Laser App published the first in a series of white papers on Wednesday detailing the trends and the effect they’ll have on the wealth management industry. The software company partnered with Nexus Strategy on the series.

“It’s no secret these days that wealth management is undergoing dramatic change and transformation, driven by massive ‘Mega Trends’ that will forever alter the trajectory of a growing industry,” the authors wrote.

These trends are happening in every aspect of a wealth manager’s business, from regulations to technology to client expectations.

“Just as other long-standing industries have been disrupted and changed forever by society, government and technology forces that created big-time winners and losers, so to is wealth management being similarly impacted.”

Laser App and Nexus Strategy drew from materials by industry publications, national press and other industry sources to write the paper.

“To conduct this research in order to benefit financial advisors in the long run, we borrowed the ‘content analysis’ methodology of author and social scientist John Naisbitt from his seminal book, ‘Mega Trends,’” Tim Welsh, CEO of Nexus Strategy and co-contributor on the white paper, who also writes for ThinkAdvisor’s TechCenter, said in a statement. “The results of the analysis provide a roadmap for industry participants to evolve their businesses and approach to providing wealth services to succeed in a more complex and competitive industry.” 

1. Increased Demand for Advice

The paper referred to research from Pershing that found the U.S. wealth market comprises about $32 trillion in investable assets, and the number of millionaires is expected to grow by 40% in the next five years. Aging baby boomers are also adding to demand for financial planning services as they begin transitioning from work to retirement.

However, the paper noted that this demographic change and associated wealth transfer “creates more challenges than opportunities for the status quo in wealth management.”

Wealth managers who remain focused on the baby boomer generation without adjusting their services to meet the needs of their Gen X and Gen Y descendants risk losing their current clients’ assets when those clients pass away and their heirs see no reason to stay with the advisor, not to mention the opportunities lost as younger wealth accumulators look elsewhere for advice.

Key questions for wealth managers who want to make this first trend an opportunity rather than a threat include:

  • What is your approach to gaining market share in a growing industry?
  • Have you invested in a scalable technology infrastructure and are automating processes to gain needed operational efficiencies?
  • What is your approach to attracting and retaining the next generation investors?
  • Are you investing in the client facing technology applications this generation has grown up with?

2. The DOL Fiduciary Rule

The financial services industry hasn’t withstood such a wide-ranging distruption as the DOL’s Conflict of Interest rule since deregulation in the 1970s created discount brokerages, the authors wrote. The rule will force multiple players in the industry to “drastically alter their business models” in order to serve clients.

“Already we are seeing impacted firms such as the largest independent broker-dealers, LPL and Ameriprise, make changes to their investment products, accounts and managed programs. According to many industry studies and actual firm reports, independent broker-dealers are spending up to $16 million to rectify their platforms in order to comply,” according to the report.

Ameriprise announced in late October that it will continue offering commission-based accounts with BIC exemptions to “enable both advisory and brokerage options for clients and advisors,” but will “narrow the offering.” Raymond James will do the same, as will Morgan Stanley, Cambridge and Cetera.

Merrill Lynch and Commonwealth announced in October that they would cease offering commission-based IRAs.

“While the fiduciary standard requirement by the DOL currently only affects a sub-set of wealth management assets in retirement accounts for now, the fiduciary standard is expected to be broadened to all brokerage assets once the SEC enacts its fiduciary rules as mandated by the Dodd-Frank Act, signed into law in 2010. Thus, the DOL rule is just the beginning of a wide-ranging need to comply with fiduciary standards across the entire industry,” according to paper.

Questions posed to wealth managers reflecting on how the fiduciary rule will affect them include:

  • What is your strategy for changing the technology and product mix?
  • What training will you need to provide to advisors to ensure compliance?
  • What new systems and workflows are necessary to implement to shield from future liability?

3. The New Generation of Digital Advice

The first wave of robos after the financial crisis inspired a lot of hand-wringing among financial services providers, and not undeservedly. The paper noted that the “Robo 1.0” era brought low-cost advice and improved client experiences to investors, with easy to use interfaces, advanced mobile access and paperless account openings.

With a few years of hindsight, though, we’ve seen that these experiences aren’t out of reach for incumbent financial services providers, and the Robo 2.0 era includes giants like “Schwab, TD Ameritrade, Fidelity, eTrade, Invesco, Blackrock, UBS, Morgan Stanley, Wells Fargo – virtually every major player in financial services.”

And those giants are “outrobo-ing the robos,” according to the paper. For example, Schwab Intelligent Portfolios’ manages over $10 billion, compared to Betterment’s $6 billion.

“Because of the widespread availability of low-cost robos, investment management costs are headed to zero (Schwab’s robo is ‘free’), basically fully commoditizing investment management services,” according to the report. Advisors will need to do a better job of articulating the value they provide their clients. “If advisors are purely transaction-oriented, then their long-term sustainability is also in doubt as those functions will be replaced by robots who can do those services faster, better and cheaper.”

Questions advisors can ask themselves include:

  • How will you adjust your AUM pricing model to reflect the commoditization of investment management?
  • How are you differentiating and articulating your advice and value add from the robots?
  • What is your strategy for harnessing big data and artificial intelligence?

4. Aging Advisors

Just like their clients, advisors are aging, too. The paper noted there are more advisors over the age of 80 than under 30, and over a quarter of advisors are planning to retire in the next five years.

However, less than a third of those retirement-oriented advisors have a succession plan in place. The question of who might be there to take on the business is also unknown. “Historically, Wall Street was the source of huge training classes that taught the business in scale, however, post-financial crisis, those training budgets were cut,” the authors write.

Consequently, they predict a wave of consolidation to take the industry as advisors retire from their firms, putting trillions of dollars of assets into play. “Already, the industry is seeing an uptick in mergers and acquisitions and this trend is expected to continue as advisors look to monetize their businesses,” according to the report.

Some questions for advisors:

  • How will you transition aging advisors?
  • What programs do you have in place to find a solution to the lack of succession planning?
  • How are you attracting, training and retaining next generation advisors?

5. The Move to Independence

Following the financial crisis, advisors and clients drifted away from the large financial firms looking for a model that offered a better experience, according to the paper.

Technology fills the support holes opened when advisors left those big firms, and in fact, many RIAs are better off from a technological standpoint “as their nimble stature enables them to quickly embrace and adopt the latest developments while the lumbering technology departments of Wall Street are too busy integrating their legacy mainframe systems from government forced mergers vs. being able to innovate on new platforms.”

The paper referred to research from Cerulli Associates that predicts a quarter of the advisors currently at wirehouses will become independent over the next few years.

Laser App predicts the migration to independence will increase as advisors who were paid retention bonuses in the form of forgivable loans to stay at wirehouses come to the end of the term on those loans.

Questions for advisors:

  • What is your strategy for attracting and onboarding wirehouse advisors going independent?
  • How are you investing in technology to increase capacity and make these advisor and client transitions smooth?

— Related: In 5 Years, Wealth Management Will Be Transformed: Roubini ThoughtLab