Close Close
ThinkAdvisor
Skip Schweiss

Portfolio > Asset Managers

Skip Schweiss: RIAs Can’t Afford to Ignore These Big Trends

X
Your article was successfully shared with the contacts you provided.

A fast-evolving set of risks and opportunities is challenging late-career workers, retirees and the financial advisors who serve them, and those who fail to respond to shifting conditions could see hard-earned nest eggs battered by unforgiving market forces.

At the same time, financial services firms that manufacture investment funds and outsourced portfolio models are facing their own evolving set of pressures and prospects, leading to a fast pace of product development across the spectrum of mutual funds, managed accounts, exchange-traded funds and other investment vehicles.

This was the case made in a recent interview by Skip Schweiss, the CEO of Sierra Mutual Funds and former president of TD Ameritrade Trust Co. Drawing on his extensive experience working in and around the advisory industry, Schweiss said this environment is also driving significant evolution in the work of registered investment advisors.

As Schweiss told ThinkAdvisor, today’s wealth management professional is expected by clients to be many things — a financial planner, a guidance counselor, a confidant and more. In a marked change from decades past, the investment management part of the client service equation is often placed behind these other roles, in no small part because today’s clients expect to get top-notch investment support from any professional they choose to work with.

These dynamics make it critical for wealth management teams to find ways to offload lower-value investment management tasks without adding manual labor or having to spend the time implementing and maintaining proprietary technology.

Concurrently, according to Schweiss, advisors’ clients are seeking investment approaches that better match their current phase in life, and for many RIAs’ core client segment, this means growing demand for investment options that can help them manage sequence of returns risk while also addressing their growing longevity.

It’s a fine balance, Schweiss says, but it is one that advisors and investment managers can work together to address in a way that benefits all parties involved.

THINKADVISOR: The last time you spoke with us was in January, when we talked about why 2023 would be an important time for the turnkey asset management program marketplace, as well as for outsourced portfolio models. I imagine you’ve had a busy but interesting year working on these topics?

Skip Schweiss: Without question. So, right now, we are continuing to build out our suite of risk-managed fund solutions in a way that reflects those trends. As you know, we’ve been around for 36 years now, and for most of that history we were really a fixed income manager.

In the past few years, advisors have been asking us to extend our risk management discipline into the equity space, and we’ve bene busy doing that. We are also getting into the balanced fund and full-on equity asset classes.

Next year, we’ll also be extending our risk-management discipline into the exchange-traded fund wrapper space, which is really exciting. And we are, of course, working on packaging up all of those things into usable models for advisors.

A lot of TAMPs are telling us: “Hey, we love having this or that model on our platform, but what advisors are really looking for is a full suite of options. Starting from a more conservative model, moving to a more conservative-moderate blended model, then on to a real moderate model. Then you might have a moderate-growth model, followed by a growth model and then an aggressive-growth model.

We’ve been busy responding to that granular demand, which is advisor-driven.

Do the advisors give you a good sense about why they are interested in this spectrum of options today? Is it because their clients are changing and facing different challenges? Maybe entering retirement and wanting a little bit more stability?

That’s part of it. Our core clientele is largely pre-retirees and retirees — people who have already earned their fortunes, so to speak, and now they don’t want to lose it. But they also know they can’t just sit in cash because of their longevity risk, though these days they are getting better returns on safer assets than we have seen in a long time. It’s more than a 5% return on safe assets.

This gives investors an interesting option, but they also know they need to take some risk. That’s why investors who work with us value our approach of taking a tactical, rules-based management approach. They can access the equity space without worrying too much about being torched while doing it if the markets turn on us.

We’re hearing this from advisors, who are hearing it from their clients.

Investors are saying, “I know I need to be exposed to some risk in order not to lose a ton of ground to inflation and in an attempt to grow and protect the nest egg as I draw income.” But they don’t want to wake up one day and see that sudden 20% or 40% drop.

It reflects the broader questions some advisors and clients are asking about really being careful around sequence risk. It can ruin your retirement.

Yes, so true. You can really, by no fault of your own, choose to retire at the wrong time and really suffer some bad luck. That immediate downdraft early in retirement can really derail an otherwise successful long-term plan.

Do you spend much time thinking about things like where interest rates may move or whether we are going to enter into a recession or not?

Well, it’s true that the future is always uncertain, right? But it feels a little more uncertain today than ever, with the heightened geopolitical risks and inflation and interest rates on the rise.

A more concrete point to make is that, as long as I’ve been in this business, I’ve agreed with the axiom that you should not fight the Fed. Now, I’ve watched and been confused for a year or more as markets have indeed fought the Fed, even though I feel like Chair Jerome Powell has been quite clear about his commitment to fighting inflation.

I’ve been around long enough to remember what happened when the Fed let inflation get away from it back in the 1970s — twice. Powell knows this history well, so I just haven’t understood all the calls that are saying that rates are just about to start falling.

More to your question, though, the answer is no, we don’t spend a ton of time concerning ourselves with these market timing questions. We are more trend players. We are looking at virtually every asset class and the securities we recommend each day and we are trying to see where the momentum and trends are — getting our clients into rising trends and getting out of falling trends.

In that way, we really are not concerning ourselves too much with all the other economic noise.

Can you tell us more about the ETF product development you mentioned earlier?

As with all of our product evolution, this push is being driven by market demand. It’s driven by advisors coming to us asking if we can deploy our risk management capabilities, first into the equity space and now, they tell us they would really love it if we could do the same thing in ETFs.

That’s being driven by all the big factors you hear about. It’s the better tax management, the intraday pricing and the lower costs. All of those things are driving demand in this direction.

I will add, however, that the death of mutual funds has been greatly exaggerated. They still have quite a few multiples the of AUM that ETFs have, but the momentum is in the other direction.

I was just having another conversation with someone, and we were talking about how mutual funds and 401(k)s are really meant for each other, and there is a huge market in 401(k)s today, in the realm of $8 trillion. I don’t think that’s going to change, so mutual funds aren’t going anywhere anytime soon.

Another thing I wanted to make sure we touched on again is how you view the overall momentum and direction of the registered investment advisor industry. Back in January we spoke about a few different trends, for example the seeking of business models that can allow advisors to serve clients with lower assets but at greater scale and efficiency. What are you seeing high level now almost a year later?

Yeah, to start I think that theme is still a relevant one.

As you know, I was on the custody side of the business for 30 years, so I got to know literally thousands of advisors. When I first got into the business, most of their minimum account sizes were in the realm of $100,000. Over time, I watched as that number grew first to $250,000, then to $500,000 and now to $1 million in many cases.

So, there is still this issue of people with lower wealth but who still have means to invest and save for retirement who aren’t getting help. It’s tough, because on the one hand, the RIA industry remains very robust. There are a lot of people out there with enough money to meet those minimums to make for an attractive industry for the foreseeable future.

But, things are evolving. Even though we’ve seen tremendous consolidation of mid-sized and large firms, the actual number of RIAs has continued to grow thanks to breakaways and new entrants. It’s not extraordinary growth, that’s true, but new entrants continue to come into the space.

I do still think we need to crack the middle market. For example, I can look at my kids, who are in their 20s and 30s. They aren’t a high-net-worth client at this point, but they are definitely getting towards a point where they could probably use some professional advice, and there’s not a huge number of choices for them at this point.

There are some monthly subscription fee approaches that they can consider, so there are a small handful of providers out there for that type of clientele — but I don’t think it’s widely known in that demographic. I just don’t think we, as an industry, have cracked that nut yet.

I do think there’s some interesting approaches being championed by young people coming into this space. Part of that, I think, is just the reality that, if you are coming in as a planner who is 25 or 30 years old, you are going to struggle to attract very many 60-year-old millionaires right off the bat.

So they are starting to build a business model based round their peers. But that’s still a hard way to make a living and it can be hard to scale, so some innovation is needed.

Pictured: Skip Schweiss 


NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.