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The Social Network: A New Age of Wealth Management

The Social Network: A New Age of Wealth Management

The robo advisors are already here, and another game changer could be around the corner.

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 such low-cost, diversified investments as ETFs.

Although some wealth management professionals might scoff at this “Walmart” approach to investing, 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 disrupter 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 and changing consumer habits are forcing executives to adjust. If the Department of Labor’s fiduciary rule passes in some form, as expected, we could be witnessing a massive disruption in the way wealth management firms cater to their clients, with those advisors who fail to adapt left in the lurch.

On one end will be the advisors of high-end private wealth clients, offering complex products and services that are customized to meet clients’ desired outcomes, future liabilities, and cash flow needs. Investment counsel will continue to be wrapped and bundled in full-service “family office” solutions to ensure that a holistic life advisory is maintained. 

On the other end will be the low-cost, no-frills advisors who efficiently cater to the lower-level retail and sub-retail populace. New players are entering this space as the technology-enabled robo-advisor model continues to gain credence and help eliminate barriers for such organizations as Facebook and Amazon. 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 in this respect. 

So, where would this split leave the mass affluent, typically defined as those with a net worth of $100,000 to $1 million? These investors present the greatest opportunity for financial advisors: By 2020, mass affluent wealth is projected to grow up to 50 percent 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 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 clients’ goals.

This process must begin by fully justifying the value of the 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 any payments from providers to advisors. Regulators also required transparency in how any fees were used. Opening the books of the service model resulted in a huge shift in the industry, and the number of advisors in the UK fell by 25 percent. Those advisors 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 the wealth management professionals 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 “skill up” and re-attach their services to the public good of their clients, communities and economies as a whole. 

Those players that continue to keep their heads in the sand are ignoring the lessons of history. Just because you have the flag of a major wealth management 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 Managing Director, Americas at the CFA Institute.

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