Wirehouses ready for their ‘Empire Strikes Back’ moment on adviser fintech

Morgan Stanley revealed its fully armed and operational adviser fintech ecosystem at a recent media event in New York City.

After decades of independent advisers claiming technological superiority over outdated “legacy” brokerage platforms, the wirehouses may be poised to strike back.

Wall Street giants once controlled most of the software that brokers and financial advisers needed to trade, manage portfolios and create financial plans. But a long time ago (aka the 1990s) in a galaxy that we all live in, the internet and cloud computing gave rise to a wave of fintech startups developing innovative alternatives that helped fuel, in part, the adviser independence movement that is still going on today.

If registered investment advisers breaking free from legacy technological terrors to win advisers and client assets from wirehouses was akin to the Rebel Alliance winning a key victory against the Galactic Empire in George Lucas’ 1977 “Star Wars,” the next phase of adviser fintech could look more like the 1980 sequel, “The Empire Strikes Back.” Not because any firm is embracing the evil dark side or revealing troubling paternity results, but because of the way wirehouses are using their vast scale and immense resources to develop a digital advantage in the battle for client assets.

Morgan Stanley & Co. revealed its fully armed and operational technology ecosystem at a recent media event in New York City. The “Connected Client Journey” brings the firm’s WealthStack software together with the tech it acquired with its purchases of ETrade and Solium, and integrates third-party software like Salesforce, BlackRock’s Aladdin risk analytics technology and tax optimization fintech LifeYield to deliver a single digital experience for investors ranging from do-it-yourselfers to high-net-worth clients. The same platform is also used by Morgan Stanley’s advisers to prospect, nurture leads and deliver ongoing advice.

The tech suite is the result of an enormous investment in developing a truly next-generation digital platform to serve any investor regardless of age, stage of life, wealth or individual circumstances, as Andy Saperstein, Morgan Stanley’s head of wealth management, said at the event. It even features new capabilities like direct indexing, artificial intelligence-powered recommendations for advisers and automated digital marketing.

“In any channel, in any area of our organization, there are different competitors that are strong, but there is no competitor that can put it all together like this,” Saperstein said.

He’s right. Connected Client Journey is the nearest anyone has come to the fintech holy grail of providing comprehensive service across client segments while solving the integration challenge that still plagues many independent advisers, if Morgan Stanley’s effective demonstration is to be believed.

“Empire Strikes Back” showed just how effective this strategy can be. Darth Vader uses a unified force of human soldiers and technology to defeat a powerful yet fragmented Rebel base. As the Rebels flee in a piece of junk that can’t make the jump to lightspeed — a table stakes technology that Han Solo promises but can’t deliver to his clients — the Empire pursues in a sleek, custom-built starship. The Empire even works with third-party providers when it can’t do everything on its own.

Other Wall Street firms are following a similar playbook. UBS Group picked up robo-advice pioneer Wealthfront, and JPMorgan Chase & Co. announced a significant hike to its tech budget after buying 55ip, OpenInvest Co. and Nutmeg Saving and Investment Ltd.

Merrill Lynch & Co. Inc. unveiled its new Client Engagement Workstation in 2020 and has continually updated it with financial planning and portfolio analysis, interactive client report videos and mobile access to the workstation.

While Goldman Sachs Group Inc. is not a wirehouse, it may be the closest comparison to Morgan Stanley. The investment banking firm bought digital adviser NextCapital Group Inc. in August to pair with a growing portfolio that includes a credit card partnership with Apple, the Marcus digital banking and robo-advice business, online custodian Folio Investing and the hybrid RIA United Capital.

There’s clear client demand for these unified systems. Three-quarters of affluent investors said they believe their provider could serve all their financial needs, and 58% expressed an interest in consolidating all investible assets at a single institution, according to a study by Cerulli Associates.

The early results are promising. As Wall Street focuses less on head count and more on having existing advisers use technology to bring in new clients and increase wallet share, Morgan Stanley, UBS and Merrill Lynch have all reported record results in recent earnings reports.

“One thing we’ve demonstrably proven is advisers and teams that are embracing these technologies are factually growing faster than those that are not,” Jed Finn, chief operating officer at Morgan Stanley Wealth Management, said at the New York City event.

However, the more firms tighten their grip, the more advisers will slip through their fingers, and the movement to independence isn’t slowing down. The registered investment adviser channel gained a net 1,530 advisers in 2021, 69.4% more than the net gain of RIAs in 2016, according to InvestmentNews Research. Wirehouses had a net loss of 2,065 advisers.

Meanwhile, custodians, turnkey asset management providers and fintech companies are working at solving the integration challenge for RIAs.

Wall Street can’t rest on its laurels. After all, overconfidence can be a weakness.