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July 10, 2012 at 08:07 AM
The next time you’re in traffic, eyeing different makes and models of cars, you may also be getting a preview of the future of the wealth management industry. My meaning is this: I predict that over the next several years, the wealth management industry will radically transform itself so that two types of firms predominate—one type at the low end (“for the masses” if you will), and one at the high end. Or, to put it in the parlance of car-speak, one type that’s analogous to Toyota, and one type that’s a Lexus. And guess what—the types of firms in the middle, the ones that remain in the middle, I should say—will be crushed and disappear into oblivion.
Model 1: The High End Is All About Relationships
Market factors are at work in this coming transformation. First, there’s now a proliferation of tools that enable ordinary investors to perform the same types of analyses that formerly only banks, brokerages and other advisory professionals could do. Increasingly, these investors are comfortable handling their own money and assuming roles that used to be reserved exclusively for their advisors.
It’s not hard to see where this will lead: In the future, many of these savvy investors will want more from their advisors than the standard services that are typically offered by today’s RIA. They’ll want advisors who provide value added services that go beyond money management, and encompass all types of financial decision-making—such as advising on the feasibility of high-end real estate purchase, collaborating with a client’s legal counsel on structuring a pre-nuptial agreement, or helping a client’s children put together a lifestyle budget. In effect, these types of advisors go from being financial advisors to being family advisors. They’ll need a unified view across the family’s financial holdings.
This is where the high end of RIA firms will be going in the years ahead. And because the relationship between advisor and client is the all-important factor here—and family financial matters trump the more mundane aspects of measuring stock performance—the perceived value of such services will be high. Clients will be willing to pay handsomely for this type of personal, on-call relationship that features in-person meetings, frequent and easy access to advisors, and high-touch interaction on all types of financial and non-financial matters.
This is the Lexus you see in traffic ahead of you, driven confidently by a driver who can well afford such a vehicle and is not concerned about price—because he or she knows they’re receiving a standard of quality that is far superior to what the general market has to offer.
Model 2: Low End Does Not Mean Low Quality
At the other end of the spectrum, we have the low end. But that choice of words does not mean shoddy or inferior. Rather, it means that these RIAs will be offering low-priced services to cost-conscious investors, just the opposite of what’s offered by the high-end ‘Lexus’ firms we’ve just described.
