2023 Brings Challenges and Opportunities for RIAs
By Jon Talamas
The year ahead will feature challenges and opportunities for America’s RIAs. Are you buckled in?
After a turbulent 2022, registered investment advisors (RIAs) are relieved to close the year, turning their attention to 2023. Will the new year be better? It’s hard to know. But one thing is certain: It will continue to pose threats and growth opportunities for U.S. investment advisors.
In 2022, RIAs witnessed a weakening global economy, hints of an impending U.S. recession and the Russia-Ukraine War, which sparked turmoil in energy and agriculture markets. There’s no reason to believe these and other issues will vanish in 2023. Other problems will emerge for the first time, complicating RIA decision-making in the year to come. Below are some specific financial advisor challenges for the next year.
A Slowing Economy– According to LPL Financial’s Outlook 2023, global growth might slow from the high 2% range to the mid-1% range. Where it lands will depend on what happens with China’s economy. Loosening COVID-19 restrictions after public protests sparked infection waves will impose an economic toll on China in 2023.
Also significant is the differential impact of inflation across world economies. Although U.S. inflation appears to have peaked late in 2022, other nations (think Germany) are still experiencing accelerating inflation. If it continues to soar, 2023 will likely feature economic volatility for citizens of the world. This will make client management more difficult as worried clients contact you for reassurance.
Combatting U.S. Inflation– The Fed began its campaign to reduce inflation in 2022, ordering multiple jumbo rate increases designed to reduce consumer demand. By yearend, inflation had slowed, and the Fed started signaling a pause in rate hikes over the short term. But progress was not uniform across all economic sectors. Even though durable goods prices are increasing at a lower rate, say LPL economists, service prices continue to rise rapidly, especially in the housing and health services sectors. A high-priority investment advisor challenge for 2023 will be inflation-proofing client portfolios.
A Likely U.S. Recession– The U.S. economy will probably enter a recession sometime in the coming year. The Conference Board’s Leading Economic Index (LEI) has decreased seven times over the last nine months. LPL says a significant decline over six months typically points to a recession in the near term. If this occurs, LPL economists believe it will be due to “…the consumer sector retrenching after years of inflationary pressures, high housing costs and slow real wage growth.”
Equity Volatility– Stock prices will likely experience volatility as interest rates and inflation remain in flux. However, stocks will probably see prices turn north again as long as the Fed’s rate-hiking campaign ends early in 2023. Lower inflation and a looser job market may also send stock prices higher. According to LPL, they typically increase after the Fed stops hiking interest rates. Equity price gains average 10% a year after rate hikes end.
Housing Market Doldrums– Housing will continue to be under pressure from high inflation, Fed rate tightening for at least part of 2023 and higher borrowing costs. The latter factor will decrease consumer home purchasing and builder investment, holding back the U.S. economy. However, demographic factors— including the increasing need for Millennial and Generation Z clients to purchase new homes— might trigger growing demand later in the year. Advisors might find themselves counseling clients on buying a home in times of rising prices and mortgage rates.
The War for Talent– Nearly 40% of investment advisors will retire over the next ten years. According to a Cerulli Associates study, advisors who are on the cusp of retirement control 47% of industry assets under management (AUM), yet, 25% of advisors planning to retire in the next decade lack a succession plan.
RIAs need to begin injecting more new advisory talent into the industry to ensure that tomorrow’s clients receive the investment advice they need. Firms are also starting to feel the need for more skilled support staff, particularly tech workers. According to a recent survey of wealth management executives, 30% reported a spike in tech employee resignations, leaving gaps in essential skills for serving clients.
Opportunities Ahead in 2023
Although the RIA business will face daunting challenges in 2023, it will also have many opportunities to pursue. If nations can avoid COVID-19 flare-ups and bring inflation under control while producing an economic “soft landing,” it’s probable that next year will be good for RIAs. Here are some RIA tips for 2023:
Addressing Profit Margin Crises– RIA businesses typically have fixed costs. Yet financial asset valuations fluctuate, producing variable revenue. This leads to profit margin crises. Embedded in this challenge is an opportunity: moving advisors to a variable compensation model. RIAs can better match their expenses with revenues by creating bonus plans and equity participation that reflect a firm’s profitability. The upside? They can mitigate falling margins in challenging markets and pay more to retain talent when financial markets are inflating in value.
Taking Advantage of Tax Changes for 2023– Three tax code changes are in the works that will benefit RIA clients. Make sure your clients take advantage of them, as this might free up more cash for investing. First, the IRS will adjust tax brackets to account for inflation. Since the inflation rate was so high in 2022, the bracket changes will be significant, leading many clients to have lower tax liabilities. Second, increased contribution limits for 401(k)s and Health Savings Accounts (HSAs) will phase in due to higher inflation. Third, the standard deduction for single filers will grow by $900 to $13,850 next year. The standard deduction for married couples filing jointly will increase by $1,800, equaling $27,700 in 2023.
Secure 2.0 Will Enhance Retirement Planning– Dozens of provisions in the $1.7 trillion federal omnibus appropriations bill will help expand and strengthen the U.S. retirement system. Some provisions would:
- Mandate automatic 401(k) enrollment, with exceptions for certain small and new firms.
- Increase the Required Minimum Distribution (RMD) from age 72 to age 73 next year. It then increases to age 75 in ten years.
- Allow larger “catch-up” retirement plan contributions for older savers— from $6,500 annually at age 50 to $10,000 beginning in 2025 for people aged 60 to 63.
These changes allow you to review your clients’ retirement-planning goals and tactics in 2023. The likelihood of finding additional assets for retirement savings will be high.
In addition to the above three opportunities, here are others that might bear watching over the coming months:
- Standardizing office procedures to improve client experience and customer satisfaction
- Refining your ideal client profile to maximize marketing effectiveness and revenue per client
- Boosting your brand by better defining it, differentiating it from competitors and demonstrating its tangible value to prospects and clients
- Adopting modern digital tools to make your marketing more targeted and measurable
- Expanding your service offerings to respond to the needs of your prime clients
- Embracing new technology to give clients more access to and information about their investment holdings
As you move ahead into 2023, pat yourself on the back for the successes you achieved during a turbulent 2022. Then consider what you need to stop doing, start doing or do more of over the months ahead. Here’s to a successful 2023!
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