Editors noteSince this was published, the White House has asked the U.S. Department of Labor (DOL) to consider revising or rescinding the regulations that define advice and guidance that lead to fiduciary status. This news article has more information on the status of the rule and Vanguard’s stance on the proposed regulatory change.


It’s not what happens to you, but how you react to it that matters.


In the year that I’ve been back in the United States, there’s something I’ve been noticing in conversations with advisors, interactions with colleagues, and just reading the financial news every day.

Regulatory rumblings, robo-advisors, product innovation (and proliferation)—they’ve all been grabbing headlines and making us plan for their possible impact on our businesses. They dominated discussion at the Inside ETFs conference held by ETF.com this January.

And they’ve got one more important thread tying them together. They all mark, in their own particular way, profound change at work in the advice business.

Now, even in financial services, an industry once described as “conservative,” change is taking charge—and elbowing the status quo onto unstable ground. Change makes some people uncomfortable as they consider the potential disruption it will bring about in their business. But assuming we accept change is here to stay, the question then becomes, “How will we choose to respond?”

An industry in transition

This year’s Inside ETFs conference offered me a great opportunity to hear from advisors firsthand their thoughts about the shifts rapidly transforming our business. I also weighed in at the conference with some thoughts of my own, a few of which I’ll share in a moment. But, first, let’s look at some of those changes that confront our industry today and that could exert a great influence on how we all do business in the future.

On the regulatory front: Perhaps most notably, the U.S. Department of Labor on April 6 issued its rule for a tougher fiduciary standard for our industry. The long-anticipated decision has generated passionate discussion and has far-reaching implications for advisors (we’re studying the rule in depth and will continue to communicate our thoughts on what it could mean for advisors and their clients).

In the ETF space—obviously, this category just keeps growing more and more popular. Once regarded as an obscure and a little-understood product, we now almost take for granted the flexibility, low cost, and variety ETFs bring to the investing marketplace. Globally, ETFs captured about $238 billion in net cash flow for 2015, beating mutual funds and hedge funds combined!*

About that ETF variety I mentioned—it’s simultaneously a strong selling point and a potential cause for concern. ETF providers continuously seek to find and exploit market niches with new products. But we’ve often found these attempts to create increasingly esoteric ETFs to be mere product proliferation. The U.S. Securities and Exchange Commission has taken an interest in this area, casting an eye in particular on leveraged ETFs (proposing limits on the use of derivatives to potentially multiply returns).

Of course, I couldn’t write about industry change without devoting some space to so-called robo-advisors (independent, software-based investment platforms, if you want to get technical). Hardly a day goes by that you don’t read about a company creating its own robo, buying out a firm that’s already built one, or partnering with another company to offer the technical solution to advisors or investors.

The advice business: Under threat … or something else?

The facts are pretty clear: The industry is changing. Disruption is erupting, be it through government involvement, trending products, or technological advances. Clients’ preferences for how they get advice are shifting, as are the demographics and needs of the clients themselves. Advisors are learning what members of other industries have before them—that in a hyperconnected, app-enabled, client-centric world, “business as usual” is no longer enough.

As menacing as all this might seem, you could also view the current environment as an opportunity.

So let me repeat here a thought I shared with Inside ETFs attendees a couple of months ago: With asset allocation a commoditized activity, advisors must bring something else to the table. Now is the time, as an advisor, to communicate your value to clients as more than a portfolio manager. Talk with them (preferably well before the need arises) about your enhanced role as a behavioral coach. Sure, a robo can manage a portfolio within a given set of parameters. But it can’t empathetically talk a client out of a wealth-destroying selling spree when markets turn volatile. You can.

Does that mean advisors should shun technology that automates parts of their jobs? Absolutely not. We see technology as a powerful force that enables advisors to do more of the activities that build their businesses, such as meeting with clients and cultivating new ones to serve. It’s an idea Vanguard examines in depth with our “advisor evolution” resources, which are designed to help advisors successfully navigate the extraordinary change transforming our industry.

My final point encapsulates both of these ideas—and that we’d all be smart to embrace change. It makes sense if for no other reason than to manage risk. But perhaps even more compelling are the possibilities that open up when a business walks into uncertainty, but with purpose. And I’m not speaking hypothetically—I’ve already witnessed this in our own industry.

I’ve written before how I saw this principle play out during my previous stint in London: How, in 2013, U.K. regulators made fee-based compensation for advisors the law of the land. In the law’s aftermath, many advisors resisted the change, struggled to adapt and, as a result, saw their businesses fail. That said, there were many that succeeded, and the common theme among them was that they identified the new rules as an opportunity.

What did they do? Among other things, they understood the transition was here to stay. They started early and disrupted their existing business model before being disrupted by someone else. They gave their employees incentives to adapt to the “new normal.” They developed an advice-driven offer for clients and clearly articulated their “new” value proposition—their “advisor alpha.”

Opportunity mind-set

I’d argue that this moment of disruption, here in the United States, right now, presents advisors with an incredible opportunity. In fact, I’d go so far as to say there’s probably never been a better time to be a financial advisor, and here’s why.

Baby boomers are entering retirement in massive numbers. They’re facing many complex, individualized, personal financial challenges. Things like how to draw down their savings sustainably while at the same time ensuring adequate income. They’re dealing with the kinds of things you definitely want to speak with a live, empathetic, human expert about.

At the same time, it’s getting easier and more affordable for advisors to leverage technology. Let the algorithms behind the robos work for you. They can bring you efficiency and make it easier for your practice to scale.

Vanguard is committed to helping you thrive in this dynamic time for the advice industry, through our suite of online tools, resource centers, research, and advisor advocacy. We believe that whatever the challenge, there’s a competitive opportunity to evolve and adapt. And while others struggle to hold on to the past, smart advisors will find ways to serve clients even better with the tools becoming available today and tomorrow.

* Eric Balchunas, 2016. Five key takeaways from 2015 ETF flows. Accessed March 15, 2016, at http://www.bloomberg.com/news/articles/2016-01-04/five-key-takeaways-from-2015-etf-flows.

Note: All investing is subject to risk, including the possible loss of the money you invest.