Faking Growth

Wealth management is not really growing – the trends are troubling – but there is a way.

RIP the organic growth of wealth management. 

Most of today’s wealth offerings are built for a business that no longer exists and for clients that are moving on – or not moving in. Follow this train of thought to the looming derailment of “wealth management”:

• The products are free – Investment beta and trading commissions are now free at leading direct providers. If you aren’t free, what is the value of your cost? If you say “advice”, then what about….
• A lot of clients say they don’t want advice – or to pay for it – I watched a consumer panel at a national industry event and all three of the panelists said they don’t have an advisor, “You can do everything at Fidelity”, “Advisors always sound like they are selling me something”. 46% of retirement plan participants in a survey said they don’t have financial advisors and aren’t looking for one. But among the clients we have…
• Most “clients” are unengaged – National stats indicate that if you blend all of the coverage models – from small RIA and private bank up to the largest direct providers – you get an average ratio of 150 households per advisor. Don’t overthink this, stay with the consumer view that with the exception of small, very high touch service models, most “clients” are really pieces of clients who also have connections to 4-6 other financial organizations. They don’t feel like clients but I suspect most providers see that fractional client as a real client, leading to the inevitable zero sum game when clients consolidate accounts. Winners and losers time, especially since…
• “Retirement” has replaced “accumulation” as the profit driver for advice. 12,000 Americans retiring every day have very different needs and require much more attention and complex solutions than they did when they were saving for retirement. This cohort is providing more than 75% of advice industry profits through 2030.

We can get this train back on the tracks and grow, but what is your definition of “growth”?

If your objective is to sell your organization, you can achieve impressive growth by acquisition, ride rising markets and buy more scale on the dips. Yours is a market share play with a revenue bogey and it’s more of a trade than a business. And when it works, it works – if you can sell at the right time.

For the rest of the industry, especially those on-going concerns responsible to shareholders as well as clients and employees, the solution is organic growth. And organic growth is measured by net new assets and client share of wallet. And it’s measured at the median relationship and the median advisor – not the top 10%. Consistency is a winner in enterprise value.

A NextChapter community executive says it very well, “Net new assets indicate the health of the business, and household share of wallet indicates the value the clients place on their relationship with their advisor and the firm”. 

Recipe for Success in Wealth Management – Accept the Consumer and Act Your Scale

Organic growth for wealth management firms results from providing the clients what they want now and in the near future. If you are following the 75% of AUM riding off into retirement:

• They have declared “planning” and “relationship” as their evaluation standards.
• They fear inflation, the ability to fund healthcare and not exhausting their assets
• They have liquidity needs for both peace of mind and to fund large expenses in retirement

There is no way to solve for these issues at a coverage ratio of 150:1 if you plan to do so using only human beings. Even if you employ a lot of humans.

The path forward is to first design for your scale – and be clear-eyed about what you are and what you are not. And then making sure you declare your value proposition to associates and clients. The days of being a “financial advisor” are over. It is time to be crystal clear about what you do since most clients seem not to know what we do or why they need us. 

Every advisor and practice is different, so there is less value in providing “the answer” than in asking the right questions to help determine your appropriate scale:

• What do you really do? You can manage a book of 150 with investments, but not with retirement planning. Our research of top planning advisors reveals a coverage ratio closer to 25:1 – households to professionals. And virtually all successful retirement planning practices are teams with multiple professionals with different specialties.
• Who are our clients? The more variety, the less efficient. And what percentage of a client’s AUA do you need for what you do well. Scale favors bits of clients and single decision-makers per household. Planning benefits from 100% SOW – or knowledge of what and where of the 100% -- and is best with the entire family.
• What are we solving for? The aging AUA driving profits has made a shift from investing to protecting. Have you? Liquidity, credit, liability management, long-term care, premature death protection, longevity protection – these are the new benchmarks, not the S&P.

The Enemy of Growth: The Inertia of Current Success

The old saw, “the primary obstacle to future success is your current success” captures the moment. The US stock market has rocketed 37x during the reign of the baby boomer, starting in 1982. The unprecedented lift from markets will not carry the industry forward from here. Time to reinvest some of those gains into a market offering incredible opportunities – and overdue for change to meet the new demands of our current clients now expecting more. 

The opportunity is even bigger for first movers because that inertia of success will trap many current industry leaders. We’ve seen this movie before – in the movies – as consumers left theaters first for Blockbuster and then Netflix. Wealth management is just the most recent victim, but only if we try to hold on to a business fundamentally changed by the consumer – and invite the innovations and competition that will defeat us. 

So of course wealth management is not dead, but it is being dramatically transformed by the consumers who need it to be different from the way it works today. And not every provider is assured a spot in that new, multi-faceted consumer view. 

It's a choice.

Steve Gresham is the managing principal of NextChapter, a leadership community dedicated to achieving better retirement outcomes for everyone. He also serves as senior education advisor to the Alliance for Lifetime Income. He was previously the head of Fidelity’s Private Client Group. Steve is the author of The New Advisor for Life (Wiley).