What do you think of when you hear the words financial advice? Many people imagine a salesperson who pushes products and only cares about padding his or her own pocket. In fact, many people shy away from working with financial advisors, assuming advisors are only out to make a commission.
But this is a major misunderstanding.
Sure, there may be a few advisors who still work on the old-school commission model. But most of today’s advisors don’t sell any products at all. Instead, they follow a fiduciary standard and only offer advice aimed at helping you reach your goals.
The financial services industry has changed drastically over the decades. As we begin a new one in 2020, I thought it was only fitting to take a closer look at the evolution of financial advice over the past 50 years, and beyond.
(To reiterate: it’s not the old-school commission-driven industry it once was… it’s changed for the better.)
Big Fat Commissions were the name of the game before the 1980s. There was no internet. Most people only bought US stocks and bonds. There were few companies to choose from. And brokers made significant commissions on every stock they sold.
Michael Douglas perfectly summed up this period in the 1987 movie Wall Street when he said… “Greed is good.” That’s right. Every stockbroker had money on the brain, and not much else.
But all of that came to a screeching halt on May 1, 1975, also known as May Day, when the Securities and Exchange Commission (SEC) mandated that the brokerage industry deregulate commissions.
Before this mandate, brokers charged a fixed-rate for all trades, regardless of size. This meant that small investors either paid hundreds of dollars in fees, or they didn’t invest at all. High-net worth individuals had all the access to the stock market, and big brokers were bleeding their pockets dry.
But after 1975, this changed forever. Instead of fixed-rate fees, trading fees were set by market competition. As you’ll see in the following decades, this mandate single-handedly paved the way for the discount brokers we know and love today.
This deregulation of commissions continued to drastically lower broker fees through the 1980s, and into the 1990s.
Legacy financial institutions created a wave of discount brokers like Schwab, TD Ameritrade, ETrade, and Scottrade, who made investing more accessible to a broader range of people.
These companies threatened other so-called “brokers” who were used to raking in billions of dollars in commissions every year. According to Investopedia, some brokers even referred to the SEC as the “Soviet Economic Committee.” (That’s how much they were against changing the commission structure.)
But, change happened anyway. From 1975 to 2000, the cost of a single stock transaction dropped 90% – all thanks to May Day and the rise of discount brokers.
The so-called “brokers” who were against the SEC’s mandate found ways to adapt. Instead of selling individual stocks as they did before the 1980s, they started selling mutual funds (A shares and B shares). Between 1990 and 2000, mutual fund holdings went from $0.5 trillion to almost $6 trillion – an 1100% increase!
Then, mutual fund supermarkets were born, and the spread of commission-based mutual funds started to decline. The first SEC-compliant exchange-traded fund (ETF) hit the scene.
Schwab, TD Ameritrade, and Etrade offered commission-free (load waived) funds, and Kiplinger, Money, Morningstar, and Yahoo told consumers which funds to buy. It’s arguable whether this information was sound, but it still forced product manufacturers and brokers to adapt again.
Brokers started offering asset allocations (blends of funds) instead of individual funds. These were offered for a commission at first, but they later ditched this model and started charging a fee for advice.
The 1990s were a turning point for financial advisors. New securities meant they could focus on risk management and diversification in a way they never had before. They could build fully-customized portfolios for their clients, aimed at helping them address their needs and protect their assets from inevitable stock market downturns.
Greater access to computers meant advisors could now use turnkey asset management programs (TAMPs) to oversee their clients’ investment accounts, while they focused on other areas of their business.
TAMPs took care of “back office” tasks like account administration, billing, and portfolio allocation. In return, advisors had more time to attract new clients, strengthen existing relationships, and help people tackle their financial goals.
The 2008 financial crisis was a dark time for the US. Housing prices fell 33%. Unemployment skyrocketed to over 9%. People lost their homes and retirement savings.
This crisis gave birth to a whole new tech-driven industry that’s disrupted financial services once again. Robo advisors like Wealthfront and Betterment hit the scene in 2008 and gained in popularity through the 2010s. Fast forward to now (the end of 2020), and there are dozens (if not hundreds) of hi-tech, mostly automated investing platforms available to investors of all backgrounds.
Now, advisors are adapting once again.
2020s and Beyond
Advisors have been, are, and will continue to be reinventing themselves. Planning and behavioral advice are the current frontier of RIA advice. Helping clients explore their goals, understand their trade-offs, and know what they need to do to make their dreams come true – and then supporting them in actually doing it – have become the “table stakes” for today’s advisors.
Vanguard, Morningstar, Russell (and others) praise the power of behavioral advice. And advisors have begun to adopt these new service requirements to continue to earn their fees.
Younger clients have embraced passive investing (over active), and have pushed the financial industry to improve opportunities for ESG (Environmental, Social, & Governance) investing – focused on issues of climate change and sustainability. Those advisors that can’t adapt will disappear – either selling to firms that are adapting – OR being slowly fee-compressed into oblivion.
The next frontier of advice will be personal transformation. It won’t be enough to ensure that clients act a certain way… advisors who actually help clients become the best version of themselves will be the most in-demand.