On the surface, the environment for investment advisors seems a challenging one, with some long-term trends continuing to evolve and some new developments on the horizon.
Regulation
Worldwide and also in South Africa, we have seen the wholesale regulation of the advisory arena. Although we’ve come a long way since the introduction of FAIS, the expectation is that this will be an ongoing process with much more to come. As a result, compliance costs and personal liability risks have escalated dramatically. Some advisors have left the industry, while others have embraced the change and responded by clustering together in all sorts of collectives, sharing infrastructure, compliance costs and experience. This consolidation is bound to continue.
Focus on clients’ total expense ratio
In an environment of low inflation and low yields (at least on interest-bearing instruments), clients have become much more aware of the impact of costs on their long-term returns. In response, astute advisors are exploring passive investment vehicles such as exchange traded funds and notes as building blocks for constructing portfolios. There is also a move towards direct to market solutions as a way of implementing asset views, for example, a direct share portfolio instead of a general equity unit trust fund.
Clients helping themselves
Clients are becoming better informed and more sophisticated and the internet provides them with a universe of information. Investment planning tools previously only available to the advisor are now available to them. Advisors should carefully consider how they add value, how this value is delivered and how it is charged for or face potential disintermediation.
Traditional risk profiling
The accepted practice of boxing clients into a couple of risk profiled solutions based on a rudimentary assessment of their behavioural traits is being questioned. Clients realise that they are unique and are demanding bespoke solutions tailored to their personal circumstances. Advisors need to explore technology to overcome the trade-off between customised portfolios and the scalability of their practices.
Intergenerational wealth planning
The restructuring of the South African economic landscape has resulted in many more families accumulating surplus wealth that will evolve to the next generation. This requires a different type of planning, where fiduciary issues and estate structuring becomes much more important. Advisors are required to adopt some of the practices previously seen in family offices.
Institutional products
Investment concepts, products and instruments previously regarded as the domain of institutional investors are becoming available to the retail market. Think about hedge funds, private equity, property co-investment and corporate credit instruments. These require a much deeper level of understanding on the part of the advisor to ensure that clients fully understand what they are getting themselves into.
Although this might seem a daunting environment, it also offers great opportunity for those advisors who are willing to embrace change, think out of the box and adapt.
