Possible Future Directions for the Financial Advisory Industry - Coursework Example

Financial-Advisory Industry Report Table of Contents 0 Introduction 3 2.0 Industry products and services 3 3.0 Factors affecting the industry 4 4.0 Top players in the industry 4 5.0 Market share 5 6.0 Future Forecast 5 7.0 Industry Trends 6 7.1 Technology 6 7.2 Commoditization 6 7.3 Changing Business Model 7 7.4 Fiduciary Standard 7 7.5 Regulation 7 Financial advisors are met with growing regulatory pressure as securities and compliance industries costs grow and error and omission premiums rise. In light of investment scams perpetrated in the past, customers are insisting on greater transparency in the investment process. Observers expect constant industry changes in the years coming, perhaps making smaller financial advisory firms to merge with or be acquired by larger company in a bid to escape rising regulatory compliance expenses. 7 8.0 Forces Impacting the Financial advisory Industry 7 8.1 Demand 8 8.2 Customer goals 8 8.3 Complexity 8 8.4 Technology 9 9.0 Financial advisory Industry analysis using Porters five model 9 9.1 Threat of Substitute Products or Services 11 9.2 Threat of New Entrants 11 9.3 Rivalry among Existing Competitors 12 9.4 Bargaining Power of Suppliers 12 9.5 Bargaining Power of Buyers 13 9.6 Regulatory Issues 13 10.0 Possible Future Directions for the financial advisory Industry 13 List of References 15 FINANCIAL ADVISORY INDUSTRY REPORT 1.0 Introduction The financial advisory industry provides the best, well researched and analyzed financial advice services to high net-worth individuals, government and businesses at a fee. Most of these clients do not have adequate knowledge on capital formation, wealth management and cash flow. Financial advisors come in to bridge this gap by offering these specialized services (Hung 2008, p. 46). Financial planning activities have most certainly had to change over the years. This is especially true for practices that have moved from a commission-based to fee-per-service based revenue models. The old school model, which is purely commission based, has more than likely slumped in value as the industry continued to move forward. Any practice is simply worth what a client is willing to pay for it, as a general accepted rule of thumb is that a commission-based only practice is worth about 1.5x to 2.5x earnings and a fee-per-service practice is worth about 2.5x to 3.0x earnings. For a practice to be strong and therefore attractive to a customer it must have both a firm growth history and firm forecasts. A growth rate is seen as “good” if its increase in fees annually is by about 20%. A lot of firms base their growth targets on Assets under Management (AUM), it can be misleading as an increase in AUM does not necessarily mean an increase in income, particularly if the practice is fee-per-service model. For a practice such as financial advisory to be important to its clients it needs to have the skill set to deal in all aspects of financial services. 2.0 Industry products and services Financial advisors provide assistance in matters relating to managing assets, portfolio management, project management and investment advice among other services. Some of the other services that are offered in this industry are: • Retirement planning, this is inclusive of self-managed superannuation funds compliance and audit. • Estate planning and asset protection • Portfolio management and creation • Tax planning • Risk insurance • Lending • Corporate superannuation. 3.0 Factors affecting the industry 3.1 Capital market fluctuations-As the market keeps fluctuating, its effects trickle down to the financial advisory industry. This is basically because the industry is fee-based. 3.2 Unemployment-owing to recession, unemployment levels went up causing an impact on advice fee to come down. 3.3 Disposable income-less income forces households to save up the money they have or use it to settle off debts which affects their ability to capitalize on investments. 3.4 Savings rates- When saving rates go up, most households consider saving an option as compared to investing which affects the financial advisory industry. 4.0 Top players in the industry The industry has been dominated by four largest players in the market namely Morgan Stanley, Wells Fargo, Bank of America and Ameriprise Financial Inc. These companies recorded huge profits and almost have the total market profits. There are over 149,000 small firms in this industry but the main players as listed above still dominate the market. 5.0 Market share Even though the total number of enterprises shot up in the five years to 2013, a multitude of large-scale acquisitions, caused by the recession, hugely marked up the market share dominance of the industrys largest players. In one example, the Bank of America recruited more adviser forces upon the acquisition of Merrill Lynch advisers. Similarly, the Wells Fargos acquisition of Wachovia also added the companys mark in the industry. 6.0 Future Forecast Revenue is predicted to continue to rise over the next five years as capital markets improve. Furthermore, the aging of the US population will lead to more demand for financial advisory services as more people approaching the retirement age will start seeking expert financial advice (Hung 2008, p. 88). Looking at the future, the five years counting to 2018 is very promising for the industry. Revenue is also expected to rise in 2014, as capital markets begin to pick up. Researchers forecast that the industry will grow in the next five years, increasing total AUM and increase revenue generated from cover fees, which are mainly consisted of annual fees charged on assets under management. In the meantime, the recessions bad effects on consumer confidence will force more individuals to seek financial advice, as a result there will be an increased industry revenue over the five years to year 2018. 7.0 Industry Trends There are emerging trends that are reshaping the financial advisory industry and which definitely impact the usual way of carrying out business. The following are the trends redefining this industry; 7.1 Technology As consumerization of technology expands, more investors have several tools at their disposal to analyze and deal with their own personal finances. This forces financial planners to ensure they are not pressed to “falling behind the curve” of these high-tech advances in technology. In recent times, consumers are more empowered to dig information on their own about financial planning and investment decisions. The proliferation of various readily-available online information that give information regarding financial instruments, reviews of financial and advisory firms and market trends. Total account summaries are also available online and in mobile apps that provide an analysis of a client’s financial situation and overview of the market information. Financial advisors and planners must therefore remain technologically relevant and up-to-date to meet client expectations. 7.2 Commoditization As technology marks its position the field of financial advice by offering online tools and smartphone apps for barely everything starting from budgeting to investing, commoditization of the financial advisory industry rings an alarm. Many angles of the financial advisory industry services have already been commoditized. Even stock trades that used to cost about a hundred dollars, are now sold at a slice of that cost, or even for free. Meanwhile, Index investing is quickly becoming more popular, plus free software can now carry out complex financial planning projections. To evade similar pressure in pricing, financial planners must be steps ahead to find ways to add value to their services. 7.3 Changing Business Model The business model of financial advisory is also changing rapidly. Instead of acting as a “financial consultant” in a conventional setting of a big national brokerage firm or bank, more and more financial planners are setting up independent practices. This allows them to operate on their own outside of the several tainted brands in the industry. 7.4 Fiduciary Standard The fiduciary standard states that a financial planner must put customer’s needs first. In years past, this served as a standard that could not be given up in a brokerage business model where the suitability standard ruled. As suitability mandates that only those investments that meet the client’s objectives, time limit and experience are considered. According to this standard, the possibility of conflicting interest concerning compensation can come up and do not have to be disclosed. As more and more consumers become aware of the higher fiduciary standard, the industry will be under greater tension to stick to that set measure. 7.5 Regulation Financial advisors are met with growing regulatory pressure as securities and compliance industries costs grow and error and omission premiums rise. In light of investment scams perpetrated in the past, customers are insisting on greater transparency in the investment process. Observers expect constant industry changes in the years coming, perhaps making smaller financial advisory firms to merge with or be acquired by larger company in a bid to escape rising regulatory compliance expenses. 8.0 Forces Impacting the Financial advisory Industry Financial advisory is a mechanism used to assist individuals and businesses develop, implement, monitor and shift financial strategies in accordance to the changing economic environment. Financial advisory is now a separate industry, and many customers contract with an external financial advisor to plan for the future and make wise investments. There exists a myriad of factors that affect the way in which the financial advisory industry is run. 8.1 Demand The first force affecting the financial advisory industry is customer demand. This can be influenced by a multitude of factors. An example would be, helping a potential customer who does not see a link between financial advisory assistance and the resulting success. On the other hand, it can be hard to believe that they couldn’t be successful at all without the help of expert financial advisors. Demand also depends on whether consumers can afford financial planning services. 8.2 Customer goals The financial advisory industry also is impacted by what potential customers are hoping to accomplish. For example, many entrepreneurs are self-independent and may be repulsed by the idea of getting expert assistance, opting instead to seek self-made success. This at times collides with the premise behind the financial advisory sector. On the other hand, having an enjoyable retirement is an almost universal goal. Most people have the desire to invest their wealth in such a way that they can feel secure and not have worries about monitoring and redistributing their investments, so they tend to seek financial advisor providers. 8.3 Complexity The necessity and demand for financial advisory services also is impacted mainly by the nature of the activities involved. Financial advisory might be unimportant for a one-person interior designer shop that charges by the project and keeps finances very simple. In more complicated fields with bigger operations, however, planning assistance becomes more imperative. In an industry such as a manufacturing industry, financial planning might be needed to manage the firms assets, paying employees and develop promote strategies for marketing and dealing with competition. 8.4 Technology Modern information technology has a huge impact on the well-being of the financial planning industry. New technologies can help financial advisors to work more efficiently, allowing them the resources they need to give useful counsel to their customers. However, new technology also may pose a huge threat to the feasibility of the financial advisory industry. Since researching tools and information are readily and freely available, many potential clients may opt to, and able to eliminate the middleman and do their own planning and get advice online. Independent financial advisers meet the challenge of providing services that clients cannot easily have access to through from carrying out their own research. 9.0 Financial advisory Industry analysis using Porters five model Using Porter’s Five Forces model as an analytical framework for an industry gives a comprehensive view of the industry. In his book (Porter 1980), the model analyses five competitive forces that determine the attractiveness of an industry’s structure and therefore its different dynamics. The forces are (1) threat of substitute products or services, (2) threat of new entrants, (3) rivalry among existing competitors, (4) bargaining power of suppliers and (5) bargaining power of buyers. This model allows the analyzing of an industry’s structure by approaching an inside-outside thinking approach when analyzing at an industry. It is a commonly accepted model that continues to exert huge influence on the field of business strategy in both academia and practice. The model is represented graphically below (Porter 2008). A sixth factor or force, known as government regulation is normally appended to the model. 9.1 Threat of Substitute Products or Services Financial advisors face an enormous deal of competition from other experts, including accountants, stockbrokers, private bank and insurance brokers. Retirement fund managers have also started soliciting for the chance to provide some advice to their members. Furthermore, there are a number of online services and information websites that offer financial products to consumers at a free or lower cost. Other potential clients may also get advice from unreliable source such as the media, family or even friends. 9.2 Threat of New Entrants New entrants threatening entrance into any industry come with new capacity and a burning desire to attain a market share, thereby exerting pressure on current prices and costs and finally on the profit capacity of the industry. The threat of new entrants rely on the barriers to entry or the advantages that the players have relative to new entrants. Porter (2008) outlines seven major barriers that relate to new industry entrants: supply-side economies of scale, customer switching costs, demand-side benefits of scale, main players advantages, capital requirements, the inability to have equal access to distribution channels and restrictive government policy. In order for the industry to find out how the threat of new entrants is likely to redefine the future of the industry. The relevance each of the barriers need to be analyzed and applied to the financial advisory industry. 9.3 Rivalry among Existing Competitors Evidence shows that the emerging competition from alternative financial service providers and potential new entrants considering the low barriers to entry, financial advisors must not overlook the existing competitive pressures within the current industry players. Rivalry within existing competitors can take on various shapes, with high rivalry exerting pressure on the profitability potential of an industry. (Porter 2008, p. 36) singles out two factors that spell out competition: the intensity with which the rivalries compete and the basis by which they compete. 9.4 Bargaining Power of Suppliers In some industries, resellers may control the supply chain and in this way determine the pricing structure, product differentiation and in the end determine the profitability of the industry (Porter 2008, p.68). The financial advisory industry banks on a number of suppliers, fund managers and platform providers, dealer groups, software providers and providers of expert education. The financial advisory industry also highly depends on its labour supply that has become very important. 9.5 Bargaining Power of Buyers Some powerful customers can exercise their force by demanding better and quality services at a low price. By downplaying industry players against each other, they are able to push the prices down, impacting the overall industry’s profitability. Financial advisers also need to find ways of controlling the customers’ power or alternatively using this power to their own advantage. As a first step, it is necessary to analyze the factors that would add to clients having solid leverage. 9.6 Regulatory Issues While government as a regulatory body is sometimes seen as a sixth force of competition, Porter (2008) recommends viewing government as a contributing factor and not as a force. Given the importance of government regulation in the financial advisory industry, it is important to look at this factor independently. 10.0 Possible Future Directions for the financial advisory Industry Financial advisors need to design their service offering in a way that would increase the emotional switching costs for their clients as well as offering very highly sophisticated services and products that would be hard for clients to copy themselves. A holistic, client-centered wealth management model that helps clients take control and manage their total wealth on a consultative basis will become the dominant business model. Technology will also play a big role in redefining this industry, high-tech and sophisticated products and services would be the order of the day. Furthermore, the industry will be marked by an excessive differentiation of products and a packaging of services in a client-centered business solution that meet specific needs. The need to mark their place in the market would see a lot of competition and personalized services spiraling in a bid to meet customer needs. List of References Swaan Arons, H. D., & Waalewijn, P. 1999. A knowledge base representing Porters five forces model. Rotterdam, Ribes, Rotterdam Institute for Business Economic Studies. Films For The Humanities & Sciences (Firm), Films Media Group, & Information Television Network. 2011. Starting a financial advisory business. New York, N.Y., Films Media Group. https://ezproxy.uu.edu/login?url=http://digital.films.com/PortalPlaylists.aspx?aid=13753&xtid=47847. Hung, A. A. 2008. Investor and industry perspectives on investment advisers and broker-dealers. Santa Monica, CA, Rand. http://site.ebrary.com/id/10235200. British Columbia, & Loenen, N. 1991. First report, financial planning and advisory industry. Victoria, B.C., Legislative Assembly of British Columbia. Edesess, M. 2007. The big investment lie what your financial advisor doesnt want you to know. San Francisco, CA, Berrett-Koehler Publishers. http://public.eblib.com/EBLPublic/PublicView.do?ptiID=771701. Porter,2008. The porter’s five model. Toronto, Insomniac Press. http://site.ebrary.com/id/10176563. Read More