Outlining the Future

There are boom-and-bust cycles in the financial services industry. He names a few, but they tend to go with the economy: when people are making money, there's great interest; when the economy is suffering, people tend to shy away from financial markets.

His sense is that the market is "currently" bottoming out and we are about to re-enter a booming stage, so preparation is important. The next ten years, he claims, will be a period of significant growth and change.

EN: This is time-sensitive advice, but interesting to note that the author was half-right. The five years after the book's release in 2003 were a period of considerable economic growth. Then came the second worst recession in US history. A lesson, perhaps, in keeping an eye on the horizon and being ready to shift when obstacles arise.

1980s: Tax Planning

There was stagnation between 1964 and 1981, during which period the Dow rose less than one point (from 874 to 875) and the media was seeing stocks as dead. However, in the next 17 years (1981 - 1008), the dow rose from 875 to 9181 (1200%).

Prior to the Regan administration's changes to the tax codes, the top bracket for personal income tax was around 90%, and the primary concern was keeping one's own wealth rather than giving it to the federal government. The answer to this need was the development of tax-sheltered portfolios. So much so that advisors became tax planners and gave up on all other aspects of financial planning.

In 1986, the tax codes changed significantly, and investors pulled out of tax shelters to re-enter the economy. However, the advisors who had specialized suddenly lost their business, and many went out of business.

Lesson learned: while it may be good to serve current needs, one must keep an eye to the future, and maintain across-the-board capabilities in order to adapt to changes in the environment.

1990s: Assets Under Management

The last cycle was an "assets under management" cycle, which largely consists of managing mutual fund portfolios for clients. Specifically, they have abandoned the "hard, messy planning activities" and simply act as a brokerage through which clients manage their money, providing very limited guidance in the purchasing decision.

His belief is that this will be pushed to the background - mutual funds are already a commodity good, and competition has been on price (reducing fees, hence income for those who trade in and manage the funds). He feels this will not be profitable at all in the near future.

Key Factor: Shrinking Risk Premium

One factor that many of the major players in the industry agree upon is that the risk premium - the increased return offered to investors for getting into bed with risky ventures - has substantially dwindled over time. They predict that the premium for investing in stocks, as compared to risk-free securities, will shrink to 4% or less.

As a result, the ability of a financial advisor to guide clients in selecting investments will have a diminished impact - and it is expected that customers will begin to question the value of having an advisor at all.


The conclusion is that the service a financial advisor offers today (helping customers achieve a significantly higher return on investment than they could obtain for themselves) will diminish to the point where it loses its value entirely, and that the industry is overdue for a "sudden, shocking" transformation to another value proposition.