What's Behind the 'Great Unbundling' of Wealth Management?

In the world of wealth management, revenue opportunities derive from typical activities. These include advisory fees, mutual fund investments, managed account enrollments, security transactions, platform fees, and other products and services that are neatly bundled in the delivery of financial advice via a human advisor in some form of the financial planning process.

Now more than ever, these traditional activities and revenue sources are being disaggregated into their component parts based on new technologies and emerging regulatory requirements — so much so that a “great unbundling” is now changing the economics of manufacturing, packaging and distribution across the industry.

According to the experts at Deloitte Insights, to offset the costs of infrastructure-heavy distribution networks (e.g. human advisors), products have needed to be sufficiently broad to appeal to, and drive purchases from, a large reachable customer base. The resulting standardized products and distribution were bundled to gain supply efficiencies.

As a result, each bundled product was usually adequate enough to meet a mass market client’s need. In aggregate, the converged product offered value for the customer at an acceptable price point even if the investor did not want or use some of the product’s capabilities. Investors who wanted depth rather than breadth had to trade affordability, frequency or quality to obtain it, according to Deloitte’s analysis.

In other words, the financial services industry has always been entangled with product manufacturing, packaging, distribution and the resulting shared profitability in non-transparent ways. As such, investors are not always aware of what they are paying for each component — and this is why there’s been such a rallying cry recently by investor advocates and regulators for more visibility into the investment management process.

However, with technology comes opportunity. When new technology, methods or processes reduce manufacturing, distribution, or other infrastructure costs, the original reason for bundling is eliminated.

Disruption Reduction

As investors experience more choice and slimmed-down products that better meet their specific needs, their mindset shifts from “accepting too much” to “expecting just what I want.” They become less willing to pay for a bundle in which they use components unevenly (or not at all) and willingly transition to new products and distribution models, according to Deloitte.

This is what I call the “great unbundling” of financial advice that has been going on for more than 40 years, but is now accelerating in scope and scale, dating back to the first discount brokers who unbundled security advice from stock transactions in the mid-70s. This simple, yet devastating, outcome took the price of a single stock trade, from hundreds or even thousands of dollars, to what it is today — under $5 and in some cases “free.”

But did Wall Street’s product people sit around and let their money machine stop working? Of course not.

They went back to their “bundling play book” and developed the separately managed “wrap account” at upwards of 300 basis points, all in. This re-bundled the cost of investment advice and management with transactions, letting firms regain excess profitability via an opaque product structure that included money manager fees, underlying product fees, platform fees, trading costs and the obligatory advisor fee/commission, all for one convenient fee. Easy peasy.

Combined with the marketing and sales machine of tens of thousands of incentivized brokers, “fee-based advice” was once again king on Wall Street. There are now trillions of dollars in fee-based accounts across the brokerage industry, quietly churning out record revenues year after year for the big firms.

But the good news for investors is that technology waits for no one — case in point, the “robo advisor.” While the great robo experiment did not work according to venture capital-backed technology startup expectations, the concept for using low-cost security selection (ETFs), combined with automated asset allocation/rebalancing and unbundling it from a fee-based account, did work, but ultimately, only for some big online brands.

Now, robo advisors run by Fidelity, Schwab, Vanguard and Blackrock are in the range that’s less than a few basis points range, or even “free” vs. what’s currently upwards of 200-300 basis points in a separately managed account at a wirehouse or independent broker-dealer.