The same three forces are shaping advisers’ businesses around the globe: low returns; regulatory reforms; and digital disruption. It doesn’t matter if an adviser’s business is located in the UK, Holland, the US or Australia, the challenges they face in providing great service and remaining profitable are universal, says Rob Fairbairn, global head of BlackRock’s retail business.
Fairbairn says these forces of change are at different stages in different markets, but they are all “driving the business models of wealth managers and, ultimately, advisers”.
“Each [force] in its own right would drive substantial change in the business model,” he says. “All three together make it a fascinating time to be doing what we’re doing.”
Fairbairn says the rate of change is, in some respects, unprecedented. He says shifting investment markets often force changes in how businesses operate, but regulatory reform and digital disruption have not previously accompanied such market movements to the extent that they are now.
“Those three factors [regulation, digital disruption and tough markets] are all interlinked, creating this unprecedented time of strategic thought required to evolve your model,” he says.
“We passionately believe that what can be digitalised will be digitalised and if you’re an adviser who embraces that, you’re going to see a lot of benefit,” Fairbairn adds, elaborating on the theme of disruption. “If you’re not prepared to embrace digital evolution in the wealth-management space on all fronts, you’re going to be retiring a bit earlier.
“And then there’s where markets are and low rates; in particular, the ability to generate income from assets globally being as tough as it is puts a lot of pressure on fees and service models.”
A pebble in the pond
Australia dropped the first regulatory pebble in the pond with the Future of Financial Advice (FoFA) reforms, and Fairbairn says advisers around the world have felt the ripples, through the Retail Distribution Review (RDR) in the UK, moving on into Holland’s reforms, and then through other markets across Europe.
“It’s the same everywhere,” he explains. “It’s about transparency; shining a light on the relationships between investment firms and distributors, and [between] distributors and advisers. It’s ultimately about trying to reduce cost to the investor. Regulators will talk about ‘improving value’ to the investor, but it’s the same thing. In some cases, it’s trying to just improve the quality and standard of advice.”
One result of regulatory reform is to push more advisers into collecting fees for service, rather than relying on revenue from charges embedded (and often hidden) in product structures. Advisers are learning how to articulate a service-based value proposition and restructuring their businesses accordingly.
“This is fundamental to what’s happening around the world, because
this move to fee-based advice is … happening everywhere,” Fairbairn says.
“[When] you place the [advice] overlay fee on top and you don’t change your proposition from a product [offering] to being a wealth manager, the first time you send out your invoice, your clients see the price of a small car bottom left-hand side of their portfolio and say, ‘What the hell is that?’ It places dramatic pressure on the proposition.
“The adviser can structure their offer any way they like, they just have to demonstrate the value.”
A flow-on effect is that the cost of managing a client’s portfolio becomes more of an issue, as the adviser’s proposition is realigned to reflect the value added by advice. And the conversations between adviser and client change as a result.
“The portfolio shape changes: more index at the heart, more use of ETFs and index mutual funds, [fewer] securities, and the active management has different characteristics than before,” Fairbairn says.
What the adviser talks to the client about changes.
“They’re moving away from individual products,” Fairbairn explains. “They’re talking about asset allocation, they’re talking about objectives, they’re talking about goals. They’re becoming wealth managers. And you can see that happening here. It’s all about going goals-based, it’s all about how they’re moving away from [shouting] ‘Hurry, hurry, hurry – it’s Rob Fairbairn’s Super High-Octane Equity Fund!’. That’s no longer a relationship [a client] will pay a lot of money for.
“So the nature of the adviser moves from portfolio manager to wealth manager, and increasingly focuses on legacy, tax, retirement income – all those things – which we think is a good thing and the regulator thinks is a good thing, because in a low-return environment, that’s absolutely what’s needed.”
Fairbairn acknowledges that these rounds of reform have come at great cost to some individual advisers.
“Because there’s less money to go around and there’s just more compliance [and] regulatory cost, life for the small advisers – without a clear proposition or with limited resources – is ridiculously tough,” he explains.
Fairbairn says adviser numbers in the UK fell by about 40 per cent following the introduction of the RDR.
“There is a view by some that a portion of these advisers weren’t viable in a changing environment,” he says. “I firmly believe the way to think
about what’s [going on] is to believe these are good things that are happening – that are good for the end customer – and while it’s a shocking number [of advisers lost], it’s intriguing that the reason those players got out was because … professional standards were about to increase.
The rise of the robos
“It does create another unintended issue that gets onto the digital space. Clearly, you can’t take that many advisers out of the market without leaving a lot of people, who need advice, advice-less. By their very nature, on the whole, these are smaller clients, who can’t afford private banking or high-end advice.”
This creates fertile ground for the digitisation of advice, Fairbairn says, and it’s “the advisers who embrace technology, the wealth-management structures that embrace it, and the asset managers [who] embrace it” that will prosper.
It’s leading to institutions bringing to bear their systems, processes and insights to support advisers in producing appropriate, customised and extremely robust portfolios and investment solutions for clients.
“BlackRock is putting some serious kit into the marketplace now – institutional-strength, really high-powered investment offerings, the sort of thing you’d get if you were [an institutional client], but in a digital solution at a very attractive price point,” Fairbairn says.
“Everyone talks about millennials and small clients and says this is the way you deal with those unprofitable clients. In reality, I think [digital offerings] have massive application for all clients.”
He argues that digital solutions need to be more imaginative and useful than just determining an individual’s risk profile and matching it to a model portfolio.
“That’s the real magic, when you can just digitally analyse your existing holdings for all sorts of things – correlations, costs – and then give advice online about how to optimise your portfolio from there, up against a goal,” he says. “That’s what an adviser does. That’s an incredible [user] experience.
“In the US, a couple of start-ups will survive, but the winning model (and we are absolutely convinced about this and have backed it with quite a lot of our own money) will be a great brand, a trusted brand [offering] relatively simple, clean digital advice, a good user experience, strong investment credentials and, most importantly – and counter-intuitively – light-touch advice. Human advice.
“That tells you where this is going to go, in every market. So all of your [Big Four] banks, to the extent that they are in wealth management, are going to have a powerful digital offering. Some will get there quicker, some will iterate, some will buy, some will outsource it. But they can’t be in the business if they don’t have one. It’s like an ATM. It’s ridiculous not to think this is going to be a robust part of what you do.”