Last Updated on May 18, 2021 by Carlo Navarro
Evolution is inevitable. Subjected to challenging circumstances, a living organism will either grow or meet its demise. In business, evolution is catalyzed by disruption. There are few industries where this has been more apparent than wealth management.
Think back to the financial crash of 2008. In 189 days, the S&P 500 lost 47.5% of its value, plummeting from 1,300.68 to 682.55. Subprime mortgage holders defaulted. Retirement savings were cut in half. Distrust in our financial system was at an all-time high.
Was this disruption? It felt more like a cataclysm at the time. The real disruption was spawned during the midst of it, growing to maturity roughly two years later. Betterment, the first of over one hundred robo advisors that exists today, was born in 2008.
Responding to the Desire for Self-Directed Finance
Subprime mortgages were not the only cause of the 2008 financial crisis. They were an offspring of government deregulation that gave banks the ability to trade derivatives. This “hedge fund” approach caused a demand for more mortgages to generate usable capital.
In hindsight, everyone should have seen it coming. Many market analysts did, but their admonitions fell on deaf ears. Average consumers, many of whom were beneficiaries of relaxed approval policies in the banking industry, were devastated by feelings of betrayal.
Separately if you want to see one of the funniest explanations of that financial crisis and don’t mind Norwegian stick figures who swear a lot, take a look at this gem from 2008.
Wealth managers, though not bankers, were subjected to the wrath of clients that no longer had faith in the system. For decades, advisors had been taught to offer minimal details on their investment strategies, asking instead that clients simply “trust” them.
The environment was ripe for a change. Robo advisors, an option where the advisor was taken out of the picture entirely, were the first fintech applications to benefit from client distrust, but they certainly were not the last. The fintech revolution was just beginning.
Transparency in Reporting and the DOL Fiduciary Rule
Betterment was founded in 2008, but it wasn’t launched as a platform until 2010. They attracted four hundred customers in their first twenty-four hours and have $21 billion under management today. Obviously, they went to market at exactly the right time.
Blueleaf was founded in 2009. Our objective was to offer financial advisors the reporting transparency and user experience made popular by the robo apps. Seeing the need for a more holistic approach, we also were one of the first to include held-away account data aggregation as part of our base service.
Ten years ago, client-facing applications were a major disruption to wealth management. Traditional asset managers wouldn’t even look at them. Registered reps, with a heavy dependence on commissionable products, avoided them like the plague.
That all changed in 2015 with the introduction of the Obama administration’s DOL Fiduciary Rule. For the first time, transparency and fee disclosures weren’t just recommended. They were going to be mandated by law. Consumers needed a reason to trust the system again, and regulators sought to give it to them. Though never enacted, it changed the expectations of clients and advisors alike.
Holistic Wealth Management Takes Center Stage
Let’s fast forward to the present day. Client portals, reporting platforms, CRMs, and financial planning applications are essential tools for wealth management firms looking to succeed in this digital age. The naysayers have been converted, or their businesses have stopped growing.
Competition has intensified, mainly because fintech has given financial advisors the ability to go virtual. Territories are no longer defined by physical geography. They’re developed inside niche markets on a national or international level. It’s a brand-new world. Offering holistic wealth management, once avoided by those that saw themselves as “investment managers”, has now become the best way to successfully compete and scale an advisory practice.
Aging Advisor Pool is Not Getting Replenished
Unfortunately, an unexpected side effect of fintech automation, government regulation, and increased competition is the compression of advisory fees. This is affecting older advisors who are now looking to retire early, and the influx of younger people entering the profession.
According to a recent Cerulli Report, 43% of financial advisors are fifty-five years old or older. 37% of active advisors are expected to retire before 2030. The CFP Board reports that only 5.3% of certified financial planners are under thirty years old. Nearly 50% of CFPs are over fifty.
Colleges and universities are heavily promoting financial degree programs to address the pending service gap. Progressive wealth management firms are sweetening their offers to new recruits. Broker-dealers are responding with better salary and bonus packages in major cities.
Meanwhile, fintech developers strive to meet the evolving needs of wealth management professionals. Blueleaf employs automated communication and on-demand reporting that makes it possible for advisors to service more clients. Our fintech partners provide financial planning or CRM services. Would you like to know more? Call one of our coaches.
[*NOTE: The opinions expressed in this post belong to the author and are for general informational purposes only and are not intended to provide specific recommendations or advice for any individual or on any specific investment product. The sole purpose of this opinion piece is to provide education about the wealth management industry.]