[Editor's Note: This is the third article in a series. To read the other articles, click here: Article 1, Article 2]
Investment management has always been a somewhat schizophrenic part of wealth management. On one hand, it’s one of the lowest value-added functions that wealth managers provide. But at the same time, most advisory fees are tied to it.
It’s also a negatively convex function—i.e., if you do a great job at it, it doesn’t really help you to get more business. But if you screw it up, you’re toast.
Like everything else wealth managers do for clients, this function is going to change over the next decade. This article—the third in a series on the future economic model of wealth managers—looks at exactly how.
Wealth manager investment management today largely consists of allocating client assets across publicly traded securities, mutual funds and ETFs. To be sure, some firms utilize outside separate account managers for a portion of the portfolio and/or include the erstwhile-pooled fund of funds vehicle for private equity or commodities investments. Some have also dabbled in derivative securities such as structured notes (with varying degrees of success). A handful of firms have even tried to create some sizzle by including a “custom” portfolio of individual stocks selected by the firm’s investment team that (remarkably) in aggregate, tracks quite closely to a major index such as the S&P500.
But going forward, successful wealth management firms are going to have to provide much more value added in this function. Why? Robos and ETFs have made what advisors do today a commodity.
Clients on their own can now easily do a relatively good job of investing their money (perhaps not so good as a wealth manager does, but close enough) and they can do it at almost no cost. And whenever someone can easily do something themselves for a very low cost, they aren’t going to indefinitely pay a lot for someone else to do it for them.
There are many things that wealth managers will do in the future to address this issue. However, there are three that will be common to the most successful firms:
First, rather than just sitting back and letting technology obliterate their value added, they instead are going to embrace it to substantially reduce their clients’ costs and be more tax efficient.
More specifically, there are technology platforms currently used by a handful of UNHW firms that effectively change the role of outside investment managers into “design” firms (i.e., they only select securities). These managers enter their trades through an online portal and all trade execution is done at the wealth manager client portfolio level. This is overseen by an overlay manager, which tracks individual securities by lot (to ensure maximum tax efficiency) and also prevents one part of the portfolio from trading against the other.