate the systems and tools that best fit their value proposition, customized to their needs.
Essentially, firms are able to build their own “app stores” that they control and select, and they can seamlessly bring them together in an integrated framework and environment.
Today, many advisors are de-emphasizing investments as part of their offering as it becomes commoditized, and instead focusing on financial planning and wealth services as their value proposition.
The good news for investment-focused firms, however, is that new rebalancing and trading technologies are enabling advisors to bring differentiation back to investing.
Direct indexing, for example, enables firms to customize and personalize portfolios by holding the underlying securities to mimic a separate account structure to track an index or adhere to a model portfolio to accommodate personalized constraints and opportunities.
The benefits of this type of technology bring up the ability to efficiently deploy tax-loss harvesting, accommodate a large legacy position or manage to an ESG mandate without changing the risk profile of the portfolio.
This means that for the tax-loss harvesting opportunities alone, portfolio managers can deliver a significant “tax alpha” that can more than make up for their added fees for actively managing the portfolio.
To show the impact that direct indexing is having in shaping the industry going forward, consider the dozen or so acquisitions by large asset managers scooping up boutique direct-indexing shops for their technology and expertise — most notably, Vanguard’s industry-defining acquisition of Just Invest.
Timothy D. Welsh, CFP, is president, CEO and founder of Nexus Strategy LLC, a consulting firm to the wealth management industry and can be reached at [email protected] or on Twitter @NexusStrategy.