In the world of wealth management, it’s easy for some to see “robo” as a four-letter word. It’s something I can certainly understand — change is scary, especially when it challenges the way you’ve been doing business for years. But those who dismiss the rising tide of digital wealth as nothing more than a niche offering for a limited group of investors need to wake up before it’s too late.
Digital wealth is the technology that allows for faster, more efficient and cheaper investing services for people everywhere. Through this transformation, our industry is able to reach new and broader groups of investors, deliver the seamless client experiences that people increasingly expect, and execute with massive efficiency to maximize profitability. Consumers win. Our industry wins. The problem, of course, is getting to that nirvana.
To date, the unfolding era of digital wealth has followed historical patterns of innovation and disruption. The first phase occurred with first-movers like Betterment, Wealthfront and Personal Capital that launched robo offerings. The second phase commenced when the fast-followers jumped in — which included moves like BlackRock buying FutureAdvisor and Vanguard putting muscle and pricing power behind their Personal Advisor Services model. At both ends of the spectrum, the initial focus was purely digital advice offerings, but now we are quickly moving to a much wider application of digital wealth in our industry.
Enabling Digital Wealth
We are now into the third phase of innovation and disruption as more financial services firms, ranging from startups to blue-chip brands, transform by adding new channels or bringing digital capabilities to mature businesses.
Consumer trends and preferences are driving this change, and more and more retail customers are wanting the option of going from purely digital services to human hand-holding and everything in between, depending on who they are and where they are in life. They will also expect a more holistic offering rather than siloed services for investing, banking and other services. Seamless personalization is the new standard for a great client experience, and forward-thinking firms are dedicating themselves to delivering it.
Pricing in a Digital World
We can’t talk about digital wealth without discussing fee compression and the bloated cost structure of our industry. We’ve seen it before — when industries go digital, prices come down. Consumers have more choices, information is transparent, and firms with pricing power win.
In wealth management, traditional cost structures are so high that many firms turn down small accounts they can’t serve profitably — thereby turning away young investors who make up the rising digital generation. If we don’t want to play defense, and we want a viable growth trajectory in our industry, we need to be able to reach these young investors with a value proposition that’s attractive to them.
This is where the elephant in the room comes in. Old brokerage platforms for our industry are slow, expensive and outdated. They require a lot of manual intervention that inflates costs for both the custodians and their clients. To mask the true costs of their platforms, some providers have embedded self-serving revenue streams that can be conflicts of interest, especially for fiduciary advisors. But neither the costs nor lack of transparency will fly in the era of digital wealth.
Winners and Losers
If we look at how digital technology has affected other retail and distribution industries, the path forward for ours is predictable. Companies like John Hancock, JPMorgan, Capital One and Morgan Stanley are making investments in new businesses and segmented service offerings. The Edelman-Financial Engines combination looks like a bold move in the RIA space. It’s early yet, but it’s becoming clearer who will be on the winning side of the digital wealth transformation.
What concerns me is that other firms don’t sense the urgency. Complacency in the face of massive secular and technological change is what decimated other types of retail and distribution industries — from video stores to travel agencies. While it may be tempting to put off any decisions rather than confronting change, there’s an adage about killing your own cash cow before the competition does it for you. From where I stand, the time is now to get on board with the digital wealth transformation.
In his role as CEO of Apex Clearing, Bill Capuzzi sets the vision and strategy to help Apex identify and realize new areas of growth and opportunity. Under his guidance, Apex continues to be a proven leader in clearing and execution, helping power the digital revolution in financial services. Previously, Bill was chief of staff at Convergex Group, and a member of the firm’s Executive Committee, and served as director at Pershing LLC. Bill holds a B.A. from Wesleyan University and a MBA in strategic management from Rutgers University.