The year 2020, a decade of change? Robert Pettman, FLX Distribution Advisory Board Member 5/26/20

We are going to see more changes, disruptions and opportunities during the balance of 2020 than we would typically see across 5-10 years. “Nonsense?!”, you might say.  Look no further though than the fact that a significant cross section of advisors and their clients were almost instantaneously trained and ready for virtual meetings.  The technology had been available, but the will to use it emerged out of necessity.

We are going to introduce a few key concepts here in our blog, discuss further on an upcoming podcast, and then, over coming months, do deeper dives into each of the main topics.

Fasten your seatbelts, clear the windshield and get ready for a quick tour of how the rest of 2020 might unfold.


Is it physical distancing, not social distancing, that will be the biggest and quickest adaptation required for advisors?

An advisor told me the other day that when he was talking to a client and explaining how crazy his days were on the phone from 7 am to 10 at night, his client said “well, it’s great to hear business is good.” He responded “I’m working harder than ever, but I need referrals from people like you to make business good.”

It’s an incredibly challenging time for advisors who have recently had their business continuity protocols tested in a significant way, while also dealing with an incredibly volatile market and a surge of clients seeking their advice. Advisors who had not embraced social media, video communications, and other forms of digital connections with their clients are now forced to quickly make that change. Those higher up the adoption curve are pushing the limits and covering new territory. For example, there are companies like Eatngage, which allows video call participants to pre-select a meal to be delivered to their door, creating a digital lunch and learn experience.

What does this mean? It means increased productivity with the ability to serve more clients in new ways. Also, this increase in digital practice management paves the way for the next level of innovation in fin tech as it has a ceiling that’s limited only by advisor adoption.


Will model utilization accelerate as advisors focus more on advice alpha or “gamma”?

On the investment front, advisors are working with clients to downshift investment objectives with cash balances on the rise. Many have resorted to manual rebalancing to buy back into the equity market. In selecting investments, advisors have been cost conscious, favoring No Transaction Fee programs where possible. In addition, those advisors who do not typically run model-based practices are quickly learning the virtues of that practice. This doesn’t necessarily mean complete investment outsourcing (although those that do are thankful at this time), but having a concentrated set of models that narrow the scope of diligence required and enable broader ease of execution for trading purposes is paying dividends right now. There has never been a better time to have a platform provided investment model-based practice than right now.

Wealth Managers:

Are interest rates the catalyst and, in some cases, cataclysmic, to changes in the world of wealth management?

The combination of market decline and shift in interest rates has had a significant impact on broker/dealer economics. This has been felt more by the independent broker/dealers than the wires or employee models, who take a larger share of advisor payout. For the independents, especially those that are not self-clearing, this has dealt a significant blow. Perhaps one of the largest determiners of how independents monetize their business is how they monetize cash. They typically have higher advisor payouts over 90%, and many outsource their advisory platforms to TAMPs, which results in another mouth to feed in sharing platform fee economics, not to mention the custodian. The net result is that we are on the precipice of a significant consolidation of the independent space, especially if this rate environment persists. These firms are out of monetization levers, and it’s likely that the self-clearing firms with scale will be the benefactors.

With the race to zero complete, what is next competitive arena for custodians?

The race to zero could not have happened at a worse time. Trading volumes spiked precipitously and custodians missed out on that revenue while also taking a significant hit due to the shift in interest rates. The RIA pricing model for custodians, similar to some IBDs, is heavily dependent on the monetization of cash. It is not surprising that these firms are now considering asset-based pricing for RIAs and resetting their fee schedules as a result. It’s also likely that custodians begin to embrace concepts like personal indexing and fractional shares as another monetization lever combined with asset-based pricing.

Solutions Providers:

Asset Managers—Active or Passive, Liquid or Illiquid, or All of the Above?

Product Trends

The market volatility presented some room for active management to make a comeback, which was a welcome shift. Product structures also came under scrutiny in the midst of market dislocation. Fixed income spreads on ETFs widened at various points, thus shining a light on the virtues of their mutual fund counterparts.

Is horizontal or vertical integration the pathway to success? 

We’ve seen some consolidation of asset managers, and now with the market decline might we see more? Will active management get some breathing room to quell the economic challenges of depressed asset bases, or will the strain be too much to bear? While many hypothesize that consolidation is inevitable, there is an interesting trend in the RIA space towards preferring boutique shops over household names. This could imply pressure in the middle tier of asset managers and demand for alternative forms of distribution.

The large firms are not without a playbook. Some firms are purchasing fin tech companies, partly as a way to seek new methods of distribution in a fragmented market. Asset managers are not just acquiring the tech, they are acquiring the RIA relationships and ability to deliver outcomes with the hypothesis that this could be a new way of wholesaling or influencing a challenging distribution network.

Distribution Trends:

Some asset managers have been toying with versions of hybrid wholesaling models that lean more digital and potentially reduce their distribution costs. This pandemic just poured gasoline on that fire as many firms are now living that existence today. Do they go back to the way things were when states open up, or do they redefine their distribution strategy? It’s not that farfetched. As an example, companies across the US are asking a similar question about their commercial real estate strategy. When there is massive disruption, is it a missed opportunity if they go back to the way things were?

Insurers—Revisiting rates at 1%, how do insurers respond?

 The combination of a market decline and sub 1% ten-year treasury is a daunting scenario for most insurers. The ten-year is key to annuity hedging programs and being at historic lows will only mean reduction in features and benefits offered within these products. Many insurers hedged their rates at the beginning of the year giving them some tolerance for current conditions, but a persistent environment like this is very challenging economically for these companies. Expect to see more focus on investment only type products or structured product/index annuities, perhaps with less emphasis on associated insurance features.