A new age of wealth management

Social media has become a part of our lives – and it can be a part of building investment portfolios, writes John Bowman

For most of us, social media has become an essential part of how we communicate. We post, like, swipe and tag to our hearts’ content, filling our online profiles with massive amounts of information. Imagine if that information could be used to help plan for retirement or build investment portfolios.

Sound crazy? It’s not. A leading social media player is already banking on it. Snapchat, the social media app known for its disappearing messages (and for dumbfounding anyone over the age of 40), wants to become a robo-advisor by using your online data and its sophisticated algorithms to manage its users’ money through low-cost, diversified investments such as ETFs.

Although some wealth management professionals might scoff at this approach, they’d be wise to pay attention. It’s not inconceivable that the likes of Facebook or even Amazon could partner with, say, Vanguard and become a huge disruptor with a built-in platform used by well over a billion consumers.

People will always need financial advice, but the avenues they use to obtain it can and likely will change. After all, we like watching movies, but it’s easier and more efficient to watch them through Netflix than it was to jump in a car and go to Blockbuster.

It’s been well documented that industry professionals can be resistant to change. But increasingly across all industries, technological advances, firmer regulation and changing consumer habits are forcing executives to adjust. July will see the introduction of new fee disclosure rules in Canada, which are likely to increase the pace of disruption in the wealth management industry.

On one end will be the advisors of high-end private wealth clients, offering complex, customized products and services. Investment counsel will continue to be wrapped and bundled in full-service ‘family office’ solutions to ensure that holistic advice is maintained. On the other end will be the low-cost, no-frills advisors who cater to the lower-level retail and sub-retail populace.

New players are entering this space as the robo-advisor model continues to gain credence. Contracted and per-hour wealth advice solutions are also gaining steam. The fear-mongering opponents of the fiduciary rule simply underestimate the innovative energy of the financial industry.

So, where would this split leave the mass affluent – those with a net worth of $100,000 to $1 million? These investors present the greatest opportunity for advisors: By 2020, mass affluent wealth is projected to grow up to 50% faster than assets held by high-net-worth investors (those with more than $1 million). 

The current mass affluent model, however, is rife with conflicts that often lead to bad advice, misalignment of interests and a lack of transparency. In some cases, this situation is worse than simply no advice at all. If firms want to win over this growing market segment, they will have to give clients the personalized advice needed to meet their goals.

This process must begin by fully justifying the value of services provided and disclosing any compensation from recommending specific platforms or products. One particular precedent is quite scary for ‘Main Street’ advisors. In January 2013, financial regulators in the UK banned commissions and payments from providers to advisors. Regulators also required transparency in how any fees were used. As a result, and the number of advisors in
the UK fell by 25%. Those who survived were forced to articulate and prove to clients that they were getting value for their money.

Ultimately, the winners of this industry shift will be those who re-establish a value proposition with clients and put clients’ needs and financial goals first. Abandoning such artifacts of the past as public benchmarks, quartile rankings and product silos – which distract from meeting individual client needs – is essential to surviving this creative destruction.

One thing is clear: The status quo is not an option. Firms must reattach their services to the public good of their clients, communities and economies as a whole. 

Those who continue to keep their heads in the sand are ignoring the lessons of history. Just because you have the flag of a major firm or bank hanging outside your office doesn’t mean you’ll be protected. The robo-advisors are already here, and another game-changer could be around the corner.

John Bowman is the managing director for the Americas at the CFA Institute.