Profits are up at many wealth management firms and the future looks bright, but could looming regulatory changes put a drag on that upward trajectory? John Taft, CEO of RBC Wealth Management-U.S., spoke with On Wall Street about health of the industry, threats to the business and why there isn't enough new talent coming on board.

This interview is part of our special report on the state of wealth management.

What's the industry’s big challenge today?

I’m going to give you two answers. One of the biggest challenges is ensuring that regulators  — FINRA and the SEC — don’t compromise the ability of FAs to serve their clients through  rule-making. But that is a potential tidal wave still out at sea. It hasn’t hit yet.  [Second], it is demonstrating the value of the advice we provide to our clients in the face of multiple and potentially disruptive business models and technologies.

What are those disruptive business models?

The ones that are getting the most attention are online registered investment advisors.

Why single out robo advisors?

That’s a current example that disruption is out there. If you look at other sectors of the financial services industry — for example, banking — you’re seeing extraordinary disruptive threats. Robo advisors just happen to be the current threat to our industry.

We have a brick-and-mortar, advisor-centric, high-touch advice model, which for decades has been the best way to offer holistic wealth management advice to affluent and high-net-worth individuals. What we have to do is to adapt that model and demonstrate the value that we provide to our clients.

Is the industry doing that?

The industry has been doing it, evolving from mere execution of transactions. If we were just an executor of trades, the way we were 30 years ago, then we’d be out of business. But we are not. We have evolved toward highly professional, full-service wealth management that starts with a plan and discovery process and that involves identifying life goals, risk management, insurance, credit, mortgages, secured lending, personal lines of credit, trust services, estate planning, charitable giving — all delivered by advisors.  I think that is something that is underappreciated. 

The average advisor today is better trained across a broad range of capabilities and is adding a lot more value and is also doing it for considerably less cost than ever before.

But that doesn’t mean that we don’t have to continue to evolve.

What does the future of wealth management look like?

My vision for our firm: I don’t see discontinuous transformation — I see continued evolution. More professional and better-trained advisors. Broader product offerings. More transparency and access for clients to their account information. Better reporting tools. I think we as an industry and we as a firm are on the right track, provided (and this goes back to my first point) regulators don’t derail us.

How could that happen? Where is regulation going?

There are two potential rule makings around fiduciary standard of care: the SEC, under Section 913 of the Dodd-Frank Act, and the Department of Labor, under ERISA.

As you know, I have been a spokesperson of the industry in support of a fiduciary standard of care under Section 913 of Dodd-Frank for years. The industry supports that because we see it as one step closer to restoring confidence.

There’s a right way to do it and a wrong way. We support a fiduciary standard, provided that it is business-model neutral, that it doesn’t favor one type of advisor over another, allows clients to choose who they work with, allows clients access to all the products and services they have today and allows investor choice over how they pay for those services — fees, commissions or a combination of the two.

If we can have a standard that accomplishes all of those and also accomplishes the public policy goal of having a unified fiduciary standard, then that is a win-win. That’s the right way to do it.

The wrong way to do it is to violate one of the things I just mentioned. We don’t know if the SEC or the Department of Labor is going to do anything. But if they do, then they could promote access to wealth management or impede it. But we don’t know.

Is the industry attracting enough young talent?               

Absolutely not. And we have to do a better job.

We’re supporting efforts to attract younger advisors into the profession.  One is Craig Pfeiffer’s Advisors Ahead and we are using them. What they do is actually work with individuals, graduates who will enter our industry and become new trainee advisors and join teams. This program is one example of what we need to do to bring young advisors into the profession.

But more advisors are leaving the industry than new advisors are entering the industry.

Is it a problem fixed easily?

I don’t think it’s an easy fix or it would have happened before. I don’t think we have the solutions in hand today, but I believe we are more motivated to fix it than ever before.

Is the industry doing a good job bringing minorities into the advisory profession?

The answer is no. The percentage of women advisors is significantly less than the percentage of women clients, and the percentage of visible minority advisors is far smaller than the percentage of minority clients.

But there is a greater sense of urgency than I’ve ever seen before. Our firm is very focused on recruiting women and minority advisors and managers because there is no question our client base is becoming more diverse.

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