The wealth management industry is moving quickly into a new era of advice manufacturing, which facilitates professional and personalized financial advice for all investors, large or small.
Advice manufacturing refers to the shift from selling impersonal financial products to providing institutional-grade, personalized, goal-based solutions at scale. The shift from product to advice generates demand from the entire retirement ecosystem where many plan participants cannot afford a traditional financial adviser.
Legislation, fee compression, and the rise of tech-driven turnkey asset management platforms, managed account platforms and more holistic and comprehensive digital advice platforms are causing a fundamental industry shift from product manufacturing to advice manufacturing. Fund companies are now racing to lead the pack to manufacture and bring to market scalable, personalized advice solutions to help ensure their long-term competitiveness.
Fund companies are no strangers to rapid, large-scale disruption. Look at the creation of the mutual fund, one of the greatest inventions in investment management history. Mutual funds catalyzed how the industry operated and democratized institutional investing for the greater population. They were so successful that as of 2019, about 104 million Americans invested $21.3 trillion in such vehicles, according to the Investment Company Institute.
After the rise — and ultimate wild success — of mutual funds, the investment management industry converged around building and distributing different financial products like exchange-traded funds and professionally managed investments like target-date funds.
Along the way, though, the needs of the end client became separated from the interests of the financial services industry. This was likely due to mass productization and distribution, which led to economies of scale but may not have served current-day investors’ needs. This left asset managers with less and less investor interaction and therefore diminished their value due.
ETF inflows
Over the last several years, the industry has seen record inflows into low-cost ETFs and index funds. Many of the largest asset managers, most of whom are product-focused, are vying to be among the first to roll out personalized, digital retirement advice solutions to all client segments, particularly those within 401(k) plans.
Many 401(k) participants have never had access to personalized professional advice. Technology today is making that logistically and financially possible.
With COVID-19, retirement savers need advice like never before. This is best made possible through a digital, scalable platform. Technology is forcing the industry to elevate its standards. Personalized digital advice solutions are helping advisers to think beyond a product mindset, which is where the industry is headed.
The benefit of technology-driven, digital standard-of-care data aggregation is that many more investors will have better awareness of their entire financial picture and a deeper understanding of how all the pieces fit together.
As a simple analogy, brick is used to build houses, but ultimately what the future homeowner is seeking from the builder is a full, completed house — the house is the solution. To be successful, the investment management industry needs to be in the house-building business, not the brick manufacturing business, especially for those home buyers who cannot afford a contractor to build their house for them.
Rob Foregger is co-founder of NextCapital.
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