The last cyclical recession wiped out financial services. Entire firms melted down, and professionals, ranging from personal advisors to institutional investors, lost their jobs. In 2023, talk of a recession is on the horizon again. Now, however, the larger economic signals are decidedly mixed. And for financial advisors, this raises the question: Will there be a recession in 2023? And, importantly, how vulnerable are financial advisors to layoffs this time around?
There are some mixed signs already. Several firms, including Morgan Stanley and Goldman Sachs, have already announced layoffs. But Morgan Stanley reportedly spared its financial advising divisions. And while the industry remains solid, with an overall gain of 1,100 jobs in January, financial services layoffs are a reason for concern.
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To understand how recession-proof or recession-prone financial advising could be in the coming year, SmartAsset spoke with two experts: Kevin Caldwell, one of the founders of Golden Road Advisors, and Shyam Pradheep, general manager at the financial education firm Zogo.
Their answer? A recession might hit financial advisors hard. But the ones who are giving real value to their clients may be spared. That’s because the field is changing, and its evolution will really affect the job market for financial services. Here’s what advisors should know about their risks for layoff in the coming year.
Advisors Who Can’t Think Beyond Sales May Be at Risk
Some people in finance probably will lose their jobs in a recession, Caldwell says. If we do have a recession that hasn’t already been priced into current trading, “people who are trying to outsmart the market for a living are not going to be able to (do so),” he says. “And their client base is going to go somewhere else, to the extent that they’re going to have to find something else to do.”
A bear market will probably come for a certain segment of financial advisors out there, Caldwell says. But it’s the people who offer poor services and advice who will lose out.
Historically, many financial advisors built their practices around selling products, Caldwell says. Broker-dealers pushed financial assets, anything from individual stocks and mutual funds to alternative investments. Other financial advisors offered portfolios with outsized returns, promising asset management that outsmarts the market. In both cases, ultimately, these are sales-based businesses.
But clients don’t need sales anymore. Retail investors can easily buy their own assets and find professionally managed portfolios that offer a wide range of returns. That’s going to leave a lot of financial advisors in the same position as travel agents were 20 years ago, with a business built on specialized access to assets that everyone can now go out and buy.
A recession in 2023 would accelerate this trend, pushing out the firms offering products their clients don’t really need. That doesn’t mean that everyone is in trouble though.
Advice Is the ‘Product of the Future’
For firms that sell products and promise to beat the market, a recession might mean very real job losses. Instead, both Caldwell and Pradheep say, the way to thrive during a recession will be to focus on building relationships and boosting outcomes.
“It’s about enhancing outcomes,” Caldwell says. “Advice is the product of the future, not investment products. The ability to add value to families through knowledge around tax law, even behavioral psychology, that’s where the value is going to be.”
For example, he says, consider someone who invests in an S&P 500 fund. Historically a financial advisor might have made a living just selling shares in that fund. Today, that investor can buy his own shares. Instead, that investor needs someone who can help him understand why he’s getting a 7% annual return instead of the expected 10%. Or he needs an advisor who can help manage taxes or develop a good financial plan.
That investor “doesn’t have an investment problem. They have a behavioral problem, Caldwell says. “And how do you solve a behavioral problem? With planning.”
A Recession May Be an Opportunity for Advisors
Pradheep echoes Caldwell’s thoughts. To him, a recession is an opportunity as much as a problem. “While a certain amount of risk seems unavoidable for most positions, financial advisors can make the most of a unique silver lining – their services and guidance become especially important during times of high fear and uncertainty and can actively help those affected by recessions adapt to their new financial circumstances,” Pradheep says.
Part of a financial advisor’s job is to help clients create plans as “recession-proof” as possible.
“While they may not be immune to economic downturns, their offerings for individuals and households can add extra security,” Pradheep says.
In fact, advisors see an almost counter-cyclical move during financial downturns. For many clients, a recession is when they pay more attention to how they spend and invest every dollar. According to Pradheep, this is when Zogo’s financial advice and education products see a surge in new and returning customers, people who are willing to spend money to make sure they have a good plan.
“While it may stretch their budget a little thinner, those with an advisor tend to view this expense, not as a cost or fee associated with managing finances and investments, but as an investment in itself that can help them lay a strong foundation and create a plan to weather short-term downturns while still keeping their focus on long-term goals,” Pradheep says.
In other words, financial advisors can not only weather a recession … they can thrive.
Recessions tend to accelerate trends already in progress, and selling financial products may be already on its way out. The professionals who give individual advice, one way or another, will probably be fine.
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