Bill Hortz's picture

"We must accept that technology now drives change faster than ever before, that the consumer has a stronger voice and demographics will force us to adjust.Dan Sondhelm, Sondhelm Partners

[The Institute for Innovation Development interview series seeks to learn from innovative business leaders, uncover innovation best practices, and discover how to apply these insights into the financial services industry.

We recently sat down with Dan Sondhelm, CEO of Sondhelm Partners – a firm designed to help financial companies attract investors, strengthen distribution and build brands. As a nationally recognized financial services communications expert and business consultant, we asked Dan for his real-world perspective on the major challenges and trends in the financial services industry.]


Hortz: In working with a wide range of industry clients, from small boutique fund firms to large asset managers and from wealth management firms to industry service providers, are there common challenges they face in today’s business environment?

Sondhelm: There is definitely overlap in the challenges facing advisors and asset managers of every size. While there are common themes, it depends on the individual asset manager and wealth manager as to which is the greatest challenge. Differentiating oneself in a crowded marketplace, competition, fee compression, increased regulatory scrutiny, recruitment and shifting demographics are broad-based issues driving change across this industry.

Hortz: What are the major trends you see shaping up in the mutual fund industry?

Sondhelm: The industry has entered a distribution phase as the Boomers begin retiring at record numbers. For many of them, mutual funds were a favorite investment but now they need that money and new money is not finding its way into mutual funds the way it once did.

Other trends are a greater focus on fees and transparency and the rise in passive investing. The growth of passive investing and the proliferation of Exchange Traded Funds (ETFs), each of which has very low costs, have naturally attracted investors while forcing many mutual fund providers to lower their fees. Simultaneously, compliance continues taking a greater share of many firms’ budgets.

As a result, scale is becoming important in order to compete so smaller firms may seek strategic partnerships or to be outright acquired and absorbed into a larger entity that can provide the services they need to survive.

Hortz: Should we expect merger and acquisition activity to increase?

Sondhelm: Consolidation is becoming a topic in more conversations. We have seen more firms express interest in finding a strategic partner. Both 2015 and 2016 were robust M&A years. Some of the more notable deals included the merger of Henderson Group and Janus Capital Group, and the Ares Capital acquisition of American Capital. Most recently, Raymond James Financial Inc., agreed to buy Scout Investments and its Reams Asset Management division from UMB Financial Corp. In 2016 there were 149 asset manager transactions announced globally, 148 in 2015 and 135 in 2014, according to Sandler O’Neill. Midsized managers with specialist capabilities were the most targeted.

Smaller mutual funds are also part of the trend. Many realize they are better money managers than marketers and decide to refocus their efforts. They often try to be adopted by larger firms with distribution so they can continue to manage the portfolios, sell the assets outright or liquidate. Other mutual funds see this is a buying opportunity to enhance asset levels or add portfolios they didn’t already have. We have helped a number of our asset management clients explore their options. In fact, I am currently working with a client looking for a mutual fund manager of a small cap or micro cap fund who may want to consider selling to another firm.

Hortz: What do you see as growing challenges for independent advisors and wealth managers?

Sondhelm: Like the asset managers they work with, many advisors now must shift to be compliant under the forthcoming fiduciary standard in the DOL rules. They will have to make changes to comply and may face a revenue loss as a result of moving clients to lower fee products. Concurrently, some offices will have to add staff or hire a vendor to handle the additional regulatory requirements, increasing their overhead.

Other challenges facing advisors are succession and recruitment. Clients want to know what will happen to their account if their advisor can no longer perform his or her duties. The average age for an advisor is early 50s according to a 2016 report by EY: The Next Generation of Financial Advisors. For each graduate of a financial planning college program who enters the industry, there are two advisors who just became eligible for Social Security benefits, according to the EY report. On the flip side of this equation, not many young people are entering the business. The U.S. Bureau of Labor Statistics projects the number of job openings for financial advisors will jump 27%, or 60,300 additional jobs, by 2022.

Advisors are also seeing a more educated client who often wants to have a hand in their financial planning. They scour the web and come to meetings armed with information and questions. People check credentials and reputations online before going to that first meeting. One’s reputation is now a dynamic entity that must be managed. You can no longer assume they’re going to automatically agree with everything the advisor recommends.

Hortz: You recommend positioning a firm’s experts as primary influencers in key conversations and creating a value that’s independent of investment performance. How do you go about doing that? What does it take to be a real thought leader today?

Sondhelm: Today there are multiple opportunities to tell one’s story. For maximum impact they should each be working together. Public speaking, small group meetings, one-on-one discussions, and meeting with reporters and placing editorials in selected media help add credibility while controlling and spreading one’s message. Maintaining an active website and social media presence, as well as, producing articles and white papers featuring timely content your prospects and clients care about are ways to become an influential subject-area expert.

Consistency is also important. It’s not enough to communicate. Post content weekly to your site, if possible, and distribute it via social media. You should also be proactive and consistent in regularly reaching out to the media, seeking opportunities to communicate positions and views on relevant issues. It’s okay to be controversial as long as you can support your position. The goal is to become credible and have influence. To do this, what you say has to matter and you must do so on a regular basis, otherwise no one’s going to listen.

Ultimately, your advice and insight should turn into active engagement via emails and calls, which will develop customer relationships. This is where advisors can become innovators as they creatively learn to engage people from online to offline.

Hortz: From your experience, what is the difference between a “great” story and a “lousy” story?

Sondhelm: A great story is going to be relevant, honest, focused, and help prospects understand and solve their priority issues. It’s got to have purpose and be able to generate thought leadership and possibly change perspectives or behavior.

Readers will tend to dismiss anything that’s an overly controlled, self-serving, promotional or product-placement type piece thinly disguised as news. Anything that is unclear, full of jargon or inconsistent will reflect badly on its author and lose integrity in the eyes of the reader, hurting one's reputation.

Hortz: Any other major challenges for advisors and asset managers we have not discussed yet?

Sondhelm: A few years ago no one saw the proliferation of the robo-advisor but today it’s a factor and the industry has had to react to it. The Robo-advisor asset share continues to increase whether as standalone companies or part of a larger entity. Presently, robos manage about $75 billion in assets but this may increase to $250 billion by 2020, according to data from Statista, an online statistics company, in the InvestmentNews 2017 Advisor Technology Study.

Demographics are also forcing change. The country is aging. As clients enter the income withdrawal stage advisors need to find a way to replace those assets leaving the firm. Similarly when a client dies the heirs often take the assets elsewhere. It’s very difficult for advisors and subsequently asset managers to win in this scenario.

According to a Pershing study, an estimated $30 trillion in wealth will transfer to the next generation of investors over the course of the next 30 years. As this wealth is transferred, many in the next generation will be looking to align themselves with new financial advisors. Studies show that 90% of millennials will leave their parents’ advisor and over 60% of advisory firms do not have a plan in place to court millennials.

It’s a Darwinian environment and the larger firms have generally shown a greater ability to adapt. This has become evident in such areas as marketing, technology, compliance and recruitment.

Hortz: What is your best advice for independent advisors and asset managers in building a growth strategy in an operating environment of accelerating business and cultural change?

Sondhelm: We must accept that technology now drives change faster than ever before, that the consumer has a stronger voice and demographics will force us to adjust. Some smaller players may be able to thrive by developing a niche and building a reputation around it. Others will find that cultivating a digital and media presence will help mold them into the thought leaders they aspire to be.

In general, I’d say don’t be afraid to go outside your so-called comfort zone and seek objective advice of experts. Sometimes a new perspective is needed in order to achieve growth. Ask yourself why a person should invest with you and make sure your value proposition is straightforward as you build your business for the long term.

In sum, firms can no longer afford to sit complacently on the sidelines and expect growth without business innovation. To grow they need to have a long-term proactive strategy to meet today’s current and coming challenges.

This article was previously posted on Financial Advisor Online.

The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation and unique community engagement strategies. The institute was launched with the support and foresight of our founding sponsors - Pershing, Voya Financial, Ultimus Fund Solutions, Fidelity, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines). For more information click here.


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