Advisors, Not Firms, Hold the Power Now, Consultant Says

Trout's blog presents such researched arguments as, "For 50 years, advisors needed firms more than firms needed advisors. That ... has permanently reversed." He declares: "Employee models are losing the wealth management war."

In the interview, Trout, who has more than 20 years of industry experience in the United States and the United Kingdom, forecasts that advisors who are essentially "salespeople with a standard portfolio" will fare less well because personalization has become the name of the game. He also addresses the human element in advisory, for which there remains a deep need.

Artificial intelligence, for example, "can't sense the hesitation in a client's voice," he says. Yet AI enables hyper-efficient personalization.

Here are highlights of our conversation:

THINKADVISOR: "For 50 years, advisors needed firms more than firms needed advisors. That ... has permanently reversed," you write. "Firms that recognize this first will dominate the next era of wealth management." Please elaborate.

WILLIAM TROUT: There's been a shift in power from the employer to the advisor, more of a customer of the firm rather than the old feudal system — if you want to call it that.

The fiduciary construct is the fastest-growing channel. Most of that has spun off from the wirehouses, who are very controlling: "You sell what we tell you to sell, and you'll be compensated on your sales productivity."

That model, with its bureaucracy and locked-in technology platform, is less appealing. Now, with the rise of RIAs, you're seeing equity owners.

Also, advisors are leaving wirehouses for broker-dealers. You can set up your own shop and are able to have the technology you need.

THINKADVISOR: You write that employer models are "losing the wealth management war." Please explain.

TROUT: Firms, especially the wirehouses, have thrown money at [advisors] to bring them on board and essentially treat them as a captive employee sales force.

They're restricted to a set technology platform that's determined by management. They're not incented to [acquire] equity in the firm.

They're at the mercy of their overlords who want them to sell proprietary product. So they get into a portfolio-management sales rut.

THINKADVISOR: What do advisors want most these days?

TROUT: A growth path. They want a trajectory to accruing wealth themselves and equity in their firm — an ownership culture. They want long-term incentives.

The most basic way to do this is through restricted stock. This approach is now being developed at traditional institutions, like some banks.

THINKADVISOR: Are any other compensation changes occurring?

TROUT: Traditionally, many advisors were paid on a grid where they were incented to sell products. Now, for example, there are team-based incentives that reward collaboration.

It's team performance rather than individual production.

That appeals to younger advisors, who tend to work in team-based practices. This approach also encourages knowledge transfer and succession planning.

THINKADVISOR: "The logic of the wealth management industry has been inverted: Brand and distribution scale no longer determine winners," you write. "Technology platforms that enable productivity and deliver superior client experiences are becoming the primary drivers of dominance," you say. Please talk more about what determines the winners.

TROUT: I'm not sure that most clients, and indeed, most advisors really care [what the brand is].

Advisors want the ability to service clients efficiently and grow their books. They're interested in having a good technology platform for planning that's innovative, flexible and aligned to their success.

They want partnership economics where, as the firm grows, the advisor does well too. That's key.

Wirehouses are losing market share. Self-directed platforms are gaining it. So, advisors better be able to offer best-in-class service.

THINKADVISOR: Are there any differences now in how advisors should try to bond with clients to create a lasting relationship? Where's the human element amid all this technology?

TROUT: [Because of advanced tech], the advisor is playing much more of a relationship manager role. That [often] needs to be done in person or over Zoom if [geographic distance] dictates.

There's definitely a strong human element that has not gone away.

THINKADVISOR: Do you see any new advisor trends emerging or that you expect?

TROUT: AI is the big one. It's enabling advisors to get a lot of insight into client behavior.

Advisors will become much more productive and able to personalize their interactions with clients in terms of portfolio ideas and planning.

Those who are basically salespeople with a standard portfolio are going to come under pressure because all that can be duplicated.

There has to be added value: advisors getting into things like tax planning, estate planning, multi-generational [advice].

THINKADVISOR: More advisors are in fact offering tax planning now. Why is that?

TROUT: It's a way to optimize the portfolio to capture tax losses and defer capital gains. Taxes are a huge piece of the financial planning puzzle.

Tax planning is a way to make the relationship stickier and to understand the client's financial picture at a level you otherwise wouldn't be able to. It really brings the advisor close to the client.

THINKADVISOR: But will AI revolutionize the financial advisory business?

TROUT: I think so. It's going to be a massive productivity boost. However, AI is not good with estate planning; implications of changing tax laws, which it can't understand; or long-term care [among other financial services] because it's [just] numbers-based.

It can't sense the hesitation in a client's voice.

Human advisors are there to provide a sense of reality and coach the client to stick to their goals and think about what their needs are.

So the advisory business will become more human, and those advisors who are able to speak to client needs and concerns are going to do well.

THINKADVISOR: In a nutshell, what's your forecast for the wealth management space?

TROUT: The industry is changing fast. And wealth managers are trying to position themselves [accordingly].

The advisor won't disappear. But there's going to be pressure on firms who aren't able to retain advisors and don't offer differentiated services that are efficient but highly personalized.

Technology is a big part of that.