The Grand State of Denial of Financial Incumbents

The financial world is changing before our eyes, and has been for some time. The way people consume financial products is changing. The way financial products are distributed is changing. The business models of financial services are changing. The demographics of financial consumers are changing.

After meeting with hundreds of large firms over the last few years, one thing is clear. Very few have recognized that the world around them is changing.

In fact, many are living in a state of denial.

What has caused this change? Like the auto, energy, retail, and manufacturing industries before it, technology is radically transforming financial services. Before technology, there was no transparency. There was a lack of information. When people are more educated and presented with more information they tend to make better decisions.

Financial services has long thrived by being opaque. Some advisors sell clients products only because they receive kickbacks and their clients don’t even know it. 401k platforms charge you layers upon of layers of fees for practically nothing. Many mutual fund and ETF companies are merely unscrupulous sales organizations that will do anything and pay anyone off to grow their AUM. Broker dealers sell you insurance products only because they have marketing arrangements with them. Brokerage firms give you statements and calls every quarter to keep you in the dark. A culture of selling through 3rd parties and wholesale channels has created complicated arrangements, solicitor’s agreements, and sharing of 3% sales and marketing fees where everyone has their hands in each other’s pockets.

The financial services gravy train built off opaqueness and backroom deals will no longer exist in the coming decade, based on a few trends that should be worrying to every corporate strategy head and financial services executive:

  1. The average wirehouse advisor is 60 and will be retiring in the next 5–10 years. Will there be a crop of young advisors to take their place?
  2. The average advisor client is 60 and will be retiring/drawing down their assets in the next 5–10 years. Will their children and their children’s children continue walking into a branch and talking to an advisor?
  3. New DOL regulations and upcoming SEC rules will make it nearly impossible for investment managers to pay off asset gatherers to use their products. Without the revenue stream of commissions, fee only models will be the norm. Will advisors be able to prove their worth?
  4. In February, LPL, the largest independent broker dealer, with over 14,000 largely fee based reps (collect commissions for selling products), reported that the firm added just 18 net new advisers (.1%) and grew their assets under management by only 0.1% in 2015. Yes, 18, that it not a typo. How does the independent broker dealer business model survive?
  5. Research firm A.T. Kearney estimates $2 trillion invested in digital wealth platforms by 2020, simply based on current CAGR. That’s about the same size of firms like Fidelity, PIMCO, State Street, and UBS, most of which are more than 50 years old. Wealth management is one of the last frontiers of financial services not to be completely digitized. Who will be take advantage of this tidal wave shift?

If you have built a billion dollar business, and your revenue and sales channels either won’t exist as they do today or at the very least will be a fraction of the size, how do you grow over the next 10–20 years? It’s hard to change, especially when you don’t feel you need to. If you have been doing things a certain way over the last 50 years and they have created tremendous success and wealth for your organization, why not continue down the same path? As the US auto industry learned the hard way, if you don’t change your ways, and fundamentally re-shift your attitude and business practices, you will no longer have a business.

There are 3 solutions for financial incumbents:

1. Change your culture. Innovation, through technology and new ideas, is how you will survive for the next century. Many banks have recognized this and have built out innovation labs and venture arms to “learn” and grow with startups. JP Morgan recently even unveiled a 100,000 square foot office space for their tech division that resembles Google more than a big bank.

2. Change your business model. If trends are moving away from active funds towards passive, why charge 1% for an active fund, if you can make the same actively managing a passive portfolio?

3. Reinvent your business, and start new business lines. If you are an LPL and the independent broker dealer business is clearly a slowly sinking ship, why not totally change your business? Digital has radically decreased the cost to explore new business lines across the financial spectrum.

In a recent announcement, Wells Fargo, the world’s most valuable bank, said that they will be rolling out a digital wealth platform sometime in 2017. Basically, what this means is they have no solution and are sweeping it under the rug, hoping it goes away and by next year no one cares anymore. More frightening is a quote from the COO in the announcement:

“When you think about who would use robo-advising more often, you think about the millennials,” Mr. Sloan said. “One of the reasons why it’s not going to fundamentally change the business is, while there are a lot of millennials, they don’t have any money. But they like convenience.”

A few reasons why this statement is very dangerous coming from the senior management of the world’s most valuable bank:

1. Roughly half of our customers are not millennials. In fact, our average age is almost 40. 30% of Betterment’s assets are coming from clients over the age of 50.

2. There are 15.5 million Affluent Millennials with over $100,000 in investable assets in the United States alone. That’s trillions of dollars he is completely discounting. Plus, what about all the HENRYs who may have $50,000 now but will be millionaires in ten years? These are the clients Wells Fargo will need. Do they think they are going to come running to Wells Fargo after they totally brush them aside now because they can’t figure out how to monetize them?

3. According to the latest PwC Strategy& Global Wealth Management Survey 2016

47% of HNWIs under 45 who don’t use robo-services would consider using them in the future

These are people with over $1 million, not 20 year old college students. To make things even worse:

69% of high net worth individuals (HNWIs) are now using online/mobile banking but only a quarter of wealth managers currently offer digital channels beyond email

The only explanation I have is that large financial firms are living in a state of denial.

  • Denial to the fact that anyone in the next 20 years will be walking into a branch or brokerage firm to sit down with anyone to talk to them about ANYTHING.
  • Denial to the fact that the entire generation you are writing off today as not “having enough money” for you to care, won’t suddenly come back to you when they do.
  • Denial to the fact that a technology firm like Google or Facebook has access to more customers’ trust and data than you will ever have, and could easily disrupt your business.
  • Denial to the fact that paying someone 1–2% to receive a quarterly phone call isn’t good enough for a more educated generation of consumers.
  • Denial to the fact that digital is not just a passing fad.
  • Denial to the fact that you don’t need 100 portfolios managers, 200 analysts, 500 advisors, and 50 brick and mortar branches, to do the same work as an engineering team and a few technology systems.
  • Denial to the fact that a $200 lead gen cost online to get a young affluent customer who will grow with you is no higher an acquisition cost than a million dollar branch office on Park Avenue, fancy diners, golf outings, and thousands of color brochures.

Most importantly, denial to the fact that the status quo might keep the wheels turning, the lights on, and your job secure now, but you are setting yourself up to fail in the future.