Mention the expansion in the number of online wealth management services and traditional financial advisors are quick to dismiss the viability of the growing cadre of firms such as Personal Capital, Wealthfront, FutureAdvisor and Betterment. After all, they add, “Investors prefer to interact with their advisors face to face.” Do they?

Consider this. As technology has become more integrated into the lives of U.S. consumers, people are much more comfortable transacting business online and desirous of the ready access to information, products and services … anytime, anywhere and from any device. Everyone is aware of the fact that Walmart is the nation’s largest retailer. Were you aware that Amazon is the second-largest retailer in the U.S.? Did you know that online banking represented 54% of banking transactions in 2012 compared with 14% for in-branch? (That’s according to AlixPartners.)

For those who might challenge how analogous these trends are to the wealth management sector, you may be interested in a study conducted by Booz & Company on trends that are shaping the global wealth management industry. Let’s start with the good news:

• Assets under management are growing in markets around the world.
• North American assets under management have now eclipsed their pre-crisis levels.
• The number of high-net-worth individuals is growing two to three times faster than GDP.

Yet in spite of the positive growth trends, Booz & Company found that “pre-tax profit margins for wealth managers fell in all regions of the world from 2007-2012.” In North America for example, margins dropped from 29% to 21%. According to Booz & Company, contributory reasons included “the rapid advance of digitization” and a “fluid competitive landscape.” Perhaps more ominous, one of their conclusions was that “few wealth managers have adapted to this new reality.” They observed that as “more and more high-net-worth individuals are motivated to use technology and emerging channels to manage their wealth, the industry is moving toward a 24/7, multichannel, digital environment directed by consumers.”

As this segment grows, there will be further margin compression on traditional advisor firms. Why? The rates charged by these online entities can range from 0.15% to 0.35% compared with the 1% to 2% charged by traditional advisor firms. Perhaps most interesting is the “minimum investment” levels established by the online advisor firms, which range from zero to $5,000. The lower thresholds will certainly have some appeal to target audience segments such as trailing-edge baby boomers, Gen Xers and Millennials, groups that often don’t meet the investible asset criteria espoused by traditional advisor firms. It should be noted that in North America it has been estimated that these groups stand to benefit from a $12 trillion to $18 trillion intergenerational transfer of wealth over the course of the next 12 years. 

One of the greatest points of leverage for online wealth management firms is their broad geographic reach and ability to scale their business model quickly and efficiently. To offer one example, Personal Capital Corporation recently launched a national advertising campaign focused on client acquisition. Given the interest exhibited by many VC firms in the online wealth management space, firms such as Personal Capital have met with success in raising capital, which will only serve to fuel their ability to expand their reach and build their brands in an aggressive manner.
The irony is that the online wealth management firms don't offer anything to investors that isn’t available to traditional advisors. Tools such as client portals with aggregated reporting, online account access, performance monitoring dashboards and secure document-sharing and financial planning tools have been on the market for years. Unfortunately, few of these digital products have gained traction with advisors.

From our perspective, online wealth management is a viable channel that will continue to evolve and grow. While the early attention is on the start-ups, particularly those that have attracted the top VC firms as early-stage investors, the digitization of the wealth management business could very well be driven by large, established brick-and-mortar financial institutions that have already identified Silicon Valley firms as a legitimate competitive threat. 

For those independent advisors who view the digitization of wealth management as an opportunity rather than a competitive threat, the future holds tremendous promise. While there are risks and trade-offs to be sure, the benefits in terms of cost reduction, client acquisition and retention and revenue growth could be meaningful. In the words of the late Steve Jobs, Founder of Apple:

"If you don't cannibalize yourself, someone else will."

More importantly, the failure to embrace this trend could challenge the survival of those financial advisor firms that choose not to adapt. 

Cliff Campeau is a partner with Evolutionize LLC and a regular blogger on financial services marketing best practices. Evolutionize specializes in providing independent financial services firms with a suite of proven practice development solutions, including Web site development, inbound and outbound marketing tools and compliant social media marketing program support. Campeau can be reached at