2020: Winds Of Change

Emerging Trends in Wealth Management

In these uncertain times, wealth management firms are particularly on the line for providing stability to their clients

New data presented by the Aite Group, an independent research and advisory firm focused on business, technology, and regulatory issues and their impact on the financial services industry, looks at the trends impacting financial services for 2020. Reprinted with permission. See the full report here.

Boston, January 9, 2020 – 2019 saw the ultimate erosion in transaction pricing, with Charles Schwab cutting trading commissions to zero and then acquiring one of its chief rivals, TD Ameritrade. 2020 will see a U.S. wealth management space that is being redefined by this tie-up, and there will be winners and losers.

Meanwhile, instability and social uproar can be observed around the globe, and with these issues as well as the looming climate crisis, wealth management clients are increasingly asking their financial advisors for purposeful investment opportunities, with environmental, social, and governance (ESG) and impact investing becoming part of their standard repertoire.

Wealth Management

2019 saw the ultimate erosion in transaction pricing, with Charles Schwab cutting trading commissions to zero and then acquiring one of its chief rivals, TD Ameritrade. 2020 will see a U.S. wealth management space that is being redefined by this tie-up, and there will be winners and losers. Meanwhile, instability and social uproar can be observed around the globe, and with these issues as well as the looming climate crisis, wealth management clients are increasingly asking their financial advisors for purposeful investment opportunities, with ESG and impact investing becoming part of their standard repertoire.

Regulation Best Interest forces smaller brokers to seek cover:
There is a natural convergence of the broker-dealer and advisor client service models with respect to a fiduciary standard. We see the development of new technologies helping to democratize the operating environments of FIs, and regulation is providing the glide path. Technology needs to be adopted with a renewed sense of urgency to remain compliant and competitive. But technology design, implementation, and pricing is not yet aligned with the needs of smaller brokers. Large players will spend to reduce risk. Smaller incumbents do not have sufficient resources to integrate these technology solutions. To that end, we see smaller brokers continuing to embrace the services of large consolidators that can deliver reasonable pricing through economies of scale. As we move into 2020, there will be a continued decline in pure broker-dealer models, increased hybrid registrations, and those that seek the shelter of large enterprise platform providers.

Zero commission creates a value migration:
To remain competitive and independent, broker-dealers highly dependent on commission revenue must find ways to generate new revenue sources, deliver more value to clients, and scale their operating models with technology. Trading-centric broker-dealer firms must evaluate their clients’ needs and shape propositions that their clients are willing to pay for. Digital advice is one such proposition; banking services might be another. Short of meeting those requirements (and most brokers will not adapt fast enough), we see continued consolidation in this industry segment.

To remain competitive and independent, broker-dealers highly dependent on commission revenue must find ways to generate new revenue sources, deliver more value to clients, and scale their operating models with technology...

Zero commission impacts asset management distribution:
The move to zero commission for exchange-traded funds (ETFs), stocks, and options by the top discount brokers/registered investment advisor (RIA) custodians is another trend impacting asset management firms in the ability to access and influence brokerdealers, investment platform providers, and advisors. Zero-commission trading has virtually eliminated the ETF no-transaction-fee (NTF) platforms, in which ETF provides covered trading costs via revenue arrangements with RIA custodians. Participating in NTF platforms translated to greater investment flows for ETF managers, as RIAs preferred using NTF platforms over transaction platforms. The elimination of NTF levels the playing field by putting all asset managers on the same platform, but it will likely lead to more rationalization of asset managers on platforms negatively impacting midsize and small ETF managers that lack the product breadth and scale compared to larger ETFs, which are likely unaffected by this change.

Advisors support client longevity
The aging marketplace is fueled by the baby boomer wave and is driving greater focus on a longevity plan. While supporting aging clients is not new, the challenges are. The average life expectancy is lengthening, and clients face the prospect of spending 20, 25, or even 30 years in retirement. This places tremendous strain on retirement savings but requires more support, which presents an opportunity for advisors transitioning to financial planning. The support goes beyond creating retirement income streams to meet client needs and wants in retirement, and expands to encompass wealth transfer and related services to support clients while they are alive and after they are gone. To meet this growing need, wealth management firms need to enhance client discovery and expand their advanced planning capabilities, including nontraditional support tied to aging clients. Wealth management firms will also need to explore advice-based compensation to monetize the expanding role and services they provide under longevity planning.

Financial wellness moves beyond the workplace:
Financial wellness is increasingly being used in the wealth management marketplace as a term that reflects the expanding role of wealth management and a more holistic approach to financial planning. The term “financial wellness” began in the workplace environment with employers seeking to improve not only retirement saving but also overall financial wellness by offering HSAs. Financial wellness offerings are being closely tied to 401(k) offerings. Moving forward, financial wellness is moving out of the workplace to encompass services beyond traditional wealth management, such as paying off debt, helping clients find a qualified caregiver, providing elder care support, or helping with financial crisis management. While financial wellness adds value to clients, it will also force wealth management firms to reevaluate their service and support models as well as their methods of compensation for investment management and advice.

Read the full report, Top 10 Trends in Financial Services 2020, here