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How to avoid becoming extinct as technology disrupts wealth management

The advisory community needs to recognize that technology is fundamentally changing the way investors are consuming financial services these days

May 25, 2014 @ 12:01 am

By Neal Ringquist

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Historically, technology in the wealth management industry has been limited to offering investors online access to account balances, and perhaps to a client portal where they can obtain performance reports or read market commentary from an adviser. Compare this to what consumers today can find online. Advisers are now competing with the online budgeting, planning and analysis services provided by a variety of finance and banking websites, many of which provide online personal financial management on their websites. Investors can access online holistic planning and investment management through a growing number of “robo-advisers” and their associated mobile apps. Simply by surfing the web, consumers are exposed to far more sophisticated levels of technological engagement than they can get through their traditional adviser relationship. And this is going to drive change.

The advisory community needs to recognize that technology is fundamentally changing the way investors are consuming financial services these days. Wealth managers would do well to consider what happened to 401(k) providers in the 1980s. Back then, participants in 401(k) plans could only see their account values on a quarterly basis. Investors in mutual funds, however, were able to get their account values on a daily basis. This naturally led investors to wonder why they couldn't also get daily updates for their 401(k)s, since these were, after all, similar types of accounts. At this point, mutual fund provider Fidelity stepped in to offer a 401(k) service that provided daily account values. Fidelity went on to become the dominant 401(k) service provider, in the process burying the market leaders of the time, such as Bankers Trust. Today, mutual fund companies remain the nation's dominant 401(k) providers.

This is a perfect example of consumerfication, where people get accustomed to a technological advance in one area of their lives and come to expect that same benefit in another area. Technology inevitably drives change indiscriminately, and winners and losers emerge across diverse industries. The same type of disruption is happening right now in the wealth management industry, although it has not yet been sufficiently recognized. Many advisers are at risk of becoming the 21st century's Bankers Trust. To avoid this, they need to pay far more attention to the technology that consumers are using in other areas of their lives, and recognize how profoundly this will impact expectations and determine client-adviser relationships.


Not only are online sites compressing fees and commoditizing portfolio management, but they are doing so with smart user interfaces. Advisers must match this level of sophisticated design and recognize that individuals come to them at different stages in the cycle of consuming financial advice. For example, lead generation technology should offer a highly engaging interface to prospects. When the individual becomes a client, the technology cannot simply consist of receiving performance reports. It has to tie into client goals and define portfolio performance as progress against those goals.

In addition, clients should be able to opt into an adviser-assist model that presents an entirely different interface, one focused on the adviser, with premium functions and services that clients cannot manage on their own. The adviser-assist model can provide a greater wealth of information and more holistic planning options to address investor concerns such as risk or tax management. They can provide clients with even more benefits than the leading national sites because only advisers are able to add local context to wealth management services. Advisers know the local standards of living, housing markets and service providers, such as banks and insurance companies. They know the community. By capitalizing on this depth of knowledge, they can compete on the technological front with the national sites and can “out-local” the online-only companies with personalized expertise.


Investors can now go to the web and get respectable money management for 15 or 25 basis points, or even for free. Or they can turn to an adviser, who will provide everything from financial planning to hand-holding, and charge 1% of funds under management. Obviously they won't get as much attention online, but if investors can get sophisticated portfolio management with periodic re-balancing for 25 basis points, why pay 1%? This sounds a lot like the questions asked by 401(k) investors in the 1980s. In response, advisers must change how they communicate their fees. Here is what they need to say to a client: “For my portfolio management services, I charge 25 basis points, and for my advice, I charge 75 basis points.”

Advisers need to explain that where they add tremendous value is in closing the gap between investment returns and investor returns. Morningstar Inc. has brilliantly illustrated the difference between what an investment product returns and the actual return that investors get. Investors may not benefit from the full investment returns because, for example, they bought high or sold low. A good adviser, however, can close the gap by extending holding periods or helping investors to stay the course. In addition, advisers will respond to on-demand questions, provide financial planning or explain financial strategies to family members. In discussing fees, their advisory services should be explicitly separated from portfolio management, which is rapidly becoming commoditized. Advice is the extra value that advisers provide, and they should be clearly communicating it.


If advisers are to create a compelling digital presence, they need to be smarter about how they interact with prospects and clients. It must be said that marketing as a strategic function has not really penetrated the wealth management industry. Discussions focus on marketing tactics, such as using LinkedIn or Twitter, but advisers need to recognize that strategic marketing should drive their interactions with clients across all channels, whether these be tweets, phone calls, e-mails or personal meetings. Consumer-based businesses have demonstrated the critical importance of using marketing automation technology to capture all interactions with clients within their CRM, whether clients are visiting their website, opening an e-mail or engaging in a Twitter chat. This in turn generates leads that are nurtured with automated yet targeted interactions that ultimately produce new business.

The same capability exists in the wealth management industry for forward-thinking advisers willing to embrace marketing automation. Successful advisers will be those who create similarly rich online interactions with clients, centered on the capabilities of their digital personas. These wealth managers will recognize that clients expect technology that is dynamic and responsive, and that marketing means more than client referrals. The smart advisers will know when to approach a client — perhaps when the client announces a job change on LinkedIn or changes their Facebook status to “married” or when the adviser receives an alert that a prospect was visiting their website. And rest assured: if they fail to move fast enough, another adviser will be following the digital breadcrumbs to build rewarding new relationships.

Neal Ringquist is president of Advisor Software Inc.


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