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.
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.
But how long can this last for these bundling brokers, particularly as the technology unbundlers invest hundreds of millions of dollars in advertising to convince investors that they are paying too much?
TAMPing It Down?
Other forms of bundling and unbundling also are alive and well in various subsets of the wealth management industry. Currently, the advisor technology industry is in a race to unbundle the turnkey asset management platform (TAMP) in the form of technology-enabled “model marketplaces” now available from advisor tech leaders like Orion, Riskalyze, TD Ameritrade, Black Diamond-SMArtX and Morningstar.
Through partnerships with the mega-ETF manufacturers, such as Blackrock, advisors can craft diversified portfolios for “free” by leveraging popular, researched and vetted investment strategies and low-cost ETFs, while unbundling the investment manager component of a separately managed account. They do this by working with the portfolio management, rebalancing and reporting capabilities of the underlying software provided by the above-mentioned tech leaders.
TAMPs first came about by bringing together all the components of the tech stack combined with investment management services. But today’s API-driven, cloud-native platforms can integrate separate, best-in-breed components together so advisors and clients can substantially lower costs and improve overall client outcomes.
This most likely threatens the big TAMP incumbents, such as Envestnet. How did Envestnet respond? By going back to its playbook and deciding to manage advice at the beginning of the process — bundling the advisor tech stack and doing more on the advisor desktop.
Case in point, Envestnet’s recent $500 million mega-deal for financial planning software provider MoneyGuidePro, part of the firm’s $1-plus billion spending spree that included Tamarac, FolioDynamix and data-aggregator Yodlee. The firm now is actively looking to bundle all of this into one offering: Financial Wellness.
Even the independent RIA — the fastest growing segment of the industry — typically bundles its advice and financial planning services via an AUM fee. How will these models need to adjust as the unbundling movement accelerates, driven by new retainer, hourly and subscription models embraced by Michael Kitces and Alan Moore via their XY Planning Network and AdvicePay platforms? What does the future portend?
Beyond 2020, we see yet another unbundling of advice in the form of financial planning services being sold via a Netflix-like subscription model (rather than based on AUM), most notably the concept of advice from a CFP professional on the phone for $30 a month from Schwab.
Ultimately, what all of this unbundling from tech innovation has caused is the further commoditization of investment management. Everyone agrees that wealthy people will still need and pay for professional financial, tax and estate planning advice from a credentialed human advisor, since they have too much at stake to leave it up to a website or mobile app.
Plus, humans excel at relationships, which really is the value advisors provide, so we all believe that the advisor will remain paramount. But for everyone else, the questions are daunting — to bundle or unbundle?
If I were an asset manager not named Vanguard or Blackrock, or a managed account product manager at a wirehouse/broker-dealer or an exec running a TAMP, or even a large RIA bundling planning via an AUM fee, I would immediately start to find ways to unbundle myself before the next wave of unbundling does me in.
Timothy D. Welsh, CFP, is President, CEO and founder of Nexus Strategy, LLC, a leading consulting firm to the wealth management industry and can be reached at firstname.lastname@example.org or on Twitter @NexusStrategy.