Consolidation for Advisory Firms

Alexis Cole joined California Capital Management in 2002 and earned her certified financial planner credentials in 2015. She has worked in the financial advisory since her college days at Loyola Marymount University, where she graduated in 2000 with a bachelor’s degree in business administration. Outside the workplace, Cole enjoys spending time outdoors, riding her horse, hiking or skiing.

Question: What do clients want now that maybe they didn’t want a few years ago? And do you know why?Answer: We see our clients wanting greater access to data, whether it’s for their investment accounts or their financial plans. Over the last several years fintech’s features and capabilities have drastically improved. Along with that, client desire for easy access to information and receiving that information on demand continues to increase. Our clients like that they can see their account performance on demand, 24/7. They like that we no longer have to send them physical performance reports. And they appreciate that we can display multiple scenarios for their financial future, meaning that we show the impact of Plans A, B and C in real time, either built out in advance or on the fly. After 2008-2009, I feel our clients wanted more certainty regarding how their investment accounts would be handled during a future market downturn. While we as financial advisors are unable to completely avoid market volatility for our clients’ investment accounts, we decided we could create a system for clients to take advantage of a market downturn. We call this our Cal Cap Downturn Strategy. Our clients have four options to choose from – buy, hold, hedge and hide. Any time we encounter a market downturn of 10 percent or more, we implement each client’s downturn strategy and continue to do so at each subsequent downturn trigger. Over the last several years, we’ve noticed a smaller portion of our client base reaching out during market volatility. During March 2020’s quick and severe downturn, less than 5 percent of our clients called in with concerns regarding their investment accounts.

What do clients most frequently need to be counseled about?We always have a segment of clients who need counseling about spending down their money too quickly, which would result in them outliving their invested assets. Recently, we’ve taken to requesting the last six months of bank statements and credit card statements so that we can conduct a more detailed analysis and demonstrate to our clients where they are spending and the true trends within their income and expenses. We began doing this because we noticed that when we asked clients to fill this information out for us, those who are spenders would often underestimate how much they are truly spending. In this way, we can bring reality to our clients in an objective manner and hopefully give them a better chance to identify where they can make better financial decisions. Within the last few months, we’ve also had several clients want to invest larger portions of their cash. They see the market going up by leaps and bounds and their cash is earning close to nothing at the bank. In those situations, we need to review with each client how much it makes sense for them to keep on hand as cash reserves. From there, we can work backwards to calculate how much is prudent to invest in the market for the long term.

What do you think your industry will look like 10 years from now? We’ll continue to see consolidation of smaller and sole practitioner financial advisory firms for a few reasons: (1) Increased regulation makes it more difficult for solo advisors to continue managing and growing their practices. (2) The average age of financial advisors continues to increase. The percentage of financial advisors who are under 40 years old or are new to the business is not high enough to replace all those financial advisors who will likely retire over the next 10 to 20 years. (3) Larger RIA (registered investment advisor) firms have the funds – either through self-funding, private equity backers or lending options – to entice sole practitioners with all cash offers (or nearly so) and/or overpay for a practice.In 10 years, I believe we’ll have two main types of advisors on the RIA side of our industry – those who are sole practitioners with smaller, niche practices who partner with platforms like XY Planning (an organization of financial advisors focused on working with Generation X and Generation Y clients) and those who are part of larger RIA firms with team members who have more specialized roles in areas such as client service, compliance, financial planning, etc.

– Mark R. Madler