The biggest threat facing the wealth management industry – including financial advisers – is not necessarily losing assets under management, but losing relevance, the Professional Planner Licensee Summit has heard.
Franklin Templeton vice president of industry advisory services for EMEA and APAC Robert Crossley told the summit that technology and client demand will fundamentally reshape the industry and adaptation is essential to survival.
Crossley said Franklin Templeton research has uncovered a prevailing view among consumers that the financial services industry “has been built by Baby Boomers for Baby Boomers”.
“It hasn’t worked the same for younger generations,” he said.
“Younger generations have had very different formative influences, and that has coloured their attitude to wealth, to saving, and to money and advice.
“Younger generations have learned that technology just keeps getting better, the world just keeps getting worse, environmentally, socially, politically and economically.”
Crossley said the number one requirement of a portfolio for a Baby Boomer client is wealth accumulation, but for younger generations the number one requirement is income, and wealth accumulation is number four.
At the same time, “how those younger generations trust, and who they trust to provide advice, is very different”, Crossley said.
“For 91 per cent of Gen Z and 75 per cent of millennials, the number one place they go to for financial advice and information is social media,” he said.
“We may not agree with that, but the point is they trust very differently. It’s really about positioning ourselves to be relevant to those different generations.”
Crossley said there are three fundamental issues all players in the wealth management space are trying to solve.
They are “product differentiation, because all our products look the same and they cost too much money; scalability, producing value in a scalable way; and having sticky relationships”, he said.
“But that equation is changing. That equation of competition is being changed by client demands and technology. Technology re-prices existing skills and services. It redraws the line between alpha and beta [and] it changes what’s possible.
“One of the things that’s changing, and not just in the advice sphere, [is] the underlying infrastructure of the industry. That has enormous implications in the future for how we deliver value to our clients and the forms that that value can take.”
Crossley said the “inconvenient truth” about financial advice is that many individuals simply do not appreciate the need for it, nor understand its value.
“They don’t see the need to pay for it,” he said.
“We can’t make money from some of the people who need it the most; what we mean by ‘advice’ is changing; and who’s trusted to provide is changing.
“In many ways in wealth management, the biggest danger is not so much losing AUM, it’s really losing relevance.”
Crossley said the drivers of growth in advice are being redefined by demographics and technology, and there are many in the industry that are not reacting quickly enough or are focused on the wrong things.
He added there are participants in the industry that are in danger of solving the wrong problems or yesterday’s problems.
“Because they can’t see the change or the significance of the cumulative change happening around them, or they don’t know what to do about it,” he said.
Inevitably, AI will play a role, Crossley said, due to its capacity to make new things possible.
“In many ways, the biggest danger that we face in all our industries is being blindsided by the pace and scale of change and the rate at which new things become possible,” he said.
“In other words, [by] how quickly the future is becoming present. Whatever you believe about AI, I guarantee it’s out of date because of how quickly things are changing.”
Client relationships of the future will be “centred around engagement, relevance, new forms of utility beyond the financial”, Crossley said.
New players entering the field will use technology extremely effectively to “appeal, to engage, to include, to create communities, to essentially to create trust”.
“They create interaction, which creates data, which enables them to tailor and contextualise the delivery of their services,” Crossley said.
“They make investing fun, engaging, social, relevant. It’s social, it’s not solitary; it’s inclusive; they have all sorts of and gimmicks, essentially, to differentiate themselves.
“They are bringing completely new investors into the market, they’re engaging younger investors, they’re taking market share, away from traditional investors, they’re essentially changing the landscape.”
Crossley said the rise and rise of intangible assets, such as non-fungible tokens (NFTs) is just growing evidence of the different kinds of assets and investments new generations of clients will be attracted to. Some of them are pretty wild.
“I was talking to a music producer a couple of weeks ago, and he’s taking the streaming data from music platforms, creating indices off the back of this, and then creating ETFs,” Crossley said.
“You can go long Taylor Swift, short R&B, long hip-hop, whatever. It’s a humorous point, but it exists.”
Crossley said that from an advice perspective, portfolio construction – the constituents of portfolios – will look very different.
“Portfolio completion in future will, for younger generations who own all this funky stuff anyway, be about introducing them to stocks and bonds and portfolio construction,” Crossley said.
“For older generations, who own the equities and bonds, it will be about introducing these new forms of investment which give them utility, privileges, experiences or prestige, et cetera.
“What the portfolio will contain in the future will be far wider than what it what it contains today.
“The real point is, it enables an adviser to start where the client is, to start where the client’s interests are, and to be able to build a portfolio around those interests and what they’re emotionally engaged with, rather than trying to force them into something that they’re not emotionally interested in.”
Crossley said that as the winds of change blow through the wealth management industry, there are some key issues to help guide advisers.
“Portfolio construction means meeting the client where they are, not dragging them to us,” Crossley said
“AI’s role in data collection and engagement, to be able to understand the client and make the client feel understood, to create the engagement, to create that data, is going to change the way that wealth is delivered and done.
“And, when you think about competition, when we all think about competition, we think about it vertically, against people who think like us, act like us, and have the same constraints as us.
“Every industry in the world is horizontal: competition is not coming from other manufacturers, it’s coming from whoever has the trust with the client [and] that trust can be generated in completely different areas.”
