Strategy & Technology: Re-Thinking the Post Fiduciary Business Environment

January 5, 2018


The first in a series of blogs published by Beacon Strategies, LLC that look at the long-term trends within the wealth management industry that we believe need to be better understood from both a business and technology perspective.

We all are still holding our collective breath in anticipation of the DOL Fiduciary rule change’s final outcome. The universal truth we have embraced is that non-conflicted customer best interest is here to stay. It has and will continue to spur changes to compensation, business models and service platforms. I am not questioning this truth, but I do believe that our focus on DOL has obscured a broader change that is underway.

DOL has been the focus of activity over the past 12–18 months. The demand on resources has led many firms to adopt a case of voluntary myopia, ignoring other issues or strategic influences during this period to ensure successful implementation. While we have concentrated on reshaping the business processes that support the crafting of investment advice to satisfy DOL, these same fiduciary requirements have catalyzed other technology supported evolutions. These parallel, non-DOL activities have created the infrastructure for the mass production of personalized investment advice—personalized advice factories.

Personalized advice factories will render advice a commodity. Every firm will have the capability to rapidly and inexpensively mass produce individualized financial advice. Just as with physical commodities—a pound of copper, barrel of oil or bushel of wheat—pricing becomes dependent on supply and demand. Automation can create a virtually unlimited supply of advice at very low incremental cost. These factories will entirely disrupt everyone’s business model.

Constructing and managing a personalized investment portfolio is about to become a “big box” discount business unless the financial advice product is re-engineered around a new value chain. I’m not discounting the value of the human factor; I believe in the value of human advice and a personalized relationship. But the continuing price wars over ETF’s and Index funds, the proliferation of new lower-priced share classes and the ability to harness robo technologies (which themselves are offshoots of TAMP technologies melded with automated versions of basic planning and risk analysis tools) means there will be a rush to the bottom on pricing. Justifying the fair market value of services provided and being able to support profitable pricing—whether fee or commission—will become impossible if you are putting your customer’s interests first.

Over the next few years, this transformation to mass production will create a survival threshold. Firms who apply thought leadership to create a differentiated straight-through advice value proposition will be survivors. They will harness technology to develop a fully integrated operating platform that supports a new value chain. Those firms that embrace a piecemeal strategy or focus on a single service dimension will have a difficult time surviving in a commoditized market. The survivors will become winners because of industry consolidation, capturing the assets, customers and advisors of the failing institutions and reaping the operating efficiencies that the past decade’s investment in technology can provide.

A straight-through advice model will incorporate information capture, analysis, monitoring and presentation balanced with the personal relationship. Integrating more sophisticated goal-setting and financial planning into the account relationship, ensuring that customer’s information on demand needs are met, offering the ability to meet how and when the customer want, providing a thorough risk analysis and an annual goal review as part of the account relationship, are all examples of what needs to be included in this new value chain. Technology needs to be leveraged and woven into supporting an overall value-added strategy.

Those firms who embrace this new value proposition will be able to adapt it to their individual marketing strategies. Regardless of the size of an investor’s account, the portfolio of available technologies enables the creation of asset-level appropriate service packages that justify reasonable margins. This includes the ability to seamlessly migrate customers to higher service levels as their assets grow.

When we start to discuss technology as an integral part of business strategy, the eyes of many leadership team members glaze over. But we are not talking about implementation details best left to the “techies” or asking CEO’s to understand why blockchain technology will reinvent transaction processing. We are saying executives need a sound understanding of how technology has already changed the economics of advice creation and distribution and how it must be exploited to differentiate your business and prevent your firm from becoming a commodity provider who is engaged in a price race to the bottom.