5 Trends Redefining the Wealth Management Industry

Carlos Amador
April 5, 2016
Unprecedented levels of change continue to redefine the wealth management industry. Large incumbents such as Merrill Lynch, UBS, Morgan Stanley, Vanguard, Wells Fargo Advisors, LPL Financial, Cetera Financial, and mid-market competitors like Raymond James, Robert W. Baird, Edward Jones, Stifel Nicolaus, and William Blair face existential risk from technology disruption and demographic change. Tech-enabled financial providers, an aging advisor population, the Department of Labor Fiduciary ruling, a $30 trillion generational wealth transfer, and an inappropriate level of youth recruited -and retained- to manage relationships with Generation X and Millennials inheriting these assets, have shifted the industry landscape. What exactly are these trends? And, how can financial service providers tackle the seismic adjustments?


There are now over $18.7B managed by robo adviser solutions, and the number is expected to continue growing to $489 billion in four years. Wealthfront, Betterment, Personal Capital, Merrill Edge, Acorns, and Schwab Intelligent Portfolios have all recently sprung up as elegant, intuitive, and well-designed solutions. The emergence of this algorithm-driven technology poses a significant threat to financial advisory firms that don’t incorporate this into their business model. Money management and investment selection have become commoditized and standardized where generating enhanced returns for investor portfolios is accomplished through the overall cost compression afforded by the low expenses of running these investment solutions. Fintech - HourlyNerdSource: A.T. Kearney, 2015 Client expectations in the 21st century go above and beyond individual investment security selection. The role of the financial adviser is no longer to pitch stocks, bonds, annuities, mutual funds, and alternative investments to clients. Investors increasingly expect holistic wealth management advice that includes retirement, insurance, estate, and college planning. Financial firms that outsource money management to technology platforms, coupled with a strong emphasis on deepening client relationships through comprehensive financial advice will be well positioned to serve the future generation of investors. 

DOL Fiduciary Rule

After an investment of substantial monetary resources and political capital to stop the Department of Labor’s Fiduciary rule from taking effect, wealth management firms are coming to grips with this game-changing policy. In essence, the DOL ruling bans commission driven compensation in ERISA governed accounts, such as IRA and 401K retirement plans, through a fiduciary standard of care mandate, and completely redefines the sales driven culture in the financial advisory business. Advisors to retirement accounts will need to transition brokerage accounts into the fee-based/only products to remain compliant, unless a Best Interest Contract Exemption (BICE) is put into effect. BICE is a contract between the advisor, financial institution, and investor that commits brokers to providing advice in the client’s best interest, disclose any conflicts of interest, charge “reasonable” compensation and outline the total cost of investment products. Providers will need to heavily invest in practice management resources, product offerings and technology platforms, such as Turnkey Asset Management Programs (TAMP’s), to offer fee-based/only solutions for smaller accounts. For example, LPL Financial, the largest independent broker dealer network in the U.S., has taken steps by lowering account minimums to $10,000, lowered prices, and a heavy investment in practice management resources to help advisors transition clients to advisory platforms.

Generational Wealth Transfer

The next 30 years will see a massive $30 trillion passed down from Baby Boomers to Generation X to Millennials. In that enormous transfer of wealth, investment advisers and wealth management advisory firms will see a hard-earned asset base evaporate because they don't know how to connect with their clients' children. The problem is especially difficult for the many advisers ill-equipped to connect with clients who are technologically savvy and expect a very different experience than their parents or grandparents. The statistics are staggering: 66% of client’s children fire their parents financial advisers after receiving an inheritance, and more than half of advisers meets with their client’s children less than once a year. In order to strongly position themselves as the go-to adviser to the younger generation, financial firms must invest in technology capabilities that allow inheritors to seamlessly maintain the relationships. Further, firms that invest in practice management tools to help advisors begin conversations with the whole family and invite children into the mix will see a larger percentage of assets remain in-house. In the end, it will be a compelling value proposition with holistic wealth management, strong technology solutions, and a focus on client services that will not only keep inheritance assets, but capture a larger amount of assets from other firms.

Aging Advisor Population

The statistics are undeniable. Most studies pin the average age of advisors at 50.9, with 43% older than 55 years old, and fully one third plan to retire or leave the industry in the coming decade. This poses a significant amount of challenges to wealth management providers, including potential liability for adviser’s mistakes as a result of forgetfulness and a slowdown in mental skills. Due to the stickiness of client relationships in the industry, firms’ face the potential of lost clients and consequently, assets under management, revenues and profits. Leading firms in tune with the changing demographics in their advisor ranks are beginning to highly encourage succession planning as a tool to manage transition the into retirement. Others are going further and incorporating team operating models to better manage client relationships across generations and keep the viability of the business into the future. Tactics such as financing books of business acquisitions will help recruit solo practitioners into the ranks, while acquiring firm’s established advisors transition clients into their own practices.

New Advisor Failure Rate

The financial advisor career is one of the most failure-prone options in the marketplace. Statistics can vary, but some place the number at upwards of 90% of brokers will fail in their careers. Some of the reasons cited are the difficulty in building a book of business, fierce competition, and sales driven culture. Training programs for new career entrants range from receiving little more than two weeks’ worth of product training along with a Series 7 test prep manual, to more advanced programs that include two years of associate level experience prior to beginning to build a client base. The high failure rate coupled with the massive investment - sometimes up to $250k-$500K per trainee for advanced programs - is the most challenging issue financial advisory firms face in their search for organic growth. Some firms, such as Baird and Vanguard, have done excellent jobs in building highly innovative rotational development programs for young professionals and college graduates to provide functional experiences in areas that support the wealth management business. These programs combined with licensing exams, CFP® designation completion, and teaming opportunities should help bring new faces to the industry. Going even further, firms will need to re-think and redefine how they allocate these resources through out of the box thinking that backstop losses earlier in the cycle.

In Conclusion

Financial firms that embrace the changes outlined above - redefine their product offerings, technology capabilities, training programs, and compensation mechanisms – execute with speed and agility are well poised to capture a growing amount of the asset base that leaves providers unable to adapt and thrive. New federally mandated policies pose the most significant opportunity to maximize top line results in generations. Fee-based accounts can have a return on asset that’s 60% higher than commission based accounts; something that could yield an additional $13 billion in revenues for the industry. How to Run Your Enterprise Like a Lean Startup

About the Author

Carlos Amador

Dynamic, driven, and engaging professional with multi industry expertise, incredible intellectual curiosity, and drive to succeed. Prior pioneer leadership rotational development program participant for one of the world's leading mid market investment banks consistently ranked Top 10 on Fortune Magazine's 100 Best Companies to Work For.

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