01.04.23
In 2023, Challenges, Opportunities Abound — Here Are Several Trends To Watch
by: Rich Blake
Banks and their advisory arms are stoked for a new year of setting goals and reaching them, whatever headwinds may be howling. Assuredly, there are some stiff challenges ahead in 2023 as well as some unique opportunities for client asset growth.
Here are some predictions about the trends that could dampen and/or drive advisory industry activity over the next 12 months.
Regulatory Fixes, Fixation
Major regulatory bodies seem obsessed with cryptocurrency in the wake of the collapse of FTX/Alameda, a once titanic crypto exchange/trading firm that toppled over in spectacular house-of-cards-like fashion this past November, resulting in its founder, Sam Bankman-Fried, being brought up on eight counts, including wire fraud and campaign finance violations.
“The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector,” said a cadre of financial regulators, including the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, in a joint statement released on Jan. 3.
The regulators in no uncertain terms warned banks that dealing with crypto exposes them to an array of risks, scams and fraud.
Such an alarming tone and united front seemed abnormal, and a bit late, but nevertheless still ominously reflective of the fragile state of the market for Bitcoin — the price of which fell 65% in 2022 — and other digital assets.
Fixed Income at Fore
Bond funds are not exactly proving optimal in terms of being a vehicle to capture higher rates, many industry members have said in recent months.
But the same can't be said of certain individual investment-grade, short-term bonds held to maturity. This represents a much better, sounder and inexpensive approach to fixed income, said a chorus of experts.
ETF Shift Spreads
Equity mutual funds have ceded turf to exchange-traded funds (ETFs) for the better part of the past decade. But now that trend has crossed over to fixed-income products with a $700 billion swing from bond mutual funds to ETFs over the past year.
Todd Sohn, technical strategist at Strategas, said he expects this trend to continue if only because bonds seem overdue for a recovery — and investors do love to bottom feed. In fact, bonds, Sohn pointed out, are now at 29 consecutive months without a new high (which is a record) while yields are far more attractive today than in the prior decade.
"This is perhaps best reflected by Treasury ETFs leading our category workbook with over +$125 billion inflows last year across the duration scale," he said. "Structural catalysts aside, it’s hard not to question whether bond ETF positioning is perhaps jumping offsides."
Death of Old Faithful?
“Last year was the year that 60/40 broke,” said Andrew Barber, an analyst at Gravity Exists, emphasizing that for the first time in a half-century, both equities and bonds declined.
“For independent advisors trying to posture their client portfolios defensively in the face of inflation, 2022 was a nightmare,” Barber said.
Traditional hedges like gold and other real assets failed to keep pace while crypto completely flamed out.
Poor performance for passive allocations has revived hopes among active managers that RIAs will start to come back to stock picking. But ETF flows, particularly for fixed-income products, suggest many are sticking with passive strategies rather than paying up for potential outperformance, Barber said.
Fintech Full Circle
Financial technology birthed digital-first disruptors and so-called challenger banks which ironically are now looking for more of a human touch in this fraught time of extreme volatility. And yet, the entire world has come to rely on phone-abetted, quick-click-away services of all varieties, leaving the fintech sector at a crossroads where scale and network effect matter more than ever, and every company no matter the sector in theory constitutes a rival.
"Embedded financial services will be an expectation," said HappyMoney CEO Jeff Winner in a Forbes Business Council blog post.
In 2023, Winner said he expects more solutions for consumer lending with "widespread adoption of embedded finance and advancements in the digitization of banking."
An example of this is the burgeoning buy now, pay later (BNPL) trend widening into other categories. Consumers appear to be embracing embedded experiences while expressing less interest in traditional, stand-alone financial services.
Staffing Priorities Rise to Fore
RIA merger and acquisition activity weirdly kept simmering in 2022 despite higher interest rates and plunging asset values, although industry members are echoing a sentiment that this pace can't be sustained in 2023. Focus inward on keeping top people with sticky, robust books of business, says ThinkAdvisor.
"Take steps to keep your best advisors and other staff," the website said, citing data showing that 44% of U.S. employees were seeking jobs and 34% were actively looking for a new job, while another 10% intend to look for a new job.
With that in mind, David DeVoe, CEO and founder of DeVoe & Co., said, per ThinkAdvisor, that “everyone should be very focused on their human capital.”
Planners Tackle Succession
DeVoe had this to say regarding financial advisors and succession planning — that a glaring lack of it represents “an ongoing and growing problem for an industry whose average owner is estimated to be at least age 62.
Some 63% of advisors this year see the lack of succession planning as a big problem for the future of the industry, up from 56% a year earlier and around 50% in the previous three years. Another 30% said the lack of succession planning was a minor problem. In total, 93% of advisors surveyed view the lack of succession planning as a problem for the industry
Global Macro Outlook Grim
Blackrock warns of recession and more than a few analysts are questioning whether a hotly anticipated Federal Reserve pivot, away from higher rates, is more wishcasting than forecasting.
Expect global growth to come in shy of 2% in 2023, more than a few economists have said in year-ahead forecasts, citing problems in Europe and China.
Markets, battered as they have been, still seem too complacent with respect to inflation.
BNY Mellon Investment Management said growth as measured by economic output is likely to fall in 2023. Inflation will probably fall, but relatively slowly, remaining above target for some time, BNY Mellon said, per Bloomberg.
Assessing Risk Aggressively
Risk management became a buzz term after the 2008-2009 credit market collapse and, in more recent years, conversations between advisors and clients have tended to emphasize individualized risk-tolerance levels.
Expect the risk-centric, through-a-risk-manager's lens approach to advisory to only continue to drive discussions. In a study conducted by BlackRock two years ago, nearly two-thirds of advisors said they either always or often show how portfolio risks and returns align with client objectives and risk profiles, according to BankersLife.
Additionally, some 71% of advisors said discussing risk helped their clients stay invested during volatile periods.
Financial advisors openly discussing risk will be a trend; and tools, ways and means to measure and convey an asset's riskiness should evolve to new levels of innovation and creativity, similar to the way next-generation statistics are driving coaching decisions in professional sports, industry members said.