Difficult Advisory Environment Demands a Strategic Vision

During a recent and wide-ranging conversation with PLANADVISER, executives at Lockwood Advisors, a Pershing affiliate backed by BNY Mellon, sounded unapologetically optimistic about the future prospects for registered investment advisers (RIAs) and their supporting service providers.

Lockwood Chief Investment Officer Matt Forester and Chief Operating Officer Joel Hempel both admitted there are many challenges ahead, too. The regulatory landscape is more or less impossible to forecast, they note, while global market forces have put a real damper on long-term investment return expectations.

What are the sources of optimism? Individuals’ understanding of what financial advice is and can be has started a fundamental shift, and at the same time new technologies are presenting powerful opportunities for providers to increase scale and efficiency while also boosting the client deliverable. Faced with such a complex but high-potential environment, Hempel candidly admits his firm is in the midst of deep self-analysis.

“In general, being part of a big organization has a lot of benefits and a lot of downsides,” Hempel says. “For us it has been more of a benefit and we expect that will be even more so in the future, because of the critical importance of distribution efficiency and reach. We work with some 800 to 1,000 financial intermediaries via Pershing, which is a huge opportunity for us in this emerging environment.”

Like other firms, Lockwood is “reassessing our product set and building out very clear and straightforward ways to combine and offer our core capabilities, which include investment research, asset management and delivering a turnkey managed account solution.” 

“There are a lot of firms that work in this space and I can tell you many of them are having the same internal discussion,” Hempel says. “For all of us, the turning point in the discussion is, how efficiently can you do it and how clearly can you communicate to clients what value you deliver for the price?”

NEXT:  Advisory processes evolving 

Forester picks up the argument, suggesting even the basics of the advisory process have evolved.

“The core competencies have evolved, the process has evolved, the product set has evolved, and the challenges have gotten grander,” he says. “All of these things are drivers for change and opportunity in the advisory business. From the client perspective, it is crucial that we can also back up and talk about all the things that Lockwood [or any firm] actually does. We can think of ourselves as a research provider, as an asset manager or as a platform for delivering managed solutions.”

Hempel concurs, and suggests the term “perfect storm” is more than fair when used to describe the conditions facing traditional financial advisers and the variety of service providers backing workplace defined contribution (DC) plans and individual retirement savings platforms.

“You can’t ignore the regulatory stuff—but you also have this capital market situation that is frankly absurd—then you think about the demographics of the investors and the advisers themselves,” Hempel observes. “When you look for a way to steer your ship through this challenging time, I think it’s right to say that everyone is feeling the need to push toward more holistic wealth management and more broad-based thinking about advice.”

It is Lockwood’s opinion that this environment favors providers of greater scale and those with deeper technology integrations and connections with other provider partners. “Big data plays a huge role in all of this; there are so many elements out there swirling around,” Forester adds.

Both Forester and Hempel agree there will likely be a continued ongoing shift from active management in favor of passive management—but they suggest “investors also have to come to understand what this actually means.”

“As more of the portfolio goes passive, investors are naturally going to be more passive receivers of risk and returns, instead of a driver of the portfolio,” Forester explains. “There are the benefits of savings on fees but investors should understand this is an important shift in the landscape—it means you have to think more about how you’re organizing your exposures and understanding that there is absolutely still risk and expense involved in a passive portfolio.”

Hempel concludes that advisers in the future “cannot just be selling and pitching product.”

“We have to think about how we can take apart and reassemble all the pieces of what we do so that it all fits together seamlessly,” he says. “How do we take the manager research, the capital market forecasting, the asset allocation modelling, the discretionary manager selection—how do we package all these components so that they can fit together, whether internally or with someone else’s offering?”

Forester agrees: “This is a really important evolution for the industry … collaboration is increasing and transparency is increasing. The changes never happen as quickly as we would like, but even with all the noise right now in the industry we are still optimistic this can be accomplished.”