Official PayPal Seal

The Future for Independent Advisors and Planners Is…Stock Selection? What?

publication date: Feb 20, 2018
author/source: Brian Nelson, CFA
Image Source: 401K Calculator

By Brian Nelson, CFA

The world is fast-changing, and the financial markets are changing even faster.

One of the most influential writers in the blogosphere, Josh Brown (aka the Reformed Broker) wrote one of the most thoughtful pieces I’ve read in a long time last October, “Just own the damn robots.” The gist of the piece is that technology is taking jobs everywhere, and employees that are being displaced may be investing in the same companies that are displacing them as a form of insurance (investing in their “own destruction,” so to speak). It was a fresh read and a fascinating viewpoint.

As a former director in Morningstar’s equity and credit department that headed up training and methodology development (a long time ago now), it would be hard for me not to have the concept of an economic moat ingrained in my psyche, the moat representing what is commonly referred to as sustainable competitive advantages. The type of thinking that goes into competitive-advantage assessments is not one that is focused on next year or 2020 or even 2025, but what an industry structure might look like in 10-20 years. It’s difficult to predict the future that far, of course, but it’s very helpful to think it through. What might the future look like for independent financial advisors and independent financial planners in 2030, 2040?

I think the outlook could be similar to the outlook in 1995 for physical book stores and Amazon (AMZN). Many in the financial industry know very well what Vanguard has done to the active management industry. Money is flowing into passive mutual funds and ETFs at a rapid pace and fees on actively-managed mutual funds are facing downward pressure as investors wise up to the fee-based drag over the long haul. It seems like every few months or so, you hear of analyst layoffs. Nothing is going to stop the trend toward passive (not logic, not anything), and frankly, that’s okay. Most of the investing public, which don’t have the time or the interest to study the markets should probably not venture outside index funds anyway, and anyone from Warren Buffett to others that I respect greatly will tell you this.

But what about financial advisors and planners? As an independent publisher at Valuentum, I’ve been a huge investor advocate in making sure that individual investors are aware how much financial advisor fees matter during retirement (the fee drag is similar to that of active management). Today, for example, one can get a Vanguard advisor, a customized financial plan, ongoing investment advice for just 0.30% of assets under management, or a mere fraction of the industry average of more than 1%. Some robo advisors even charge less. We already know what happened to active management in the mutual fund industry when Vanguard came to town. Not only should pressure on advisor/planner fees be expected, but assets may inevitably flow to Vanguard and robos, meaning lower fees and fewer opportunities for advisors/planners, not more.

Again – look at what has happened to active management. We’ve already seen this game play out, slowly at first, and then increasingly more aggressively. Years ago, some active managers might have thought that it made sense for an investor to know about the stocks they’re invested in, so paying a portfolio manager or analyst an active management fee may be worth the cost, if only for that reason. But it all came down to the numbers, to the performance. I think many independent financial advisors and independent financial planners believe that they are immune to the same trends that have put many in active management out of business. Advisors and planners can differentiate their business in a whole host of different ways, on social media or otherwise, but I think there is really only one way to build a moat around their practice: by learning security analysis and cutting out the middle man.

In the future, an advisor or planner may have to know as much about stocks or bonds as the portfolio managers and analysts in active management today. It may be easier in 2018 to go along with the trends of passive, riding the wave to gain scale, but it’s going to be really difficult to compete with Vanguard advisors at their own game over the long haul. Independent financial advisors and financial planners may have to do one better.

The annual fee of 0.04% to invest in an index ETF, for example, on a portfolio of $250,000 might run about $100/year. Over 25 years, assuming no compounding, that’s $2,500. Setting up a diversified portfolio of 40-50 or so blue-chip, moaty, dividend-paying stocks might cost $200-$300 in total over 25 years, assuming little-to-no turnover, set up through a discount broker. Spread out over dozens of clients, you’re talking real savings for clients. Vanguard is pricing its personal advice aggressively: on a $250,000 investment, its low-cost advice runs about $750/year. The wiggle room saved by building a diversified portfolio for clients oneself may make all the difference when it comes to sustainability of your practice in the face of fee competition.

This is why I view learning the in’s and out’s of security analysis, especially stocks, as insurance for advisors and financial planners. We know it will be an asset grab out there in the coming years as assets shift from one generation to the next, and most of those assets will likely go to the low-cost provider, regardless of past performance (look at active management as the prime example). Why not get ahead of the game and learn to be the low-cost provider, just in case you might very well have to, sooner than later? Why not start building the moat around your business today, so you are ready for whatever the industry throws at you 20 to 30 years from now? What’s more, you’d be saving your clients tons of money, too, if building equity portfolios becomes your biggest strength and therefore an option.

If survival may be the guide, independent financial advisors and financial planners may very well have to become the new portfolio managers and stock and bond analysts in the decades ahead as their roles continue to evolve. Today, an over-reliance on index funds, low-cost mutual funds, or active ETFs could make the independent advisor and independent planner obsolete in coming years, regardless of other means of differentiation. Investors trust Vanguard, and they won’t think twice about changing teams when it comes to saving money for retirement. As advanced as it seems the financial industry has become, I think the economic moat for independent financial advisor and financial planner practices over the long haul will come all the way back to their proficiency in good old individual stock selection.

The future will always be uncertain, but why not take out an insurance policy, and learn stocks better than anyone out there? That’s how you can shield and differentiate your practice. That’s how you become the low-cost provider. That’s how you can save your clients lots of money along the way. The industry might very well go full circle in coming decades, and individual stock selection may come back in vogue as both the best custom fit and lowest cost option for clients. Knowing stocks like the back of one’s hand may eventually become a matter of long-term survival, if not a key point of differentiation, for many independent financial advisors and financial planners.

Related: BRK.A, BRK.B; tickerized for the largest Vanguard ETFs, by assets under management.


Valuentum is not a money manager, is not a registered investment advisor, and does not offer brokerage or investment banking services. Nothing in this article should be viewed as investment advice, and nothing in this article should be viewed as a solicitation to buy or sell any security. Valuentum is a financial publisher.

Valuentum members have access to our 16-page stock reports, Valuentum Buying Index ratings, Dividend Cushion ratios, fair value estimates and ranges, dividend reports and more. Not a member? Subscribe today. The first 14 days are free.

The High Yield Dividend Newsletter, Best Ideas Newsletter, Dividend Growth Newsletter, Valuentum Exclusive publication, ESG Newsletter, and any reports, data and content found on this website are for information purposes only and should not be considered a solicitation to buy or sell any security. Valuentum is not responsible for any errors or omissions or for results obtained from the use of its newsletters, reports, commentary, data or publications and accepts no liability for how readers may choose to utilize the content. Valuentum is not a money manager, is not a registered investment advisor, and does not offer brokerage or investment banking services. The sources of the data used on this website and reports are believed by Valuentum to be reliable, but the data’s accuracy, completeness or interpretation cannot be guaranteed. Valuentum, its employees, and independent contractors may have long, short or derivative positions in the securities mentioned on this website. The High Yield Dividend Newsletter portfolio, ESG Newsletter portfolio, Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio are not real money portfolios. Performance, including that in the Valuentum Exclusive publication and additional options commentary feature, is hypothetical and does not represent actual trading. Actual results may differ from simulated information, results, or performance being presented. For more information about Valuentum and the products and services it offers, please contact us at