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News March 20, 2017 Issue

Advisory Firm Executives Optimistic About the Near Future

It’s good to be an investment advisory firm executive these days. The sun is bright, the sky is blue and the road ahead, while containing some hazards, looks relatively clear. That, at least, is one conclusion that can be drawn from the results of a survey of such executives released this month by the Investment Adviser Association.

A majority of executives at IAA member firms expect to hire more employees in the 12 months since the question was asked, according to the survey, and 90 percent of firms expect to increase sales and/or organic growth as part of their growth plans over that same time period. Further, a majority also expect that the amount of assets under management for individuals and institutions will increase over the three years since that survey question was asked.

Perhaps the following findings are also signs of future optimism: Fifty-seven percent of all firms said that  developing the next generation of talent was a very important initiative for firm profitability, topping the list of those rated "very important." Another 40 percent listed it as moderately important, meaning that all but 3 percent rated it as either very important or moderately important. In addition, 38 percent of all respondents listed "succession planning" as among their top strategic priorities.

"What struck me is how confident the executives were about their future prospects," said IAA president and CEO Karen Barr. She noted that since most of the answers were gathered before the election of Donald Trump as president, they point to reasons other than the election results. "It could relate to the fact that advisers have already priced in compliance with the rules the SEC passed last year," she said, so financial uncertainty in regard to compliance has been reduced. In addition, she said, "The word is getting out about how important fiduciary advice is."

The 2017 Executive Outlook Survey was conducted by the IAA and Boston-based Cerulli Associates, a research and consulting firm that specializes in global asset management analytics and distribution. Most of the questions were asked in September and October 2016, prior to the U.S. election. Two questions were asked twice – once before the U.S. election and then again afterwards.

The survey divided investment advisory firms into two groups: asset managers, which it defines as advisers to mutual funds, private funds and institutions; and wealth managers, which it defines as advisers to individuals. Of those who responded, 68 percent categorized themselves as wealth managers, 25 percent as asset managers, and 7 percent as a combination of the two.


Responses to several questions showed optimism among advisory firm executives about the near future.

"The overall outlook for 2017 is positive, with both assets under management and headcount expected to increase," the IAA and Cerulli said in commentary to the survey results. "However, fee pressure, costs in technology (both cyber and operational), and compliance costs are rising concerns."

Here’s how the questions pertaining to growth were answered:

  • Current headcount and expected change over next 12 months. Fifty-six percent of all firms, which currently have an average headcount of 115, said they expect their firms to increase headcount by 1 to 10 percent, with 7 percent expecting growth of more than 10 percent. Thirty percent said that headcount would stay the same, while 7 percent said they expect it to decline by 1 to 10 percent.
  • Expected AUM change over next three years. Forty percent of all firms responded that they expect AUM from institutions to increase by 1 to 10 percent over the three years since the question was asked, with 14 percent saying they expect institutional AUM to increase by more than 10 percent. As for AUM from individuals, 33 percent of responding firms said they expect it to increase by 1 to 10 percent, while 18 percent said they expect it to increase by more than 10 percent. Defined contribution AUM was the only group that did not show a majority of respondents expecting an increase over the next three years: 50 percent said they expect it to remain the same, 4 percent said they expect it to decrease by 1 to 10 percent, and another 4 percent said they expect it to decrease by more than 10 percent.
  • Growth plans over the next 12 months. In addition to the 90 percent of all firms that said they plan to increase sales and organic growth, 34 percent said they were looking toward domestic mergers and acquisitions as a source of growth, while another 34 percent said they were looking to acquire talent/liftout. "Fortunately, with the opportunity of new business or strategic partnerships, most prominently the rise of digital advice, firms have the ability to act," the IAA and Cerulli said in their commentary. "As asset managers face pressure to invest in technology while decreasing fees, they have re-evaluated their distribution methods by partnering with or acquiring digital advice platforms. Large wealth management firms are also investing in, or partnering with, automated services that can keep less profitable clients on the books, albeit with a different level of service."

Regulation and cybersecurity

Not all the responses represented a sunny outlook, however. Respondents registered strong concerns in several areas, including complying with regulations and taking steps to meet the cybersecurity threat.

"I’m struck by the survey results showing a high degree of concern related to regulatory and compliance issues," said Ropes and Gray counsel David Tittsworth, who noted that one-third of all respondents listed regulatory/legal/compliance as one of their top three strategic priorities during the subsequent 12 months after they were asked the question. Separately, 82 percent of advisory firms said they were moderately or extremely concerned about the regulatory environment during the next 24 months. At the same time, however, he noted that "the results of the elections in November caused a shift in attitudes among survey respondents, with a reduction of 10 percent among those who were previously very concerned about the regulatory environment." On the other hand, the takeaway from that result is somewhat muddied by an increase of 14 percent, post-election, in those saying they were moderately concerned about the regulatory environment.

As for cybersecurity, there is no doubt it remains a major concern. It topped the list of topics that all respondents listed for budget expectations over the 12 months following the question, with 55 percent saying they expected their cybersecurity technology budgets to increase. Similarly, 93 percent of respondents said that improving cybersecurity was either a high priority or a moderate priority over the same time period. "The survey clearly bears out the fact that cybersecurity is one of the highest concerns and priorities among respondents," said Tittsworth. "I would be surprised if future similar surveys did not show similar concerns relating to cybersecurity."