The Wealth Manager Approval Process

The Wealth Manager Approval Process

Wealth management solutions come in many varieties, just like one size doesn’t fit all for drug prescriptions.

After a difficult 2015 and now disastrous beginning to the New Year, it is understandable that clients might be questioning our investment process.

The market’s unprecedented poor start is actually an opportunity to see what we can learn from a counter-intuitive example: the U.S. Food and Drug Administration (FDA).

Why the FDA?

Because there are a lot of parallels about why the drug approval process was created that can be applied to the wealth management industry to prevent emotional decision-making that can have a negative long-term impact on portfolios.


No More Bloodletting

The FDA came into existence because sketchy medical practices, like the ancient practice of bloodletting, weren’t curing sick Americans; they were killing them. In response, the government wisely created the FDA and the drug approval process, which is comprised of three phases.

Phase 1 of the FDA process tests a very small sample size, which might be preceded by animal testing. Phase 1 usually involves 20 to 80 healthy volunteers to determine the drug’s side effects and how it is metabolized by the human body.

I would note the typical wealth advisor has 20 to 80 clients as well – a good sample size to test any solution. (So far, we’re tracking with the FDA process.)

Phase 2 of the FDA process involves hundreds of people. This phase emphasizes the drug’s effectiveness by comparing results from people actually taking the drug with another group using a placebo.

At the end of Phase 2, the FDA determines whether the proposed drug has a more positive impact than the placebo. Then they determine whether to go to the final phase.

In the wealth management business, Phase 2 is analogous to two groups of clients:  Those who use advisors and those who are self-directed. Truth be told, the wealth management industry is, at best, in Phase 2 in its evolution. We need to prove our efficacy in Phase 3.


The Broader Universe

Phase 3 of the drug trial process expands to a larger universe – thousands of people. This much wider sample is necessary to provide statistically significant conclusions about the efficacy of the drug.

Unfortunately, to gather thousands of data points in the wealth management business, advisors and their firms would need to cooperate with one another and share results.

This suggestion might seem utopic because established firms, much like the doctors in the 18th century, will never agree to cooperate in a process that might jeopardize their perceived expert position. However, there is hope if you believe the Cerulli research that calls for independent advisors and their fiduciary standard to overtake big brokerages in 2016. 

Independent advisors have already taken the first step to position how their process is different. Adopting this approach, coupled with a new wealth management approval process, would be a logical next step that can’t be refuted by the establishment.

So how do we get the wealth management industry to Phase 3?

The good news is that wealth management solutions don’t kill people. However, questionable business practices can raise the specter of government regulation, as we saw following the financial crisis and in the wake of medical quackery.

Ongoing Monitoring

If the wealth management industry ever does get to Phase 3, our job wouldn’t be finished until we do something else – continue to monitor the advisor’s effectiveness.

In fact, ongoing monitoring may be as important as all the earlier stages combined. Routine evaluation of a wealth advisor’s recommendations will determine the effectiveness of the advisor’s solution to meet the needs of individual clients.

The decision to implement a wealth management process must be clearly left in the hands of the practitioner. Much like a doctor must prescribe the appropriate drug for a patient, so, too, the advisor must select the right solution for a client. They both need the freedom to do what’s best for their constituents.

That’s no easy task.

Wealth management solutions come in many varieties, just like one size doesn’t fit all for drug prescriptions. Wealth advisors need to pick among many solutions and select the right ones for their clients. Those may be delivered face-to-face, and in other instances, through a robo advisor.

So where are we today?

Independent wealth management firms have taken the first step toward the goal of providing unconflicted solutions tailored to the specific needs of their clients. However, it is just the first step. It’s not that much different from telling clients to not smoke and avoid a fatty diet. It’s a good start, but it doesn’t get us all the way there.

An approval process that can be adapted to the specific needs of the clients will make the wealth management industry and clients healthier.

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