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Hrishikesh Nashikkar
Passionate about new technologies, products and business in financial services. Love for Art (Photographer), Music (Tabla player), Food !!

Wealth Management Market — Hit by a Tsunami of disruption !

Recently, I had an opportunity to do some research on the U.S Wealth management. I think it is a best example of a huge market is going through a significant transformation and taking on challenges by leveraging modern-age technology. I believe, new landscape will offer a great value and benefits to mass-affluent and retail segment investors. Let’s look at how new landscape is shaping up.

Since 2008 crisis, the U.S Wealth management industry has been caught in a perform storm and gone through a number of extremely challenging years. Beyond the crisis, events such as the Madoff Ponzi scheme, the euro crisis, and the flash crash have further eroded investor confidence in U.S financial markets.

Despite these challenges and events, U.S wealth management market has been growing at the sustained growth rate and witnessing transformation. The overall brokerage & RIA market in client assets has increased staggering 56% since 2008.

# Market Structure & Key players

  • By the close of 2014, the U.S. wealth management market was served by around 450,000 financial advisors representing multiple players with distinct operating models, such as Wirehouses, independent registered investment advisors (RIA), online brokers, fully disclosed retail brokerage firms and self-clearing retail brokerage firms.

Wirehouses

  • Wirehouses are a group of four large, national broker-dealer firms. Bank of America Merrill Lynch, Morgan Stanley, Wells Fargo, and UBS constitute the wirehouse segment.
  • These are full-service retail brokerage organization and controls over 35% of industry assets.
  • They have an ability to offer structured products with strong in-house investment banking capability.

Fully-Disclosed Retail Brokerage

  • All broker-dealer firms that utilize another broker-dealer to clear securities transactions on their behalf. Fully disclosed broker-dealers are also referred to as introducing broker-dealer firms.
  • Commonwealth Financial Network, First Allied Securities, and NFP Securities are some major players.

Self-Clearing Retail Brokerage

  • Large to mid-sized national and regional broker-dealer firms that clear securities transaction for themselves.
  • Example — Edward Jones, Ameriprise, RBC Wealth Management, and Raymond James.

Discount and online brokerage

  • Broker-dealer firms that cater to self-directed investors by offering low-cost securities execution. The majority of firms in this sub-segment engage with clients via a Website.
  • Example — Fidelity, Charles Schwab, and TD Ameritrade.

Independent RIAs

  • Registered investment adviser firms are overseen by the SEC and individual state securities regulators.
  • Example- Oxford Financial Group, Shepherd Kaplan, and Appleton Partners.

Robo-Advisors

  • A robo-advisor is a new-age financial advisor which offers an online wealth management service. They provide automated, algorithm-based portfolio management advice without the use human financial planners.
  • Betterment, FutureAdvisor, SigFig, WealthFront are some major players.
  • At the end of 2014, these firms grew to ~19 Billion AUM, a ~65% growth from the previous eight months

# 3 Key trends transforming the U.S. Wealth Management Industry

#1. Advisory Operating Model — the shift of Advisors & Assets from a Wirehouse to RIA/Hybrid Model

  • This shift towards RIA/Hybrid model is driven by a desire for independence and fee-based
  • In RIA model, advisors are gaining flexibility and independence in offering a unique set of products to their client without depending or pressure from brokerage firms.
  • The hybrid model offers best of both worlds and earnings from a mix of commission and fee business.

# Implications -

  • Industry is witnessing high growth in AUM for RIA & hybrid model
  • Advisors are increasing relied on IRA custodians (also prefer multiple custodians)
  • There may be potential need for independent platforms for RIAs with middle/back office infrastructure around them
  • Demand for reconciliations, data aggregation etc. due to multiple relationships (RIAs) with custodians, brokerage firms.

#2. Regulations — Continuously evolving landscape

  1. The volume and pace of regulatory change are the single largest challenge facing wealth management firms, creating significant and increasing costs and constraints in delivering an integrated client experience.
  2. There is an array of new and existing regulations that mainly impacting client onboarding, advisory services and reporting.
  3. The major themes underlying regulatory intervention are:
  • Customer Protection
  • Prevention of Financial Crime
  • Transparency
  • Market Stability

# Implications -

  • The major problem is these various regulatory changes will impact different wealth management services unevenly.
  • Certainly, it will force participants to make an inevitable Operational & functional changes in existing products
  • Participants will need to continuously evaluate existing operations and make it compliant which will result in increased IT spending for next decade.

#3. Modern Technology

  1. I believe technology will disrupt the market significantly. It will be driven by new age technologies Big-data, Social, Mobile, Analytics, and Cloud.
  2. All advisory firms are looking to improve advisor and staff operational efficiency with centralized & consolidated technology application portfolio.
  3. Robo-advisory is purely a product of new age technology in the market and set to change the game.
  4. Customer experience, operation efficiency, and cost are considered key parameters in bringing technology innovations in products and services.

# Implications -

  • IT spending priority will be in –
  1. Regulatory changes
  2. Improving client onboarding
  3. Offering multi-channel client engagement
  4. Goal-based planning and reporting
  • The market is witnessing greater demand for Financial Advisor technology (front office applications) e.g. CRM, Financial planning.
  • By leveraging new-age technology, traditional players are also getting into the robo-advisory services or partnering with new entrants.

To conclude, Wealth management is undergoing significant transformation driven by changes in operating model, continuous regulatory changes, and modern technologies. The financial advisor has evolved from a traditional non-technology advisory approach to digital automated advisory and market will likely to grow exponentially by offering low-cost services and attracting more and more investments from mass-affluent and retail investors. And while, few new players are disrupting the market with their innovative products and services, others are following the change and trying hard to adapt it, and rest are quite late in the game and it’s just a matter of time before they get disrupted!