Regulatory burdens and industry shifts: The year 2020 in wealth management

December 18, 2019 10:02 AM

As a new decade begins, Jan. 1 will bring a variety of challenges for financial advisors: daily turmoil and macroeconomic changes; compliance burdens, and an acceleration of trends years in the making. The firms that are prepared will have a prosperous new year. But companies caught leaving advisors in the headwinds may vanish altogether.

In many ways, a trip back in time to 2010 in wealth management feels like ancient history. Some broker-dealers have changed hands two — or even three — times over that span, while fee compression and the rise of passive ETFs have wrought major changes to the fund landscape.

Financial advisors and their clients now have an array of new options when it comes to affiliations, business models and digital investment tools. With new regulation nudging it toward records, the RIA movement has put advisors at the center of every trend.

To see what trends looked ready to reshape the industry at this time last year, see “19 Trends to Watch in 2019.” To view the list of the main factors expected to spark change next year, scroll through our slideshow.

U.S. President Donald Trump speaks to members of the media before boarding Marine One on the South Lawn of the White House in Washington, D.C., U.S., on Friday, April 26, 2019.

Andrew Harrer/Bloomberg

2020 elections

Next year’s election need not hinge on wealth management to have wide-ranging implications for the industry. Advisors should expect to deal with any number of reactions from clients and potential shifts in federal regulations, depending on the outcome. The consequences stretch beyond whether President Trump wins reelection next November, as the races could also alter the makeup of Congress.

Reg BI going into effect

Regulators and firms must prepare for the end of the suitability standard for brokers ahead of the SEC’s Regulation Best Interest going into effect on June 30. The degree it will elevate the existing standard of care for registered representatives and dual registrants remains a subject of debate.

Advisors and wealth managers face a six-month deadline to get ready for Reg BI, which came in the wake of the now-vacated Department of Labor fiduciary rule. Reg BI will change some policies and procedures — even though it doesn’t go as far as the jettisoned rule.

CFP board new standards fiduciary duty 10/7/19.png

Under the new guidelines, the CFP Board now requires planners to either avoid conflicts of interest, or to fully disclose them, obtain informed consent and properly manage them.

CFP Board to enforce new standards

The CFP Board’s new code of ethics and standards of conduct went into effect in October, but the certifying organization pushed back enforcement until June 30. The later date places firms on the same timeline to prepare as the SEC’s Reg BI.

With some 85,000 CFPs designees in total and large brokerage firms aiming to help each of their thousands of certificants comply with tougher rules than Reg BI, the board's new standards will place many more advisors under fiduciary obligations to their clients.

What’s the impact of state fiduciary rules?

It depends whom you ask. To hear the brokerage firms tell it, efforts in at least three states to introduce their own fiduciary rules in the wake of the Department of Labor rule’s demise will confuse everyone and cost clients more money as firms attempt to comply.

For state regulators like Massachusetts Secretary of the Commonwealth William Galvin and NASAA President Chris Gerold of New Jersey, the proposed rules represent states’ rights to protect clients from harmful conduct. At the very least, they stand to alter the complex fiduciary equation.

Digital disruption spilling into new sectors

Hopefully there’s no one left on the conference circuit warning advisors that automated investing platforms are going to put them out of their jobs. Even with robo advisors reeling in massive amounts of assets, brokerage firms are reaching record client assets and the number of RIAs just keeps growing every year.

New potential sources of disruption can be found in a custodial sector in which the current group of four giants will become only a trio after Charles Schwab’s acquisition of TD Ameritrade. The other challenges to traditional models are popping up in the bank channel. Startups could make inroads, but scale often wins the day.

The advisory and fintech industries must create a safer environment for women to be able to speak out about sexual harassment. From l. to r.: Financial Planning Senior Editor Ann Marsh, Alex Chalekian, Rachel Robasciotti and Sonya Dreizler.

Ian Tuttle

Changemakers forcing accountability and action

Wealth management became national news when two advisors and an industry consultant boldy spoke out against sexist comments by well-known personal finance author and RIA entrepreneur Ken Fisher. A series of blogs entitled “Do Better” by the consultant, Sonya Dreizler, took the conversation further by exposing hundreds of incidents involving harassment, discrimination — and even assault — in the industry.

The discussion grows stronger every day on social media, and Fisher’s firm sustained outflows of nearly $3 billion in the same month the comments became public. The question for next year is how much the online talk turns to action at the industry’s top echelons and whether the commentary around gender issues will extend to those of race.

Advisor-influencers leveraging social media

A growing number of advisors and other wealth management professionals are using social media to network, engage with clients and prospects or just keep up with news.

In a sign of the rising number of influencers in the financial services, the SEC began the process of updating its advertising rules to provide modernized guidance about leveraging social platforms in November. Easing compliance rules governing social posts will unlock millions more shares, likes and hot takes across #FinTwit and other networks.

When will Big Tech sink its FAANGs into wealth management?

The specter of companies like Amazon, Google or one of the huge tech firms disrupting wealth management has haunted the industry for years. For now, it appears the companies are more likely to embrace strategic partnerships with incumbents who have better knowledge of the industry.

Savvy advisors will stay ahead of any big announcements by thinking carefully in the new year about how they can provide more value to their clients than any computer.

Private equity firms making billion-dollar deals

The late Donald Marron may have led the way in private equity’s march into wealth management over the past decade, but his recent passing won’t likely reduce the flow of capital at all. With the number of public firms on a steep decline, there will only be more massive leveraged transactions.

In 2020, more advisors will be examining the capital structure of their BD, enterprise, vendor or any other strategic partner to assess them for the long term. The newcomers following Marron’s Lightyear Capital and other pioneers must show a positive track record to ensure their portfolio firms retain and attract advisors and assets.

Record consolidation reshaping the industry

Private equity and other rapidly expanding sources of capital have provided financing for six straight years of record M&A volume in wealth management. All signs point to another new high for 2019, with the industry on pace to top 200 transactions, according to investment bank and consulting firm Echelon Partners.

Who expects the deal flow to slow down? A grand total of no one. Sellers will aim to move at the top of the decade-long bull market in equities while the swelling ranks of advisor-dealmakers will have eager partners in any expansion efforts. The opportunity — which doesn’t come without risks — will entice many advisors and wealth managers on both sides of deals in 2020.

Will giant deals create monsters or happy families?

Charles Schwab’s $26-billion purchase of TD Ameritrade and Advisor Group’s $1.3 billion deal acquiring Ladenburg Thalmann will close next year, pending regulatory approvals. The deals touch multiple sectors across wealth management and tens of thousands of practices.

Advisors will be judging the integration processes carefully, while the rest of wealth management seeks out opportunities to win business in the wake of the mega deals.

Who has the best home for wirehouse breakaways?

More than 15% of advisors say they’re unlikely to remain affiliated with their current BD or are undecided about it, a study by research firm Cerulli Associates showed last year. And some two-thirds of wirehouse advisors aiming to go independent said they would opt for the full RIA channel over affiliating with a BD.

In 2020, look for more IBDs to follow the example of hybrid RIA firms like Kestra Private Wealth Services and Private Advisor Group by providing separate channels for wirehouse breakaways. At the same time, watch for the growing number of platform providers, consolidators and other full RIAs to make the competitive threat to BD incumbents even more acute.

More growth across the entire fractured RIA sector

In terms of AUM, RIAs have expanded nearly twice as quickly as the S&P 500 and U.S. gross domestic product since 2001, according to the latest annual Evolution Revolution report. Some 13,000 SEC-registered RIAs also reached a new high in the number of firms this year.

Still, the companies with $100 billion or more have 60% of the total AUM across all RIAs. Finding a way to avoid letting advisors get lost in the shuffle will be the trick for firms either in the channel or serving some part of it.

Can IBDs attract fee-only reverse breakways?

Firms want to gain so-called reverse breakaways, but the number of fee-only planners opting for some form of affiliation or service from BDs may never live up to the level of their ambition. Still, the major IBD Commonwealth Financial Network now has around 100 fee-only advisors — with the vast majority using the firm’s corporate RIA rather than operating under their own.

IBDs eager to retain their existing large enterprises and pitch unaffiliated RIAs will display how the sector is adjusting to the competition in 2020.

Schwab's FDIC-insured default cash sweep reates 11/19/19

Interest rate cuts exposing firms’ vulnerabilities

Cash sweeps have proved a massive source of business that BDs and other wealth management firms have embraced while tapping into the rising rates of the past five years. After three interest rate cuts by the Fed this year, some longtime players will likely face the music and sell to larger firms better equipped to absorb the lost revenue.

With incumbent firms and startups vying for clients by explaining the disparity in returns for cash sweeps compared to money market funds, advisors and firms would do well to examine that approach in 2020. While true in any year, the opportunity to lock in low interest on mortgages and annuities is another reason to keep a close watch on rates in the new year.

The bull market in equities really will end someday, we promise

Chicken Little failed to be prophetic in 2019 yet again. The S&P 500 and Nasdaq set records in December following a year with few speed bumps on equities' long path upward since the Great Recession. History shows bull markets won't last forever, though.

Reasons cited for a potential correction include the massive growth of technology firms without turning a profit, trade negotiations with major implications on essential sectors of the economy — or even just the craziness that has seemingly befallen everything. Advisors and clients would be smart to have a downturn plan and stick to it.

What moves will the SEC make on private offerings and retail investors?

Consumer advocates and state regulators have warned against expanding the availability of private offerings beyond accredited investors. The SEC appears poised to enable more retail clients to invest in hedge funds, startups and other private vehicles, regardless.

Any new rule to that effect will place hundreds of thousands of advisors in the vital position of ensuring clients avoid WeWork-style placements and tap into legitimate opportunities. The temptation of high commissions for risky, unsuitable products would lead clients astray.

The Securities and Exchange Commission flag flies in front of a building.

Dozens of municipal bond market participants filed letters to the SEC warning of damaging consequences from a new data disclosure law.

Bloomberg News

Regulators cracking down on 403(b) abuses targeting teacher plans

For advisors with horror stories of teacher clients who get sold high-cost products limiting their investment returns, news reports of the SEC’s sweep of teacher retirement plans and public statements about abuses in the 403(b) market didn’t come soon enough.

The hurdles the regulator will need to overcome to provide more safeguards have proven insurmountable in the past, though. A variety of state and federal agencies oversee various portions of the market, and product manufacturers and intermediaries who work with them have an enormous financial interest in the status quo.

Firms disclosing revenue-sharing arrangements in more detail

Revenue sharing kickbacks among broker-dealers, custodians and fund companies haven’t received as much regulatory scrutiny as arrangements that are formal parts of expense ratios, according to a recent study by Morningstar. There are recent SEC enforcement cases suggesting that’s coming to an end — triggering public protests from BDs.

In 2020, look for incumbents to approach the complex question of disclosing their revenue sharing in a way that provides more information to advisors and clients without abandoning the traditional source of revenue. The SEC’s Reg BI could alter this dynamic.

How many more share-class disclosure cases?

The SEC’s share-class disclosure program requiring firms to provide more information about their 12b-1 fees showed results in 2019. Nearly 100 firms settled cases launched by the regulator by agreeing to pay restitution of more than $170 million to clients who paid for more expensive share classes than available options without adequate disclosure.

Most of the settling firms agreed to participate in the self-reporting program. For next year, the question is when will the firms who didn’t opt to self-report get hit — and for how much?