Vanguard’s top economist Joe Davis isn’t trying to alarm you. His latest forecast, on the other hand, should.

The company’s global head of investment strategy looked at the megatrends, ran the numbers, and found the status quo — namely, that interest rates and global GDP both come in at about 2% annually over the next decade — is in for major upheaval. That’s because of the massive global debt levels that could lead to higher interest rates and lower growth. The research found an 80% chance that bond yields will top 7% if deficits continue to rise. The good news is that an AI-driven productivity boom could supercharge the global economy and push through those debt headwinds. The outcome could all hinge on just how revolutionary artificial intelligence technologies ultimately become, and whether or not governments can rein in out-of-control spending.

“We’re saying that the Federal Reserve’s forecast has a 20% probability of being correct,” Davis told Advisor Upside. “I can’t think of a bolder economic assessment in the asset management industry.” While the future of the global economy is anybody’s guess, Davis is confident that today’s normal is unlikely to continue. “I wish I had a higher probability in one scenario or the other,” he said. “It would be much more convenient.”

We sat down with Davis to talk about financial markets, economics and how advisors can stay on top of a changing financial future.

Advisor Upside: What shocked you most about the new research?

Joe Davis: The research is saying there is a greater than 80% probability that we will have a material change in the economy — and in the financial markets — over the next three to five years. Over 80%. And, we were not looking to find this. It just comes across from the push and pull of technology on one side, what I’m simply calling AI, and then deficits that come with aging demographics. We did not see that coming.

But, AI better be transformational because, if not, we’re going to have high interest rates and bond vigilantes. If you don’t believe me, we caught a small glimpse of that future in April. But by the year 2030, we will have to start to enforce more discipline. It’s not on our doorstep today, but if you are an advisor, I would respectfully say: How can you start thinking about that from an asset allocation perspective and given our probabilities? Ironically, it’s actually overweighting high-quality fixed income. That’s the irony — [it’s] not gold and crypto. You have to believe in a lot of other things before it takes you down that path.

So, how should advisors approach the upcoming AI boom?

There are two phases of a technology cycle. The first one is the production of the technology, and loosely, the producers do really well. By the way, then, there’s a massive amount of new entrants that erode the ROI of the incumbents — doesn’t mean they all go out of business — but some of them do. Guess what? Next, you start seeing the technology consumption. Here’s a little factoid: When electricity spread in the 1920s and ‘30s, what were some of the best performing stocks? Ford and General Motors. Because they used electricity to power the assembly line. They consumed electricity. Even in the ‘90s, Amazon came in, and they’re using the internet, but they didn’t produce it.

I’m not saying sell technology, but as advisors, you have to start thinking about clients who have amassed significant wealth in the Mag 7 and that’s driven a lot of the equity return. You can either de-risk, going forward, because you think AI is overrated. That’s easy, move into fixed income, for sure. Or you can say: No, I’m just as bullish as before. But, now you can start thinking about: OK, what’s the second half of the chessboard?

What else should advisors keep in mind?

Structurally overweight value stocks, even if you’re extremely bullish on technology. Value stocks outperform growth stocks by roughly three or four percentage points per year. I don’t know about next year; AI can keep running. But, there’s a second half of the technology cycle. We’re still in the first phase. I wish I knew the timing of it: I’d be retiring, but I’m still a working man. And you know, that’s a cool thing.

Another way to say it is that there’s 80% odds, which means the non-consensus scenario, [of a change to the global outlook]. Here’s another way to think about it: We are effectively saying there’s over 80% odds that US exceptionalism ends.

The president’s audacious firing of the head of the Bureau of Labor Statistics may not cause asset managers to mistrust government data — but much depends on who gets confirmed as successor for the agency.

President Donald Trump last week shocked economists, market watchers and the wider financial services world when he announced the firing of BLS head Erika McEntarfer (no small accomplishment amid rumors of a UFC fight on the White House lawn next year). Trump disputed revisions to recent jobs reports, which he claimed were manipulated for political purposes, despite citing no evidence. The announcement called into question the future independence of BLS data, and perhaps government data more widely, which could have implications for asset managers.

“It’s a potentially serious problem. It’s kind of surprising to me that the markets haven’t responded with the horror you would expect,” said Hal Ratner, head of research at Morningstar Retirement.

Revisionist History

It is common for the BLS to revise numbers in its reports, given that the initial figures are estimates based on early survey data. The changes it made Aug. 1 to jobs numbers in May, June and July dramatically cut the payroll numbers it reported earlier, representing the biggest revisions the agency had made to reports since 1968, Ratner noted in an analysis piece. However, the changes brought the figures in line with what economists had been predicting, as the tariffs had been expected to make employers uncertain in the near term and less likely to staff up, he said.

McEntarfer’s firing amounts to “shooting the messenger,” as the BLS has historically operated without political pressure, Que Nguyen, chief investment officer of equity strategies at Research Affiliates, said in a statement. “This is a culture and a process that has been embedded in the agencies that measure our economy. This culture is not easy to change.” Investors use a variety of indicators, especially given that initial BLS data are subject to revisions, Nguyen said.

BLS reports are critical to gauging inflation and setting rates:

• The jobs data help inform the Fed funds rate. Despite Trump’s claims about the revisions being rigged, the lower numbers help support a rate cut.
• The Consumer Price Index numbers released on Tuesday by the BLS showed annual inflation being relatively steady in July, at 2.7%.

Heritage Hire: On Monday evening, Trump announced on social media that he would nominate Heritage Foundation economist and Project 2025 contributor E.J. Antoni, who has been critical of the Fed and of BLS data, as McEntarfer’s replacement. Trump wrote that “our economy is booming, and E.J. will ensure that the numbers released are honest and accurate.” That statement isn’t the sentiment observers were hoping for, Ratner said. “Antoni is much more the political operative than the serious economist,” he said. “My hope is that he doesn’t clear Senate confirmation.”

Financial advisors play a vital role helping clients plan and prepare for their financial futures. It’s funny that advisors don’t apply the same foresight to their own futures.

It’s no secret that developing a written succession plan is essential for effective business planning. But, a recent report by Cerulli highlights that over the next decade, more than one-third of financial advisors — who collectively manage more than $11 trillion, representing 42% of total industry assets — are expected to retire. Alarmingly, many of these advisors don’t have a formal succession plan. Are you one of them?

Where’s the Goalpost?

Start by outlining the goals and objectives. Factor in a desired timeline, financial considerations and the type of successor that would most benefit the firm: internal, external or both. The most successful plans address the goals of every stakeholder — including owners, their families, and staff — while also considering how the transition will impact clients personally.

Perhaps the most important decision for the business’s future is who will take over when the founder steps away. Larger businesses, or those offering multiple services, may need to identify several successors for a seamless transition. Whether it’s one successor or several, the first step is determining whether the torch gets passed internally or externally. If the successor is internal, allow time for mentoring and training so that the practice can continue without interruption after the founder’s departure.

Tunnel Vision. This only works if the owner and successor share a clear vision for the future. How can you be sure a potential successor truly sees the vision and will honor the hard work and solid reputation that enabled the firm’s success in the first place? Start small and keep it personal. Really get to know the staff and leadership teams. Find out what makes them tick, what they care about and who they are on a deeper level. For example, host a summer barbecue at the office and invite your team’s families. When people relax, casual one-on-one chats often evolve into meaningful conversations about career ambitions, development aspirations and future goals.

What about an external successor? While this broadens the recruiting pool, it also adds complexity. Finding the right candidate means identifying the right mix of personality, experience and skills for a smooth transition. Here’s what to look for:

• Alignment with the practice’s values and culture.
• A desire to learn about the business, clients and staff.
• Experience with a comparable service model and investment philosophy.
• Strong relationship management skills, a solid work ethic, and leadership skills.

Build Value

The succession-planning process enables holistic evaluation of the business and identification of opportunities to enhance its value. To attract potential buyers, showcase sustainable growth, how the firm has leveraged technology and processes to drive efficiency, and the strength of relationships with clients and staff. Identify competitive advantages and areas for improvement by asking the following questions:

• What percentage of the business generates recurring revenue and how can that profitability be increased?
• What are the client growth and retention rates?
• Is the practice fiscally responsible? Are budgets followed to manage spending and keep costs within projected limits?
• How strong is the brand, and is there a key niche that is a differentiator?

Next Chapter

Once everyone is aligned strategically and operationally, shift the focus to clients. After all, the founder has likely guided them through some of the most significant decisions and changes in their lives. It’s essential to involve them in your succession planning. Early conversations with the most trusted clients can reveal concerns and build confidence in the transition. Maintain open communication with clients throughout the transition process and address any concerns or questions promptly to ensure there is an ongoing atmosphere of transparency and trust.

When ready, introduce the successor through client-facing tasks such as answering client questions or responding to inquiries. This will help build trust and rapport over time.

Tee Time. While some advisors may be ready to retire, others may not. Maybe an owner plans to stay at the firm post-sale in a part-time or consulting capacity, but what happens after that? That decision is up to them. However, the sooner they begin developing a succession plan for the firm, the more time the founder has to prepare clients — and themselves — for what lies ahead.