(Forbes) -- Of the myriad segments and niches in finance, wealth management is often the most elusive. What started out as an institutionalized endeavor has become an avenue for entrepreneurs seeking to build their own brand while providing an impactful service for families.
From my perspective, wealth management has evolved dramatically, especially from the early brokerage days.
Back in 1994, digiTRADE Inc. became “the first company to bring online brokerage services to the Internet” and brought to bear the digital revolution of stock trading. I would know — my father helped build the company and sold it to Thomson Financial (now Thomson Reuters). Before becoming a household name, fintech was very visible and “in your face.”
The change from calling via the phone for transactions and waiting for significantly delayed information (and execution) to immediate delivery, feedback and service was quite dramatic. You could not deny the change because it was so visible.
By the late 90s, the tech boom truly took off and other major players arose (e.g., Amazon, Yahoo).
This was not merely a change of format, but rather a dramatic change of what I call the “medium of exchange of value.”
The newer medium enabled financial institutions (and individuals) to gain dramatic speed and acceleration in their business; in a major way, the new format of online brokerage enabled firms to be on the offense.
Fast forward to today, I see wealth management as being in more of a transitory change. Having a digital wallet, a robo-advisor or a risk number does not change the medium of exchange of value enough to merit an entire wave of adoption. Throw in a strict regulatory environment and a “gray area” of definitions regarding financial adviser versus financial advisor, and you have strong impediments to gaining market-wide dominance. Case in point: The Securities and Exchange Commission recently charged two robo-advisors, Wealthfront Advisors LLC and Hedgeable Inc., with false disclosures. The problems and hurdles are real, especially for investors seeking the next change agent that will bring a new form, such as online stock trading.
The Natural Evolution
Clayton Christensen said it best with, “Disruptive technologies typically enable new markets to emerge.”
The maturity of the internet has helped spawn many great business models, some of which are natural extensions of traditional business models but in an upgraded format. When we look at digital wallets, various versions of robo-advisors and mobile payments, they are byproducts of the maturity and security of the internet enabling possibly easier ways to transact.
However, the underlying value being transacted hasn’t truly changed all that much.
For wealth management, the value being exchanged is personalized financial advice.
At the end of the day, both humans running wealth management firms and robo-driven solutions still deliver the same results; both deliver financial planning and portfolio rebalancing.
There is no true distinction beyond a low-cost provider between a robo-driven solution and a human advisor, especially for families that fit a “mass affluent” or “low mid-tier” category.
At higher levels of assets under management (say above $1 million), the needs for an individual approach, such as the formation of trust accounts, require a highly tailored service, something that can’t truly be automated. To put it candidly, there has not been an invention that changed the status quo enough for wealth management; what we are seeing with various innovations in wealth has largely been natural evolution and extensions of existing norms.
What’s The Next Wave?
Wealth management’s true disruption has to open the door to a new market: wealth creation services. Wealth creation, by my definition, implies focusing on wealth creation/origination opportunities away from simply stocks and bonds.
Much of today’s and yesterday’s wealth management solutions have been defensive solutions, such as traditional passive portfolios, model portfolios and financial plans to invest into traditional assets and guide families to retire at X age. Unfortunately, this does not truly address the retirement/wealth creation conversation.
Today, we have gaps in retirement for pension funds and for individuals. Across America, approximately 55 million private-sector workers don’t have access to a retirement plan offered by their employer, according to AARP. Millennials were hit particularly hard by the 2007-2009 financial crisis, and should the economy experience a fundamental change in volatility, the compounding effects on subsequent generations could widen the retirement/earnings gap.
During the financial crisis, the unemployment rate increased sharply for millennials. Accordingly, those born in the 1980s have 34% less wealth than in previous generations.
For the next wave, businesses need to focus on innovating the wealth creation side of the equation.
This means a stronger dive into possibly personalizing alternative investments to personal financial advice and expanding that knowledge and distribution base across all independent and institutional wealth management.
By focusing on innovating the wealth creation side of wealth management, businesses will be able to introduce investment opportunities that generate the necessary portfolio returns to truly “retire.”
One of the key aspects of retirement is not really working; you’re relying on the run off your portfolio income to support a better lifestyle (“better” being the keyword).
Other unique insights and innovations that businesses could explore might take the form of automating the knowledge training aspect for alternative investments or delivering better means to connect the right ultra-high-net-worth family with the appropriate nontraditional financial product.
Getting Out Of The ‘Gray Area’
Wealth management has always been that “gray area” of financial services. It’s stuck between brokerage and private banking, yet at the same time, cannot be ignored. But as the demographics and financial needs of everyday Americans rise with each passing decade, wealth management can no longer be a gray area to simply have a presence in.
