Laser App published the first in a series of white papers on Wednesday detailing the trends and the effect they'll have on the wealth management industry. The software company partnered with Nexus Strategy on the series.
"It's no secret these days that wealth management is undergoing dramatic change and transformation, driven by massive 'Mega Trends' that will forever alter the trajectory of a growing industry," the authors wrote.
These trends are happening in every aspect of a wealth manager's business, from regulations to technology to client expectations.
"Just as other long-standing industries have been disrupted and changed forever by society, government and technology forces that created big-time winners and losers, so to is wealth management being similarly impacted."
Laser App and Nexus Strategy drew from materials by industry publications, national press and other industry sources to write the paper.
"To conduct this research in order to benefit financial advisors in the long run, we borrowed the 'content analysis' methodology of author and social scientist John Naisbitt from his seminal book, 'Mega Trends,'" Tim Welsh, CEO of Nexus Strategy and co-contributor on the white paper, who also writes for ThinkAdvisor's TechCenter, said in a statement. "The results of the analysis provide a roadmap for industry participants to evolve their businesses and approach to providing wealth services to succeed in a more complex and competitive industry."
1. Increased Demand for Advice
The paper referred to research from Pershing that found the U.S. wealth market comprises about $32 trillion in investable assets, and the number of millionaires is expected to grow by 40% in the next five years. Aging baby boomers are also adding to demand for financial planning services as they begin transitioning from work to retirement.
However, the paper noted that this demographic change and associated wealth transfer "creates more challenges than opportunities for the status quo in wealth management."
Wealth managers who remain focused on the baby boomer generation without adjusting their services to meet the needs of their Gen X and Gen Y descendants risk losing their current clients' assets when those clients pass away and their heirs see no reason to stay with the advisor, not to mention the opportunities lost as younger wealth accumulators look elsewhere for advice.
Key questions for wealth managers who want to make this first trend an opportunity rather than a threat include:
- What is your approach to gaining market share in a growing industry?
- Have you invested in a scalable technology infrastructure and are automating processes to gain needed operational efficiencies?
- What is your approach to attracting and retaining the next generation investors?
- Are you investing in the client facing technology applications this generation has grown up with?
2. The DOL Fiduciary Rule
The financial services industry hasn't withstood such a wide-ranging distruption as the DOL's Conflict of Interest rule since deregulation in the 1970s created discount brokerages, the authors wrote. The rule will force multiple players in the industry to "drastically alter their business models" in order to serve clients.
"Already we are seeing impacted firms such as the largest independent broker-dealers, LPL and Ameriprise, make changes to their investment products, accounts and managed programs. According to many industry studies and actual firm reports, independent broker-dealers are spending up to $16 million to rectify their platforms in order to comply," according to the report.
Ameriprise announced in late October that it will continue offering commission-based accounts with BIC exemptions to "enable both advisory and brokerage options for clients and advisors," but will "narrow the offering." Raymond James will do the same, as will Morgan Stanley, Cambridge and Cetera.
Merrill Lynch and Commonwealth announced in October that they would cease offering commission-based IRAs.
"While the fiduciary standard requirement by the DOL currently only affects a sub-set of wealth management assets in retirement accounts for now, the fiduciary standard is expected to be broadened to all brokerage assets once the SEC enacts its fiduciary rules as mandated by the Dodd-Frank Act, signed into law in 2010. Thus, the DOL rule is just the beginning of a wide-ranging need to comply with fiduciary standards across the entire industry," according to paper.
