Last year was like a chapter from a science fiction novel. The global pandemic, economic shutdowns, and the 2020 US election season are all events we’re happy to put in our rearview. The new year is underway, and change is happening.
Some of what we have already experienced in wealth management this year is a continuation of the events and actions of 2020. Last year, we saw acquisitions by Schwab (TD Ameritrade) and Morgan Stanley (E-Trade). Expect more consolidation moves to come.
New administrators in Washington will also impact wealth management in 2021. The economic policies and executive orders of the last regime are gone. Taxes are going up. Green energy is taking center stage. Portfolio construction needs to evolve accordingly.
Client Focus Shifts to ESG and Sustainable Investing
Social consciousness is on the rise — and people are focusing on Environmental, Social, and Corporate Governance (ESG). The environmental sector will benefit from a government-backed push for renewable energy. Fossil fuels aren’t dead yet, but the socio-economic climate that oil and gas companies are operating in is far from a friendly place.
Clients are savvy to all of this, so advisors need to ask more questions and get to know them on a deeply personal level. It’s time to start talking about morals and values, and then structure portfolios accordingly. Neglecting to do so could lose you clients.
Blue chips are still blue chips and financial performance cannot be ignored, but corporate governance is under a microscope. Expect to see C-suite and policy changes in some unexpected places this year. Evolution is the key to survival.
Tax Considerations Will Drive More of your Choices
The Biden administration is proposing a 39.6% capital gains tax for those making over $1 million and a 28% corporate tax (formerly 21%). The increases, though higher than anticipated, are not a surprise. They do, however, require adjustments to investment strategies.
That will mean holding periods will matter less for high income clients with no difference between long and short-term rates. Also, tax location choices will matter more as tax deferred accounts will be even more valuable to high-income clients. Investments in Munis may increase or real estate due to their tax advantages. And finally on the margin maxing out contributions to 401ks, IRAs, HSAs and all the other pre-tax and tax deferral opportunities will make more sense than ever.
Financial Advisor Compensation Models Will Change
The Obama administration’s proposed DOL Fiduciary Rule in 2015 focused a spotlight on financial advisor compensation plans. In 2021, the proposed rules are expanded to include retirement plans in advisors’ fiduciary duties.
Meet the new boss, same as the old boss. Joe Biden is not Barack Obama, but advisors learned a painful lesson about fee transparency in 2015. Expect to see compensation models continue to evolve this year, with different incentives and an emphasis on holistic wealth and financial planning.
Introducing Holistic Generational Wealth Transfers
Make a note of the term because you’ll be hearing it a lot this year. The older generation may not be quite ready to embrace ESG investing, but the younger generation is. That means that wealth building needs to incorporate it for the sake of generational wealth transfers.
The kids don’t want to inherit a portfolio of companies that are doing harm to the environment or supporting socially disruptive activities. It’s important to them. After all, they’ll have to live in this world longer than their parents do. Wealth managers need to be conscious of that.
An important point to note here is that holistic wealth transfers are not the same as holistic wealth management. The descriptor means “all encompassing,” but we’re talking about two different scenarios. Planning for a wealth transfer is a generational strategy.
Automation Will Determine Success or Failure for Financial Advisors
Implementing reporting and communications automation will enable advisory firms to scale faster and more effectively manage their clients. Using machine learning and AI to anticipate and automate client work will be how wealth managers compete with the scalability of robo-advisors.
Those who do this will succeed and grow their firms. Those who don’t will fail. It’s no longer a “maybe.” The technology has been tried, tested, and proven effective. If your firm is not using it, your competitors will eventually take your clients away from you.
Clients want a modern user experience. Even senior citizens are computer savvy these days, so why not use the tech? Many folks thought video conferencing wouldn’t work and look at what happened in 2020. The world has changed. It’s time to change with it.
[NOTE: The opinions expressed in this post belong to the author and are for general informational purposes only and are not intended to provide specific recommendations or advice for any individual or on any specific investment product. The sole purpose of this opinion piece is to provide education about the wealth management industry.]