JPNicols.com

Innovation | Strategy | Leadership

advisor 3.0

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

by

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?)

Reregulation

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

Related articles

Wealth Management 3.0 Is Here– Are You Ready? (Part 1 of 3)

by

Most banks today have wealth management clients with an average age somewhere between 70 and dead (no offense, Mom). Their books of business were largely built in bygone eras, from fortunes made in companies and industries that no longer exist.

These clients (and many of their advisors) are really not sure about this whole “interweb” fad, and they think Betty White is a great young talent.

The fact is, the world has changed and most banks have not caught up. Most probably never will. They will instead quietly slide off into obscurity like Don Johnson. Or worse, Philip Michael Thomas. At least Don Johnson had Nash Bridges. (Warning: if you readily recognize those names, you may very well be part of the problem.)

The segment of financial services we think of as ‘wealth management’ in the U.S. banking and brokerage industries today has evolved over a couple of broad eras, and too many advisors and executives don’t even realize that we’ve already entered another new era– one I call Wealth Management 3.0.

The term ‘wealth management’  is, of course, Latin for ‘don’t lose my pile of money, and make it bigger if you can’. It is also a term that was coined by the industry without its clients’ permission. Multiple surveys show that clients don’t like the term. Surveys also show that most clients define ‘wealthy’ as someone who has a pile of money at least twice as high as theirs. Maybe that’s because, as P.J. O’Rourke says;

Everyone enjoys pretending to be what he isn’t. It’s poor men who wear flashy and expensive clothes, pretending to have money. Rich men wear sturdy and practical clothes, pretending to have brains.

Nonetheless, today we begin an exploration of this industry evolution that is rapidly becoming a revolution, and we will lay out some imperatives for firms and advisors who want to survive and thrive in the new era

Meticulous researchers and conscientious historians labor considerably to deeply understand precipitating events and underlying causes. Readers of this blog know that I am neither, and therefore not burdened with such inconvenient details. I am purposely ignoring the long history of true ‘private’ banking in Europe and lumping many generations and iterations of evolution into three distinct (if arguable) eras for purposes of brevity and general laziness. Besides, sweeping generalizations are real time-savers.

Wealth Management 1.0 (1853-1982)

In 1853, some 61 years after the stockbrokers first began trading under a buttonwood tree (and presumably had since moved to more sensible indoor trading floors), some of the wealthiest men in America decided that their control of their respective piles of money ought not to cease with such trivial nonsense such as their own deaths. So they founded U.S. Trust, the first financial firm to act in a fiduciary capacity on the behalf of its clients’ trusts and estates.

Wealthy men hate to be left out of good ideas to protect and grow their own piles of cash, so over the next hundred years, other firms sprang up to facilitate all sorts of services related to the accumulation, preservation and distribution of personal wealth.

The wealthy denizens at the turn of the 20th century had to endure such annoyances as trust-busting, the advent of personal income tax in 1913 and the stock market crash of 1929. These indignations created many opportunities for firms to put their best ideas into practice to help the rich stay that way.

Much to the chagrin of more than one plutocratic robber baron, the post-World War II financial boom began to spread the wealth. The number of millionaires mushroomed from a few thousand to more than a half million by 1980, and wealth management practices spread beyond the ‘white shoe firms‘. Even to, egads, mere commercial banks.

Key attributes of Wealth Management 1.0

  • Key characteristics: Fragmented offerings- banking, trust, investment, brokerage and insurance services provided largely by specialists
  • Key firm capabilities: Creating and selling proprietary products and strategies, stock-picking, trust administration
  • Key client goals: Preservation of wealth, with eventual distribution to family members or large endowments
  • Key advisor skills: Narrowly focused subject matter expertise, membership in the right private clubs
  • Key advisor activity: Client retention, tying their rep tie into a perfect half-windsor knot

Evolving to 2.0

Most firms have had to evolve their business models beyond 1.0 to survive to this point; but as we shall see, many still depend on revenue streams attached to legacy clients that is not self-sustaining. Depending on which research you read, anywhere between $18 trillion and $54 trillion of assets owned by the Traditionalist Generation (those born before 1946) and Baby Boomers (born 1946-1964) will pass down to Generations X and Y (no doubt with nary a trace of appreciation).

Business models and value propositions that worked for older generations are, at best, punch lines to the younger generations. At worst, they are powerful motivators to innovate their own disruptive start-ups to put grandpa’s firm out of business. Yet, many firms and advisors continue to whistle past their own graveyard.

Up next: Part 2– Wealth Management 2.0 (1982-2008)

Related articles