The giant sucking sound you hear is Amazon draining revenue and market share from the stodgy retail establishment. The traditional “household” names have seen devastation over the past 10 years. They grew comfortable with a business model that had been successful in the past while new competitors became stronger and more innovative. We see a similar seismic transformation within wealth management. Not dissimilar to retail, longstanding financial services firms are digging in their heels, trying to hold on to a business model that has been very lucrative. There has been some innovation in financial technology (fintech), but it’s happening outside of the investment management dinosaurs. The firms that adjusted their business practices have been influenced by external factors: fee compression, regulatory change, and the dissemination of information (smarter consumers).
Despite the popularity of index investing over the past 8 years, active management still dominates by assets under management in the United States. With an average annual fee of 1.25%, the industry is still printing money despite lackluster performance, tax inefficiency, and antiquated structure. Right now, there is little incentive to change or adapt. We predict the investment management firms and their thousands of salespeople (who call themselves financial advisors) will ride the gravy train straight into the ground, similar to brick & mortar retail. There are too many value-destroying mutual funds, financial advisors, brokers, and insurance agents for the market to bear.
Hybrid firms that embrace technology, innovation, and personalized human service (at a reasonable cost) are well-positioned to prosper. The current market seems to be segregated into two extremes; low cost solutions that provide little or no service (call center), or full service wealth management firms that charge >1% and perceive clients as a source of revenue rather than a valued partnership.
I’m not sure if the explosion of innovative independent firms, fee compression, the Fiduciary Rule, or changing investor attitudes will tip the scale, but the long overdue financial services washout is coming.