10 of the most disruptive trends in wealth management

February 2, 2018 5:55 PM

Will the coming months bring a collective embrace of the holistic financial planning model? How will heightened scrutiny from regulators weigh on fees and the delivery of retirement advice? What about robos and artificial intelligence?

From regulatory changes to new technologies and approaches to client service, the Aite Group, a Boston-based financial services research firm, is looking ahead to a transformational year in wealth management. Aite Group analysts have identified a number of prevailing trends they see reshaping the marketplace — many of which are driven by emerging technologies, some by regulatory and compliance concerns, and still others in response to competitive pressures and shifting client expectations.

"Redefining the business model is a wide-ranging undertaking," Alois Pirker, a research director with Aite Group, said during a recent online presentation. "And I do think that 2018 is probably a pivotal year in this undertaking."

Pirker and his team expect regulators to crack down on unsuitable advice, while firms are expected to focus more on helping clients plan for retirement, and many will elect to move toward a holistic, goals-based financial planning model.

On the tech front, Aite analysts see major disruption coming from robo advice, account aggregation, advisor dashboards and artificial intelligence, with ripple effects that will be felt in how firms approach client segmentation and engagement.

Reading the tea leaves, Aite Group has compiled a forecast of 10 notable trends in the advisory trade that analysts are anticipating, changes that collectively will amount to a fundamental reorienting of the way many firms do business. Here's what they see in the year ahead.

10 disruptive trends in wealth management in 2018

Will 2018 bring a collective embrace of the holistic financial planning model? How will heightened scrutiny from regulators weigh on fees and the delivery of retirement advice? What about robos and artificial intelligence?

From regulatory changes to new technologies and approaches to client service, the Aite Group, a Boston-based financial services research firm, is looking ahead to a transformational year in the wealth management sector. Aite Group analysts have identified a number of prevailing trends they see reshaping the marketplace — many of which are driven by emerging technologies, some by regulatory and compliance concerns, and still others in response to competitive pressures and shifting client expectations.

"Redefining the business model is a wide-ranging undertaking," Alois Pirker, a research director with Aite Group, said during a recent online presentation. "And I do think that 2018 is probably a pivotal year in this undertaking."

Pirker and his team expect regulators to crack down on unsuitable advice, while firms are expected to focus more on helping clients plan for retirement, and many will elect to move toward a holistic, goals-based financial planning model.

On the tech front, Aite analysts see major disruption coming from robo advice, account aggregation, advisor dashboards and artificial intelligence, with ripple effects that will be felt in how firms approach client segmentation and engagement.

The Aite Group has been reading the tea leaves and compiled a forecast of 10 notable trends in the advisory trade that analysts are anticipating for 2018, changes that collectively will amount to a fundamental reorienting of the way many firms do business. Here's what they see in the year ahead.

Retirement worries loom large

In 2018, Aite Group anticipates that concerns about the "retirement calamity" will become a headline issue that commands the attention of both advisors and policymakers.

"This is really significant because we've had the baby boomers age into retirement and that continues to occur, but we're going to see potentially a very visible effect on our society," says Aite Group analyst Denise Valentine. "We tend to focus a lot in our business and financial services on the wealthier and mass affluent or the high-net-worth, but the reality is the country bears the burden or the responsibility for a much broader set, and it has an impact on things like health care and tax reform, and even advice."

Valentine calls out the "inconsistent" approach that government regulators have taken in addressing the shortfall in retirement savings, including the delay of the Department of Labor rule on conflicts of interest in retirement advice. Still, she sees momentum building both domestically and abroad for a tougher stance against advisors who make unsuitable retirement recommendations, as well as for proposals to encourage consumers to save more. Advisors, too, have been reorienting their practices with a greater focus on retirement planning, a trend Valentine hopes to see continue in 2018.

"We need a stronger emphasis on financial planning," she says.

Fees in flux

Advisor fees are in the midst of a major upheaval that seems poised to play out over 2018. U.S. and foreign regulators increasingly are expecting advisors to eliminate conflicts of interest and make recommendations that are in their clients' best interest, while also pressing for greater transparency in the fees that advisors charge.

And firms are feeling the pressure.

"The need for financial institutions to transform both their operating models and their remuneration structure is imminent," says Aite Group's Meghna Mukerjee.

Technology — in particular the rise of robo advice -- will be a key factor in driving down what the market will bear for fees, much as the emergence of online brokerage accounts upended Wall Street two decades ago.

"Very simply put, the various incarnations of the robo advisors right now are having a real game-changing effect, and they're offering self-directed investors really rock-bottom prices," Mukerjee says.

To avoid a "race to the bottom in pricing and profitability," Mukerjee expects firms to more clearly articulate their own value proposition as they migrate from a product-driven revenue model to one more oriented around services and best-interest advice.

"Shifting to a revenue structure that really separates the product from the pure advice as a service is a challenging dynamic to get accustomed to, but it is slowly becoming the new normal," she says.

Holistic, goals-based planning at the forefront

With client expectations on the rise and mounting pressure on fee structures from regulators and robo competitors, more advisors will make the move to convert their practices into full-service planning shops, Aite predicts.

"In 2018, goals-based financial planning will take center stage, and though this is by no means a new concept for the wealth management industry, most financial institutions will have renewed focus on getting it right this year," Mukerjee says.

She recommends that firms undertake training initiatives to ensure that the frontline advisors and reps are comfortable with the holistic service model. Likewise, she says that firms should take a hard look at their technology to ensure that they have the software and applications in place to support a financial planning operation.

Aite Group is also anticipating that successful firms will expand the white-glove service model beyond their most affluent clientele and reach slightly less well-heeled investors.

"Goals-based financial planning will not be limited to the high-net-worth and the ultrahigh-net-worth clients only, but wealth managers need to get this right for the affluent and the priority segment client as well," Mukerjee says.

Holistic planning means aggregating accounts

Accompanying the shift toward goals-based planning will be a rise in account aggregation technology, Aite forecasts.

"It's hard for an advisor to provide a real solid, holistic, financial plan without having a full picture of the client's financial situation," says Aite analyst Bill Butterfield. "And aggregation technology certainly lightens the load compared to what I call the old shoebox effect — or digging through paper statements that clients tend to store in a shoebox or a folder."

Retail banks and brokerages had been among the early adopters of account aggregation, but increasingly, advisors are finding that it can be a valuable tool to grow their businesses, as well. Last year, an Aite Group survey found that advisors who offer an account aggregation service enjoy greater revenues, higher assets per client, more wallet share and more success converting prospects to clients than their competitors who don't aggregate accounts.

"There's a real business case for this," Butterfield says. "Rolling out aggregation may not result in an immediate windfall in new client assets and revenue, but it certainly lays the foundation for future engagement and opportunities."

Data security and client privacy

With the surge in new technologies available to wealth management firms, it is critical for advisors to take a hard look at how they are securing their systems and protecting client privacy.

Aite's Denise Valentine notes that many of the vulnerabilities come from human negligence or malice, and suggests that firms consider taking the sometimes uncomfortable step of ramping up policing of their cyber policies. That could mean enhanced monitoring, or holding individuals who violate those policies — even if by innocent mistake — accountable.

"Firms, especially in asset management, are rather hesitant to do these sorts of things, but we're at a point in time when we need to take some new mechanisms or methods to get to where we need to be, because there are still way too many breaches impacting many millions of people," Valentine says. "There's a lot of unknown factor to all of this where personal privacy should be a much greater concern to people, and we need to start paying attention to it."

Richer service models for stronger client engagement

Many firms are revisiting their approach to client segmentation, in some cases broadening their reach or rolling out more hyper-targeted niche service models.

"We continue to see that firms are focused on reshaping their client segmentation strategies, but with a broader spectrum," says Aite's Isabella Fonseca.

For all of the skittishness advisors have expressed about social media over the years, a multichannel, online-heavy client engagement strategy will be critical in 2018, according to Fonseca. That means forward-looking firms will increasingly partner with fintech vendors and use an array of communications outlets to prospect for and acquire new clients, including podcasts, Twitter, text messages and email.

Fonseca looks ahead to firms "refocusing on a better and deeper set of services" to existing customers, while also branching into new client segments. Low-cost, self-service tools can make the business case for bringing on clients with lower levels of investable assets, for instance.

Likewise, more advisors are developing specific strategies for highly specialized market segments.

"Firms are refocusing on a particular niche market — areas such as women or business owners or millennials with specific products and services," Fonseca says.

Artificial intelligence coming into focus

With all the focus on digital advice platforms and new technologies to enhance the advisor-client relationship, 2018 is expected to see a surge in interest around artificial intelligence in the practice.

But before advisors go racing to roll out smart tech tools, Aite analysts caution about the privacy concerns that arise when working with an outside vendor that could access sensitive client information.

"There are control issues around data," Valentine says. "There's definitely a confidentiality issue there."

Firms must decide what, precisely, they are looking to achieve with an artificial intelligence application. Better targeted prospecting? Marketing? Automating back-office processes? Rolling out a robo service?

"There's a lot of need for an upfront assessment as to what is it that I'm really trying to accomplish? Do I really need this?" Valentine says.

If firms opt to partner with a vendor, advisors need to consider how much visibility they will have into the application, and how it will fit with other systems and processes at the firm.

"Firms are realizing that AI is not plug-and-play," Valentine says. "You can't just pop it in and have it do its thing."

She recommends that firms adopt a formal AI policy, and also urges caution given the increased interest government authorities are taking in the area, raising the prospect of new regulations coming down the pike.

"I'm not saying we should hold off entirely," Valentine says, "but it has to just be something that's very well thought out."

Advisor dashboards take center stage

An increasing interest in advisor dashboards, which integrate all manner of IT applications into a single console, mirrors the broader shift that Aite sees toward more holistic financial planning.

"As wealth management firms have shifted from a transaction-based business model to a fee-based model, we are also seeing a lot of technology needs that their advisors have asked for," she says.

"Today, financial services organizations are focusing on providing advisors with one-stop shop through an integrated advisor dashboard where advisors can actually access multiple applications from a single interface," Fonseca adds. "It's frustrating for advisors to log on to multiple software tools to manage their daily business, and likewise for clients — having several portals to access their financial plan and account information and so on."

Competition is heating up among vendors who want to get their applications incorporated into the advisor's dashboard, Fonseca says. But the prevailing trend toward integration and interoperability suggests that successful vendors will be the ones whose technology is broadly compatible with the applications of its rivals.

Fonseca even has a word for it.

"What we predict is that ‘coopetition’ is the wave of the future, so the winners in this battle will be those that actually provide wealth firms with the flexibility to more easily integrate their technology within each unique client technology ecosystem," she says.

Shake-up in the fund sector

The past year saw considerable activity in an increasingly crowded ETF market, and 2018 is bound to see still more movement as that sector continues to shake out.

Aite's Javier Paz anticipates that Vanguard will hold onto its dominant position in the market, but that it will nonetheless see its share slowly erode amid escalating competition.

"Vanguard will remain at the top in terms of money earned and client assets and number of clients, presumably, as well. The pie is just getting larger, and larger faster than Vanguard is able to continue to maintain that kind of very dominant share of the pie," Paz says. "That share will be declining as more firms participate, but it will remain considerable, allowing Vanguard to remain in the top echelon of advisors in the U.S."

Among the robo startups which include leaders like Betterment and Wealthfront, as well as a host of smaller players, Paz anticipates a wave of consolidation, and looks for more firms to team up with State Street Global Advisors in favor of stalwarts Vanguard and BlackRock.

Blockchain buzzword bingo

Aite analysts are steering clear of any outlandish predictions that would herald 2018 as the year of blockchain or the year of the cryptocurrency, but so those topics are so buzzed about that analysts are recommending that firms keep an open mind and at least be able to entertain client inquiries along those lines.

"All these things that are related to the blockchain economy present an opportunity to the industry to not necessarily co-opt the message — but, why not, co-opt — and basically ride it for what it's worth," Paz says. "And use it as a tool of engagement where the financial firm is perceived as being forward-thinking."

With increased investor interest in bitcoin, other cryptocurrencies, mining and the blockchain ecosystem, firms will do themselves and their reputation a disservice if they simply dismiss those issues.

"I think being an incumbent being able to be conversant on this topic, having a coherent perspective rather than, 'We don't do this here,' would be a positive step," Paz says. Sometimes that may even mean the advisor engages with clients in the hopes of steering their interest toward a more conventional investment.

"[I]t would be perceived as a progressive firm that knows what it's doing and can at the same time pivot the interest that somebody may have to something that is safe and prudent," Paz says.