Clearly, it’s great to be the client’s trusted advisor. Now get ready to be the trusted advisor of the future. What’s that? The trusted advisor of the whole family. Morgan Stanley, for one, isn’t wasting any time: its FAs are right now training to become those advisors.
To be sure, it’s a transition that requires shifting to an entirely new practice management model; namely, a family wealth model. That’s how Morgan’s Jim Tracy, director of the firm’s Consulting Group, for managed money, as well as director of practice management for advisors, described the evolving new world, in an interview with ThinkAdvisor.
The expected big change to this substantially different business model brings big challenges to advisors industrywide, especially those still operating as they were 10 or 20 years ago, as Tracy points out. FAs need to evolve just as their clients are evolving by, for example, focusing more on diversity within their teams.
Morgan’s practice management program, Elevate, trains advisors to prepare for the future “to make sure they’re putting themselves and their clients in the best position on a go-forward basis,” Tracy notes.
That includes FAs in the firm’s fiduciary advisory business, Consulting Group, which, under Tracy, has grown to $930 billion in assets under management, according to Morgan’s latest earnings release in April.
Its Universal Managed Account (UMA), the fastest growing platform at the firm, boasts $220 billion in AUM, ranking No. 1 industrywide, Tracy says.
One chief reason for that growth is Morgan’s use of more and improved high technology. In fact, technology is the firm’s biggest line expense annually in its quest to differentiate itself from competing wirehouses and others.
For instance, its technologically advanced UMAX gives UMA advisors capability to trade across their entire client base using a dummy account applied to every client. And, says Tracy, it takes only three minutes.
ThinkAdvisor recently interviewed Tracy — a former chairman of the Money Management Institute who has been in financial services for more than three decades — about the present, the future and the past. That last one? Advisors doing business the old-school way. Here are excerpts from our interview:
THINKADVISOR: Please describe the practice of the financial advisor of the future.
JIM TRACY: It’s a family wealth advisory model, where the advisor will be less focused on the individual client and more focused on family needs and goals to become the trusted financial advisor of the entire family. The services that were provided for the patriarch or matriarch will be provided for the whole family.
What’s the biggest challenge?
That transition to the family wealth advisor model. It comes with focusing more on financial planning, creating diversity among your team – not only in age but in ethnicity – to make sure your practice looks more like the clients you’ll be dealing with in the future. It’s training advisors to evolve as clients are evolving. So the practice management model has to shift, and advisors need to change. Some of them are doing business the way they did 10 or 15 years ago.
What are the most important demographic shifts FAs need to be aware of?
In not too many years, women will control the decision-making on 60% of U.S. wealth. So there’s a higher need for advisors to be able to communicate with multiple family members, including Generation X and millennials.
Certainly much attention is being paid to millennials.
Yes, but the Gen X universe of older children are the likely inheritors of the current client. There’s a fair probability that the average client approaching retirement will transition a lot of their assets to their Gen X children first. The aging baby boomer’s assets will flow first to Gen X and second to the millennial clients, or some combination of both.
What other insight into Gen X and the millennials can you share?
The one thing people are missing in this whole analysis of the marketplace is that we change over time. People assume the differences between Gen X and millennials are going to be that way forever. But that’s not true because as they go on in life, their needs will change and how they want to engage will completely change.
Exactly how will the millennials change?
Our expectation is that with [mounting] responsibilities, complexities and challenges in life, they’ll become much more serious and more desirous of having a relationship with a trained professional that’s been attentive to them over the years and has the skills [to help them] for the rest of their life.
How do robo-advisors fit into all this?
Robos sit right where the industry was 20 years ago – focusing on investments. There’s nothing new that’s being offered. The algorithms, a lot of the models – all firms have done that for many, many years. What’s new is the access. Robo’s aren’t complete solutions and certainly don’t pass the needs test of high-net-worth and ultra-high net worth clients.
What about robos’ lower cost that attracts many folks?
Many more investors are focused on value than on cost. Cost is an issue in the absence of value. Clients place a much higher premium on having planning conversations and talking about family trusts and estates than on [low cost]. You can commoditize investment advice, which is what’s essentially happening with robo-advisors, ETFs and indexing. But you can’t commoditize the added value that many advisors bring to the table.
What trends and pressures are affecting the managed money business?
There’s been significant growth in managed money. The appetite to be in a managed account program has increased, and assets are growing at a low double-digit rate. Trends in the industry are impacting how products are built and developed, and clients are showing a preference for being in an advisory relationship.
What trends are affecting products?
Active managers have struggled in terms of competitive performance vs. ETFs and [other] passive solutions. To me, it’s not a discussion of active or passive. As we develop portfolios for clients today, we’re doing more around active-passive optimization, making sure that we’re optimizing active managers where they have a tendency to do well. And we’re utilizing passive management in areas where they consistently perform in line with or outperform active managers.
What’s the biggest challenge for managed money advisors right now?
It’s not necessarily managing money. It’s far beyond investing only. It’s: Is your practice changing to make sure you’re meeting the needs of your client and their family for the next 20 or 30 years? It’s how is your client changing? How is their family changing? It’s a shift away from “Hey, I do investments” to “I’m a trusted advisor, and I assist families in the following ways.”
How is Morgan Stanley’s Unified Managed Account business doing?
UMAs are our fastest growing platform.
What are the advantages of such accounts?
The ability to combine multiple types of structures into a single account. It’s very simple to manage. You can take separate accounts – ETFs, mutual funds [and so on] – and put them all into a single portfolio under a single asset allocation process. Our technology allows for auto-rebalance and auto-reallocate.
UMAs have been around for more than a decade. What’s the main reason they’re growing so fast now?
Technology improvements that allow for different types of securities to be [combined]. You can build a wider menu of opportunities, and that makes them very efficient.
How much is Morgan Stanley investing in technology?
We’re making a massive investment — an enormous amount of money in technology and upgrades [in part] to transition to a highly desired mobile world.
How enormous is your investment?
Hundreds of millions. Technology is the biggest line item we have every year for expenses. It’s a big part of how we feel we can differentiate and be more impactful in the future.
In 2012-2014, the growth of separately managed accounts was flat. But in 2014, SMAs had a rebirth. How are they faring right now?
We’ve seen substantial growth over the last three or four years because separately managed accounts tend to be very low-priced; so the fees and expenses are very low. And there’s more customization in managing the portfolios.
Morgan Stanley has invested a considerable amount to make changes to comply with the Labor Department’s fiduciary rule. Will the firm adhere to a fiduciary standard for all FAs whether or not the rule, or a Security and Exchange Commission fiduciary rule, goes into effect?
We’ve made some modifications, and we’ve already rolled out some changes in anticipation of the rule. But the rule has been relatively unclear in terms of what it ultimately will mean and how firms will be required to react to it.
— Check out The 2 Most Important Questions Advisors Should Ask Clients on ThinkAdvisor.