Wealth Management 3.0 Is Here– Are You Ready? (Part 3 of 3)

Over the past couple of posts we took a fairly irreverent whirlwind tour through the last 150+ years of those financial services oriented specifically towards helping successful families grow, protect and share their wealth– the very essence of wealth management. [See Wealth Management 1.0 (1853-1982) and Wealth Management 2.0 (1982-2008)]

Today we will bring this three part series to a close, but we will revisit often the idea of the changing nature of the wealth management business and discuss how firms and advisors must adapt to compete in this new era.

Wealth Management 3.0 (2008-?)

If the forces of change burgeoning at the beginning of this current decade stuck out their collective feet and tripped the industry and sent it reeling, then the global financial crisis begun in 2008 and its resulting round of bank failures, mega-mergers and new regulations knelt down behind the backs of the industry’s knees and sent it tumbling noisily and unwillingly into the latest era, Wealth Management 3.0.

More banks failed in the last four years than the prior 15 years combined. Financial giants like Bear Sterns and Washington Mutual went out of business, once swaggering players like Merrill Lynch and Countrywide Mortgage ran to the protective arms of a lowly commercial bank, and Masters of the Universe like Goldman Sachs and Morgan Stanley actually sought bank charters.

Brokerage firms all but hired costumed characters to stand outside suburban strip malls and dance and twirl signs that said “Giant Clearance Sale! Stocks as much as 80% off!”. It was, as Bill Murray’s character Peter Venkman said in Ghostbusters, a “disaster of biblical proportions”.

“Human sacrifice, dogs and cats living together… mass hysteria!”

–Dr. Peter Venkman, Ghostbusters

Frogs in boiling water

Even firms that weren’t dying from mortal wounds– self-inflicted, or otherwise– began to realize that they were like the proverbial frogs in water that was approaching the boiling point. The persistent bull market and deregulation of the previous era had masked the steadily rising water temperature.

Former Citigroup Chairman Chuck Prince famously remarked in 2007 that “..as long as the music is playing you’ve to get up and dance”. But even MC Bernanke’s extended dance mix had to spin down sometime. And when it did, even firms without severe asset quality or liquidity issues came to realize that they had a problem in their cost structure.

The troubled airline industry provides an apt, if unfortunate, analogy. All clients deserve a safe, courteous and on-time flight, but wealth management groups were designed to deliver an experience above and beyond the minimum– they are the first class cabin of the firm. But many firms began to realize that in their blind quest for growth that their gate agents had been allowing some holders of deep-discount coach tickets to take up first class seats and drink all the champagne.

In other words, there was not always the discipline to ensure an appropriate matching of marginal expenses to marginal revenue. Worse, the industry conditioned clients to expect the first class experience for blue-light special pricing. The talent and technology needed to provide comprehensive wealth management services are not cheap; and providing them economically is a challenge (though not impossible).

But the crude cost cutting axes swung in the prior era won’t work today. Managers instead must skillfully wield a discriminating scalpel to trim away unjustified and unproductive expenses, while simultaneously investing in the things that matter to the clients. (Hint: It won’t be mahogany, marble and fine china for the clients of the future.) Firms that cannot do that will likely attract a new management team that can. (See Is Bank Merger Mania Imminent?)


Just as deregulation was a driving force in Wealth Management 2.0, reregulation will be a driving force in Wealth Management 3.0. This past Saturday, July 21, marked the two year anniversary of President Obama’s signing into law the Dodd-Frank Wall Street Reform and Consumer Protection Act.

So far Washington’s paper multiplication machinery has managed to turn the 848 pages of the bill into 8,843 pages of rules– and they are only 30% done with writing the rules and regulations! If this pace continues, we will have nearly 30,000 pages of new rules for firms to wade through by the time they’re done– likely sometime early in 2017.

When I was a young boy I was always intrigued with the ad in the back of my Archie comics for the machine that turned ordinary pieces of paper into $5, $10, even $20 bills! They have that machine’s evil twin in Washington. It turns massive stacks of money into prodigious piles of dense prose.

Many of the new rules will, at best, fight the last war in 20/80 hindsight; and it is very likely that the next crisis will not be anticipated therein, let alone thwarted. Nonetheless, today’s firms and and advisors are already spending time, money and cultural energy ensuring compliance with all of the new rules and regulations.

Firms and advisors also need to devise new ways to generate revenue, as some provisions severely curtail some of the most profitable business practices of the past. No wonder so many firms are looking to new wealth management initiatives to offset these challenges. (See Banker Jones and the Last Crusade: Is Wealth Management the New Holy Grail?)

For extensive reporting and resources on Dodd-Frank, excellent information is available from the law firm DavisPolk, and this infographic is a good primer on the current status.

The next generations

As formidable as are the heaving changes wrought from within the industry, those generational and technological changes from the outside may be even more profound and devastating if firms and advisors do not embrace the winds of change rustling through their own Rolodexes.

Advisors: Generation Y, the Millennials (born roughly from 1982-2000), are joining your workforce and your client base, and they will not even consider your firm’s services if you aren’t relevant to them. As my friend David Stillman likes to say:

“This is the most connected and most collaborative generation ever… They not only accept diversity, the expect it… Millennials will experience as many as 10 career changes in there lifetimes. That’s career changes, not job changes.”

— David Stillman, co-author, When Generations Collide

They have all but ditched email because it’s too slow. They communicate not only with their peers, but with other modern firms, via text messages and directly through Facebook. Your paternal smile and shake of the head as you explain that those things really aren’t your style will only confirm their suspicions of your paleontology.

They “crowdsource” recommendations for everything from restaurants to car purchases and they trust the wisdom of the crowd far more than any marketing message you can possibly craft. If other people they trust aren’t talking about you, they will will look at you like someone crashing their favorite hipster music festival in sandals and black socks (which is to say, you actually have a shot if you are cool enough to pull it off).

If they are unhappy with their experience with you, it can hit their Twitter feed and their Facebook wall, and in the matter of minutes, you and/or your firm have some viral bad PR on your hands before you can even say “Do you want those funds wired, or do you want a check”? And no, they do not want a check, thank you.

Some firms still aren’t even present on these social networks, so they aren’t even aware of the conversations underway about their brand (good or bad). Others are present, but mistake social media as merely a soapbox to push their own one-way marketing messages.

The firms best positioned to thrive in this social era are actively participating in the conversations and using these interactions as ways to build relationships and deepen client engagement.

Key attributes of Wealth Management 3.0

  • Key characteristics: disruptive innovation is the new norm; rise of mobile, social media, big data and analytics; reregulation
  • Key firm capabilities: transparency; acting in clients’ best interests; active and relevant social media presence; clear value propositions; goals-based advice
  • Key client goals: mass luxury; seamless integration for self service and full service; social responsibility (in many forms), capital preservation; social and peer validation of advisors and strategies
  • Key advisor skills: comfort with technology; social media literacy; not being lame
  • Key advisor activities: customized client intimacy; monitoring social media for risks and opportunities; tailoring holistic advice (and reporting) to relevant goals

 Coming Up: Becoming an Advisor 3.0

In upcoming posts we will continue to explore the rapidly changing landscape and discuss the skills and activities needed to move beyond Advisor 1.0 or 2.0. To be relevant and successful in the new era, you must be an Advisor 3.0.

© JP Nicols – 2012

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