Complex algorithms tell us where to go, what to watch and what to buy next. Why can’t wealth managers do the same for their clients? And why are we hearing so much about unified managed households?
To answer the last question first, a unified managed household — UMH for short — is a process of comprehensively managing portfolios at the household level to significantly improve investor, adviser and firm financial results. Leading firms have built UMH platforms, many more are under construction, and soon they will be widespread.
In its algorithmic glory, a UMH continually nudges advisers and clients toward the next best actions to take to improve after-tax returns and maximize income in retirement.
A MMI white paper, Modern Wealth, identifies the financial levers of a UMH platform that enhance outcomes: reducing costs, managing risk, minimizing taxes and maximizing Social Security. These are relevant and effective whether the market is up or down, whether your clients are in accumulation mode or already in retirement.
These levers are baked into software-enabled ecosystems through the connective tissue of application programming interfaces, or APIs. Wealthtech vendors are developing these APIs at a fever pace. Without them, these tech tools aren't able to compare notes, and UMH platforms cannot spotlight the next key steps an adviser needs to take.
In theory, UMHs continually nudge investors toward greater efficiency, greater harmony with goals and risk tolerances, and greater results. In practice? Well, this level of coordination is “wicked hahd” to pull off, as we say here in Boston. A proper UMH platform needs every tech component to work together, and it’s only recently that most wealthtech vendors have even begun to build tools around the idea of connecting to a larger ecosystem.
To get to that coveted “next best action,” the wealthtech industry must coordinate, quantify benefits, and prioritize next best actions, including:
• Financial planning.
• Data aggregation and consistent data flow.
• Proposal generation that addresses costs, risks, taxes and Social Security.
• Multi-account portfolio management to coordinate asset allocation, asset location, transitioning, rebalancing and the optimal sequence of withdrawals from all sources.
This is why wealth management platforms and wealthtech suppliers are building, buying, cooperating and competing. UMH is something our industry has talked about for years. But the end of a historic bull market and a global pandemic, plus a generational wealth transfer that's moving ahead of schedule, have goaded platform architects to roll up their sleeves and get to work.
Why is this being done at a fever pace? Comprehensively managing portfolios at the household level significantly improves results for everyone in the value chain — investors, advisers and firms. An EY study found when all the dots of a household portfolio are connected, coordinated and optimized, investors enjoy a 33% improvement in spendable income. That adds up to more than $1 million of increased discretionary spending power over 30 years on a portfolio with a starting value of $1 million.
Quantifying the financial benefit at that level all but eliminates the cost conversation with clients — particularly baby boomers, who don’t like to “overpay” and have been forced by Covid-19 to change their retirement plans.
Boomers are leaving the workforce earlier, either by choice or as a result of employers’ desire to reduce costs by eliminating their highest-paid workers. Early retirements cut short boomers’ highest earning years, and that means less money in IRAs and 401(k)s. And drawing Social Security benefits early results in missing out on the 8% annual “raise” the government offers to those who delay filing from ages 62 to 70.
And many see the ugly combo of rising inflation and taxes on the horizon. Keep in mind, the answers you provide and decisions made are irrevocable. Once the road to retirement begins, regular paychecks end and expenses continue. If you are a boomer accustomed to getting what you want, and you need to maximize retirement income, a UMH is the only way to achieve it.
Fortunately, modern wealth management platforms have most of the UMH components already in place. The essential missing ingredient is a way to coordinate and optimize next best actions … and to clearly express the concrete benefits of following the UMH approach. Legacy systems and new tech didn’t speak the same language early on or were too siloed to deliver optimal results. With APIs, all that is changing.
The real battle being waged is who can create a precision instrument, and even more important, develop a user experience that makes it obvious for advisers and their clients how to take the next best action on the road to retirement peace of mind.
Jack Sharry is co-chair of the MMI Digital Advice Community, sits on the Next Chapter Advisory Council, hosts the “WealthTech on Deck” podcast, is author of Authentic and Ethical Persuasion, and is executive vice president at LifeYield.
A 20-year financial services veteran brings values-driven planning expertise to the St. Louis-based RIA.
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