Photo Illustration by ChrisNicholls; Source Photos: Wil Stewart and Jeremy Bishop

In his August column for Investment Advisor entitled "What Will Become of Us?" Pershing AdvisorSolutions CEO Mark Tibergien posed several questions regarding thefuture of investment and financial advice and potential challenges(from Amazon, from custodians, and from the Securities and ExchangeCommission and Financial Industry Regulatory Authority) that mightemerge. He went on to offer a few predictions.

Mark is correct to point out that evolution will continue in thefinancial and investment advice space, and perhaps even accelerate.The pace of change will vary over time, and it will be affected bynew competitors and regulatory developments.

The following are my own predictions of the future changes thatwill likely occur in the financial and investment advice profession— and how these shifts will impact registered investment advisors,in particular.

Between the dangers posed by the SEC's Reg Best Interest tobroker-dealer business models, as well as the substantial increasein consumer's knowledge of, and demand for, fiduciary advice, theinvestment advisor profession will continue its strong growth inthe years ahead.

1. Large RIA firms will become larger.

Especially as founders of existing, smaller RIA firms continueto age and seek exit strategies. Some larger RIA firms will merge.Other large RIAs will be bought out by private equity investors. Afew will go public.

But new small RIAs will be formed, due to the ongoingentrepreneurial spirit of many investment advisors, paired withtheir quick ability to adapt to new technologies, and the continueddevelopment and emergence of high-quality software platforms forsmaller RIAs.

2. Margins for RIA firms will be reduced.

No surprise here. After reasonable officer compensation is paid,expect margins to fall to 10%, from their current level of about20%, for wealth management firms.

3.  Small RIA firms will eschew outsourcing portfoliomanagement, but will begin to rely upon independent consultants forinvestment strategy due diligence and for mutual fund/ETF/otherpooled investment vehicle selection.

Paying an outside investment manager basis points to manage aportfolio will diminish over time, when just mutual funds and ETFsare utilized in portfolios.

Instead, smaller RIAs will begin to embrace independent firmsthat provide research (for a flat fee each year) into investmentstrategies, portfolio design, and investment product selection.

Independent and objective academic research and back-testing ofinvestment strategies, with forward-thinking analysis applyingpredictions of the macro-economic environment and incorporatingtesting for the impact of severely negative macroeconomic events,will result in the expert portfolio strategy/product due diligencethat many RIA firms need today. The smaller RIAs will thenimplement those strategies themselves, aided by ever-betterportfolio management software.

4. RIAs will pay a fixed annual fee for access tocustodial platforms, plus per-account fees.

This is inevitable as other sources of custodian income (revenuesharing payments from funds, payment for order flow and revenuefrom cash held in low-interest accounts) are discontinued due tonew legislation, regulation or enhanced fiduciary duediligence.

5. Fiduciary standards will emerge from the SEC and DOL, in astrongly applied manner, under a new administration.

The foundations for this push are already present,including:

A. A keen knowledge among policymakers of the importance of thefiduciary standard;

B. The substantial coalition of dozens of consumer and othergroups that support the fiduciary standard;

C. Greater knowledge of just what "fiduciary" means and what abona fide fiduciary standard requires (especially when a conflictof interest is present);

D. A desire to walk back the current SEC's strongly criticized"Regulation Best Interest" (the title of which is deceptive);

E. The desire to occupy the fiduciary space at the federallevel, as continued competition emerges from more states moving toimpose their own fiduciary standards; and

F. Greater endorsement of, and less opposition to, the fiduciarystandard as more and more Certified Financial Planners exist, boundby their voluntary acceptance of a stricter fiduciary standard thanthe SEC currently requires.

The "incidental advice" exemption for brokers from theapplication of the Advisers Act also will be substantiallynarrowed. All this is a question of "when," not "if." And, onceinstituted for a couple of years, this new era of "fiduciaryinvestment advice" will be very difficult to unwind.

6. This will drive more firms and advisors toward fees paid bythe client rather than fees derived from products.

A. There will be a realization that it is nearly impossible toproperly manage a conflict of interest, in order to keep theclients' best interests paramount to the interests of the financialadvisor. It is better to avoid conflicts of interest wherepossible.

B. Fees will reflect the level of service and expertise applied,and will be "reasonable."

C. While levelized commission platforms will emerge, questionswill arise concerning whether even a reduced 3% or so commission is"reasonable compensation" under a fiduciary standard, when solittle advice is provided.

D. All ongoing (even intermittent but often) investment adviceeventually will become subject to the fiduciary standard; onlyquite limited "sales exceptions" and "education exemptions" willexist.

7. Asset managers' fees will continue to decline.

A. The annual expense ratio of mutual funds and ETFs willdecline.

B. 12b-1 fees will disappear — if not by regulatory fiat, thenby pressure arising from an ever-increasing number of fiduciaryadvisors who understand that 12b-1 fees add no value to a mutualfund's shareholders.

C. Other revenue sharing payments will cease.

D. Soft dollar payments by funds to brokerage firms will eitherdisappear by federal legislation, or will diminish under pressurefrom fiduciary due diligence.

E. Greater focus will emerge on the internal transaction andopportunity costs within funds and ETFs.

F. ETFs will gain greater market share, in part due to lowertransaction costs (as they affect continued fund shareholders), andin part due to the tax-efficiency of equity ETFs. (However,Congress may seek again to change the tax rules in this area.)

G. Sharing of securities lending revenue with the investmentadvisor or its affiliates will be banned.

H. As alternative sources of revenue dry up for fund companies,the annual expense ratio (AER) for mutual funds and ETFs stabilize,but at lower average AER levels than are present today.

8. "Flat annual fees" — whether paid in quarterly installmentsor via monthly subscription services — will become moreprevalent.

Asset-based fees will continue, but will decline.Forward-thinking RIAs will bifurcate fees, charging robo-advisorlike low AUM fees for investment portfolio management, whilecharging flat annual fees for ongoing financial planning.

9. Technology will continue to lower portfolio-managementfees.

The "robo-advisors" who are not yet profitable (as many stillare not) will disappear or merge (or they will be acquired by aprofitable hybrid-model firm). Advisors know "robo-advisor"services are just a great integration of technology, with a slickweb interface.

Technology integrations will continue to get better. Whilelarger RIA firms have deeper pockets to review and implementtechnology solutions, smaller RIA firms will continue to seesoftware emerge for their use at substantially less cost.

10. Mutual funds and ETFs will continue to see increased usefor a period of time, but then portfolios of individual securitieswill become dominant.

This latter trend will be aided by block trading and moresophisticated portfolio management software. Tax and costefficiencies will continue to fuel this evolution, not only forvery large accounts, but increasingly for smaller and smalleraccounts.

Smaller RIAs may initially pay to outsource this form ofportfolio management, but when they reach the size to have adedicated trading desk staffed by three or more individuals theywill consider taking this form of portfolio managementin-house.

11. Under the expert scrutiny of fiduciaries, sales ofhigher-cost variable annuities and fixed-index annuities willdecline.

Insurance companies increasingly will realize that the tail riskassumed in various riders to VAs and FIAs is not justified by thepremiums received (net of commissions paid).

Fiduciary advisors will continue to use nonqualified VAs wheretax deferral is warranted, but policies will be stripped of mostriders and no-load, low mortality and low annual expense feepolicies will rise to the forefront.

Sales of FIAs will decline as more low-cost alternatives thatuse similar strategies emerge (such as the SWAN ETF), and asfiduciary advisors increasingly understand the uncertain risksposed by insurance companies that possess unexceptional financialstrength, or the liquidity risks present for many (evenhighly-rated) insurance companies should another financial crisisoccur.

Doubts concerning the continuation of unfunded state guaranteefunds should another Great Depression arise also will be a factorin fiduciary decision-making.

12. The title "financial planner" will require licensure in anincreasing number of states.

Those who don't meet certain minimum educational and testingrequirements, such as those found in the CFP certification (and/orsome equivalent education and testing of foundational knowledge),will not be able to utilize this term.

13. "Financial planning" will become regulated as an add-on tostate regulation of individual investment advisors.

Peer-review structures will be put into place in many of thestates to assist in evaluating complaints against individualfinancial planners or firms. While efforts to have "financialplanning" established as a regulated profession at the federallevel will occur, absent another major financial crisis suchefforts will not likely succeed.

14. Over time, consumer trust in personal financial advisorsand the demand for personal financial advice willexplode.

Once greater educational standards exist for entry into theprofession and higher standards of conduct are in place (andconflicts of interest are minimized), more and more consumers (manyof whom eschew personal financial advisors for now, for they "don'tknow who to trust") will seek out personal financial advice.

For many clients, "financial life" checkups will become asroutine as regular physician check-ups.

15. Personal financial advisors will become "lifecoaches."

Financial planners, most of whom already embrace a large breadthand depth of knowledge that can be applied to client situations,will continue to embrace "financial life coaching." Personalfinancial advisors will continue to apply insights into what drivesmost clients' ultimate goals:

A. To lead a life that results in greater happiness for bothclients and persons near and dear to them; and/or

B. To leave a positive impact upon the community orworld-at-large via leading a meaningful life.

16. Defined contribution plans will continue to dominate, butbroader application of ERISA's fiduciary standards will occur.

ERISA's fiduciary protections are extended to governmental403(b) and other similar non-ERISA plans. Via legislation inCongress, safe harbor protections are created to absolve plansponsors from potential liability — provided fiduciary investmentadvisors are engaged.

17. One defined contribution plan will rule them all.

The U.S. government consolidates the many various types ofdefined contribution plans into "one defined contribution plan forall," with a standard-form utilized for plan adoption and with asimplified menu of options.

All employers are required to offer qualified retirement plansand/or payroll deduction to IRA accounts. Contribution limits aremade more uniform.

Defined benefit plans continue to exist for many governmententities and some firms, but with lower maximum contributionlimits; the number of new employees enrolled in defined benefitplans continues to decline, overall, in the United States.

18. In the long term, routine examinations and inspections ofRIA firms will become far less frequent and intrusive.

Once conflicts of interest are minimized throughout a greaterportion of the investment advisory profession, a cost-benefitanalysis of frequent inspections reveals their lack of true impactas a means of consumer protection.

Inspections involving firms that possess custody, however,become more frequent and more robust, as a means of deterring Ponzischemes and other frauds. More frequent targeted inspections serveto prevent frauds often start small from becoming much larger.

It's also worth pointing out these four threats to theprofession:

1. State-run retirement plans

Continued opposition to the application of fiduciary standards,coupled with the messaging from broker-dealer firms that smallaccounts cannot be serviced unless high commissions and other feescan be charged, will continue to fuel the growth of state-run,low-cost retirement plans — to the chagrin of all in financialservices who believe that such is not a proper function ofgovernment.

2. A FINRA takeover of RIA regulation

FINRA, whose market share and revenues continue to decline, willseek to take over the regulation of RIAs (although the states,along with the CFP Board and other organizations, will stronglypush back against such a takeover).

If FINRA succeeds, the movement toward further embracing bonafide fiduciary standards stalls, and even reverses. Risingregulatory costs from becoming subject to FINRA would drive manysmaller RIA firms to merge, and the cost of entry into theinvestment advisory space would dissuade many new RIA firms fromforming.

3. Tax-policy changes

Substantial changes in tax policy may emerge that eliminatetax-deferred and tax-free investment vehicles and products,including any further contributions to defined contribution plansand IRAs. The elimination of Roth IRAs, in particular, will be seenas an avenue to raise revenue.

Other tax law changes may force the annual recognition ofcapital gains and losses, as well as have them taxed as ordinaryincome. Still other changes may further eliminate itemizeddeductions, including all state/local taxes and mortgageinterest.

"Universal health care" will eventually occur (via a combinationof non-profits and Medicare), and this will result in theelimination of deductions for amounts contributed to Health SavingsAccounts.

"Tax simplification" may reduce the value proposition of somefinancial advisors, and lead to substantially easier-to-file taxreturns (with "draft returns" prepared for many wage earners by theIRS itself).

4. Monied interests and politics

Powerful economic interests oppose many reforms, and slow downothers. Without a Constitutional amendment to overturn CitizensUnited, efforts to modify the regulation of financial andinvestment advice will be slowed.

But, even then, reform efforts will continue at the federal andstate levels, aided by broad recognition of the need to continue toreform the standards for the delivery of financial and investmentadvice, with reforms occurring during the favorable regulatoryclimates that exist from time to time at both the federal and statelevels.

Ron A. Rhoades, JD, CFP, serves as the directorof the Personal Financial Planning Program and assistant professorof finance in the Gordon Ford College of Business at WesternKentucky University. He also is an investment advisor and an estateplanning/tax attorney, and he has often served as a consultant tobroker-dealer, RIA and compliance firms. This article representshis own views.

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