Last Updated on June 18, 2021 by Carlo Navarro
The wealth management industry is in the midst of disruption. Between a new generation of investors, the continued emergence of automated advisors and fintechs upending traditional models, more firms and advisors competing for the same clients, and a heavier regulatory burden, the industry has become enveloped in complexity. The dirty little secret? We did it to ourselves. Each of the factors above has convinced firms and advisors that they must step up their game. While this is true, most advisors have missed the memo on what that means, exactly.
Instead, advisors and firms have focused on bespoke (but not necessarily value-added) investment advice and products, clunky ways of managing and passing along information, and operating on multiple client service models that don’t add value. Where clients have come to expect simple, intuitive wealth management options, they are becoming ensnared in a complex web of our own making. This complexity is doing real damage — both to the business as a whole and advisors’ lives. The continued choices advisors make around complexity have served to worsen it.
Products, Accounts, and Account Types are Part of the Problem
Rather than seeking to simplify the complexities of the current landscape, the opposite has occurred. We now live in a world with more financial products than ever — and the proliferation of products and product types continues. For example, there are at least as many equity funds as there are stocks for them to invest in. Here’s the thing: the more custom and proprietary products that are available, the more considerations advisors must take into account in making suggestions to clients. Presenting viable options means sifting through everything available to find the right match.
Clients are bearing the burden of this complexity, too. They have more accounts (his and hers 401ks and IRAs as well as multiple bank accounts) in more account types (IRAs, Roth IRAs, SEP-IRA, 401(k) Roth 401(k)s, 403b) across more institutions than ever before (5-7 institutions on average). The average consumer owns 5.3 accounts across all types of financial institutions. For the mass affluent and the wealthy, the average is much higher. Advisors are tasked with juggling multiple accounts across multiple financial institutions to create a strategy that serves their clients well.
Then, there’s the cherry on top of the complex sundae: the marketplace is and continues to grow more crowded. New robo advisors and digital platforms emerge almost daily, and virtual advising has eliminated geographic boundaries and enabled firms and advisors to compete on a national scale. In addition to navigating proprietary products and numerous client accounts and account types, advisors and firms must do it all under increased competitive pressure. It’s not easy.
Complexity is Getting Passed Right Along to Clients
And advisors are struggling to break down this complexity for clients. Instead, the deluge of information, concepts, and offerings that advisors are swimming through get passed right along to clients. Advisors are known to create long, winding reports with perplexing charts and graphs that clients are loath to decipher.
Clients really just want to know three things: 1) what do I have? 2) How am I doing? 3) Am I OK? Advisors not only pass along complexity to clients or — worse yet — proactively add complexity, but they also miss opportunities to simplify. As an industry, we don’t provide the simpler reports we could and should. We miss opportunities to automate communication to clients to help steer them away from the frantic churn of the news cycle. In short, we miss most of the opportunities to proactively manage clients and deliver value in the form of simplicity and clarity to our clients.
Complex Client Service Models and Operations Hamstring Advisors
So far, we’ve looked at the complexity of products and services in wealth management, and the inability (or unwillingness) of advisors to simplify complex concepts for the clients. Wrap that up in complicated client service models and operations and you end up with an over-emphasis on low-value customization.
Many advisors and firms are taking the misguided route of unnecessary customization where it doesn’t add value. Take, for example, the advisor that works with 50 clients and creates a different billing model for each of them. Does this create value for the client? No. Does it somehow make it easier for the advisor to manage? No.
Advisors get caught up in the competitive landscape and reactively turn to customization as a way to differentiate. The problem is that they are actually shooting themselves in the foot. The only way to differentiate in wealth management is to add (and effectively communicate) value. Advisors caught up in the customization hype are doing neither — and they’re only adding a ton of complexity to operations and account management.
Building a one-off investment or billing model for each client is tantamount to spinning a web of complexity in which they become entangled. Rather than building an effective model and tweaking parts of it as needed to meet client needs, advisors are draining time and resources. The former could be just as effective and afford the advisor additional time to spend on strategic, value-added services. The latter just creates a mess.
All of this complexity boils down to an unpleasant experience, both for the advisor and clients. Where clients want clarity and simplicity, they are being met with difficulty and confusion. That’s no way to build trust and it’s no way to survive or thrive in the current market. In our next article, we’ll explore the strategic role of simplicity and how it helps advisors differentiate and build credibility.