Crawling up the wealth management pyramid

Where you live in the wealth management pyramid has a huge impact on your relevance to clients, your pricing and your future viability. Research shows few clients know the difference between services provided by a bank broker or an independent planner. But differences matter, especially with regard to how we invest in our businesses and how we defend our pricing in an increasingly competitive world.
Each adviser approaches their clients from their own place in the wealth management “stack.” Let’s take a closer look at the pyramid we created from the perspective of where different advisers live, working our way up from the bottom.
Investment manager: This adviser starts and ends their client relationship at the bottom of the pyramid. It still represents the vast majority of our industry.
Most charge 1% for portfolio construction and rebalancing. There is not a lot of added value to the client for the price charged. This is especially true for advisers who outsource all of the investment management (and charge a turnkey asset-management-platform fee on top of it, no less). Most innovation dollars have flowed here as indexing has outperformed active management and made investment implementation far less valuable (and higher fees harder to justify). The entire industry is commoditizing this aspect of the business. Your clients can get a managed portfolio for free at some of the custodians, or pay as little as 15 basis points at the self-directed robo-solution (with an additional 10 basis points of product cost). We are going to a total investment cost world of 30 to 50 basis points.
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Financial planner: This adviser leads with planning (middle of the pyramid) and invests the portfolio in line with planning output. Systems like MoneyGuidePro and eMoney have made planning scalable and relevant. Unfortunately, only a small (but growing) segment of our industry is delivering a financial plan, and even less charge for the service. Too many advisers treat the plan as a one-and-done solution rather than as a living document to be constantly revisited. Firms like Vanguard are finding ways to deliver planning nationally for as little as 30 basis points. Self-directed planning is the next wave of innovation. However, the complexity of people’s lives will always provide an opportunity for humans to play an important role in helping clients with their ongoing financial plan and charge a premium for their expertise. That human element is worth an additional 30 basis points if it’s bringing dynamic and ongoing planning, otherwise it’s a one-time flat fee.
Financial life adviser: These advisers start at the top of the pyramid by managing their clients’ entire financial life. They understand the life the client wants, ensure they have the resources to live it and help protect them from unexpected surprises. Financial life advisers escort clients through the tough trade-offs in their everyday choices and charge for their ongoing advice and guidance. The planning and investments are built in the context of the client’s overall financial life. Until recent innovations in technology and behavioral economics, it was unimaginable that this too could be digitized, measured and tracked just like we do with investing and planning. But firms today are creating engaging systems to integrate themselves into every major financial decision a client makes, benchmarking and demonstrating how they are improving the client’s life in tangible ways. Helping people navigate their entire financial life is where human empathy and judgment can be most impactful to people and therefore most valuable. This can add an additional 20 to 30 basis points of pricing power to basic planning.
COST AND VALUE
I firmly believe that where you live in the wealth pyramid will completely determine what you can charge. In order to maintain a 1.5% all-in fee to the client, including underlying investment cost, advisers will need to approach clients from the top of the pyramid. We have to move beyond one-off plans and solutions. We are most valuable as guides in the ongoing voyage of a client’s life, but we have to engage in a digitally enabled way so we can be there on-demand whenever clients need our help. The industry has not quite caught up, but that’s changing rapidly. This is a massive opportunity for all in the industry.
HOW TO WORK YOUR WAY UP
Many advisers work with turnkey asset management platforms, or TAMPs, to provide scale in their investment operations. Competition and market forces will force all advisers to make massive price cuts or evolve to integrate the entire wealth management stack. Consequently, we are about to see the birth of a new kind of platform, turnkey advice and planning platforms, or TAPPs. This is not an original idea. Michael Kitces and I recently had a Twitter exchange about an article he wrote on this subject years ago (I toyed with his original acronym to make it easier to say and remember!).

Hey we are a tfpp…who knew? #kitcesdid.. https://t.co/4OUhvVTCQP

— Joe Duran (@DuranMoney) March 11, 2016

The TAPP digitizes the entire wealth management pyramid and provides all of the plumbing and technology that helps an adviser elevate their importance for the client and become more valuable.
One way or another, we human advisers will move up the pyramid to help our clients in a more meaningful way and defend our pricing. If not, we will go the way of the pharaohs.
Joe Duran is chief executive of United Capital. Follow him @DuranMoney.