IMGCAP(1)]The financial planning landscape has dramatically changed over the past five years.
The industry has been forced to transform itself because of an increase in do it yourself investors, increased competition and the revenue-shrinking effects of the recession. The next 20 years will prove critical, as the first wave of Baby Boomers turns 65 next year and will have a large need for retirement planning services. Will the industry be able to stave off DIY investors and recover from the effects of the recession in order to capitalize on the increased demand for financial assistance?
In A Random Walk Down Wall Street, economist Burton Malkiel argued that "a blindfolded monkey throwing darts at a newspapers financial pages could select a portfolio that would do just as well as one carefully selected by experts." From October 2002 to October 2007, a monkey, an average Joe or a certified financial planner all could have made money. The Dow Jones Industrial Average appreciated over 90 percent during that time.
Making money in the stock market was easy and many investors did not see the need for financial planners. As more people became interested in the bull market, the financial planning and advice industry grew steadily; however, the number of DIY investors grew at an even faster pace.
The Aftermath of the Recession
As the economy begins to recover, and equity markets appreciate over the next few years, investors will have decisions to make: Do they continue to go at it alone or is it time to seek the professional services of a financial advisor? IBISWorld, the research firm where I work, predicts that many investors will choose the latter as more investors will take their financial matters more seriously in the post-recessionary world. The next two decades will be critical for the industry as the number of investors needing financial advice continues to grow.
In 2011, the first wave of the Baby Boom generation, as defined by the U.S. Census, will turn 65. Over the next 18 years, more and more Baby Boomers will face the difficult question: Will I have enough to retire?
Not only will having enough money at the start of retirement be a major concern for Baby Boomers, so too will having enough money to last the course of their retirement, especially as life expectancy increases due to higher-quality health care. A sobering study last year by the Employee Benefit Research Institute found that only 13 percent of Americans are confident that they will have enough money to live comfortably when they retire.
In order to compete effectively for this growing market, financial advisors will need to differentiate themselves from online brokers. The industry will need to resist engaging in a price war with online brokers and focus on two key areas: quality and range of service.
Baby Boomers are not only looking for an advisor to provide them with a financial game plan, but also an advisor who understands their needs and can empathize with them. One firm that has tried to capitalize on the specific needs to baby boomers is Ameriprise Financial. Its Dream Book product is a retirement planning tool that goes beyond the numbers by balancing the financial and emotional aspects of retirement planning.
Financial planners will also need to be able to differentiate themselves from online brokers in the range of services they provide. Not only will the Baby Boom generation be concerned with retirement planning, Boomers will also have estate and tax planning needs, that financial advisors will be more capable of fulfilling.
New Revenue Streams
The financial planning and advice industry is well poised to meet the various needs of the aging population as the increase in DIY investors in the early 2000s forced financial advisors to change their business model to remain competitive. Financial advisors were unable to compete with discount brokers on fees so they chose to differentiate themselves through quality of service, strength of performance and multi-functionality.
Over the past decade, financial advisors have become much more like full-service providers by offering cash-management planning, protection planning, tax planning and estate planning, in an attempt to widen their client base and build longer-term relationships.
This strategy was beneficial in competing with DIY investors; however, the successful blueprint was copied by the brokerage industries, and stock brokers began acquiring insurance licenses and focusing on other aspects of financial planning outside of pure brokerage. As a result, financial advisors and stock brokers were forced to lower fees to compete and industry profitability fell. Coupled with the effects of the Great Recession, IBISWorld forecast profitability decreased 2.1 percent annually between 2006 and 2010.
Recession Hits Industry Hard
The recent foreclosure epidemic, which drained wealth from consumers and eroded the financial strength of many companies, caused industry revenue to drop 6.5 percent annually between 2007 and 2009. Low income and high unemployment placed downward pressure on new financial planning fees, renewal fees and investment commissions, which comprise approximately 50 percent of financial advisor revenue. Falling market values caused a selloff in equities, less money was invested, and transaction revenue decreased.
As the economy rebounds, the financial planning industry should be able to capitalize on these new demographic conditions as the industry already provides the overall services these customers want. The key is packaging products to appeal to the specific needs of these customers. Also, IBISWorld believes the industry must focus on differentiating itself from brokers through quality service, strength of performance and multi-functionality.
Taylor J. Hamilton is a finance analyst at IBISWorld Inc., a Los Angeles-based industry research firm. Prior to working at IBISWorld, he worked as a financial advisor and district manager at a Fortune 500 financial planning firm. He can be contacted by e-mail at
