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These are halcyon days for investors, particularly the proverbial “little guys”, and not just because broader benchmarks are making new highs on a regular basis.
A dissertation on GameStop, Roaring Kitty and the now notorious Reddit forum WallStreetBets isn't necessary here, but that kerfuffle underscores the point that so called ordinary investors now wield immense power – perhaps more than many of them even realize.
As advisors well know, the world today is driven by and dependent upon technology. With the proliferation comes more access to information, empowering investors in the process. Obviously, many regular investors can't afford a Bloomberg terminal or institutional-quality research, but there's an abundance of either favorably priced or free data and information out there that informs and empowers retail investors. As Gordon Gekko said in “Wall Street”, “The most valuable commodity I know of is information.”
Information is an important starting point, but there's more to the story when it comes to engaging with an increasingly savvy investor base in today's climate.
Accessibility and Fees Matter
Access to information is important, but investors are benefiting on other fronts, including access to professional advice and fee compression on that advice. Derek Bruton, the CEO of Kingswood US, highlights some of the perks for investors that come with declining costs.
“The growing competition for the retail investor has driven the cost for advice, and the ability to transact this advice, dramatically lower,” said Bruton. “Asset management fees have plunged due to the abundance of low-priced ETFs hitting the marketplace, and low cost of entry asset management platforms like Betterment and Schwab Intelligent Portfolios have made access to advice simple and cheap. Even choosing to manage a portfolio yourself has become wildly inexpensive with the elimination of trading fees across most large brokerage platforms.”
Speaking of passive ETFs, index funds and the impact those products are having on investor outcomes, it's right there in the tale of the tape. On U.S. open-end mutual funds, asset-weighted average expense ratio dropped to 0.45% in 2019, down from 0.48% in 2018, according to Morningstar's June 2020 study on fund fees. That 6% year-over-year decline is the third-largest on record.
"Investors are increasingly aware of the importance of minimizing investment costs, which has led them towards lower-cost funds and share classes. There has also been intensifying competition among asset managers, who have cut fees to appeal to cost-conscious investors," said Ben Johnson, Morningstar's director of ETF and passive strategies research.”
How advice is delivered is having a positive impact on fees. As advisors eschew transaction-driven compensation models in favor of fee-based ones, they're more inclined to deploy low-cost ETFs in client portfolios over higher fee active mutual funds.
“It’s a great time to be a retail investor! Seemingly limitless advice options, which are extremely affordable. What’s not to like? ” adds Bruton. “Furthermore, there is a human element to these options. You can go into a branch office or get your investment consultant on a Zoom call. It’s not just digital, impersonal advice. The advice providers who can manage the noise and complexity of the landscape will capture the greatest market share.”
Change Is Good for Advisors and Clients
Fee compression and easy flow of information aren't nails in the coffin of the financial advice industry. Rather, today's evolving landscape of investor empowerment represents opportunity for advisors.
All those free trading apps, financial blogs, podcasts and more are great, but too much consumption can have negative implications. Advisors can bring clients back from the brink. Plus, advisors still fill crucial voids no free trading app can provide.
“As advice options have grown in number, so has the complexity of the options in the retail investor’s eyes. And while there’s a human element to many of these new, low-cost options, that doesn’t mean that the advice delivered is truly customized for the investor who needs or wants higher personalization.” adds Bruton. “This is where financial advisors can triumph. People choose to use financial advisors because they want one person to put all the pieces of their financial puzzle together – taxes, estate planning, insurance, education, retirement – and serve as a fiduciary to manage the entire picture. Ultimately, they want peace of mind, and are willing to pay for it.”
Bottom line: Yes, it's a great time to be an investor, but for many of the reasons that statement is true, it's also a great time be in the business of financial advice.
Related: To Grow a Successful Wealth Management Business, First Focus on the “Business”