The future of investment product wholesalers is uncertain. Their business has increasingly failed to address what most financial advisors are looking for. And as asset management firms consolidate over the next half dozen years, the ranks of wholesalers are likely to dramatically shrink too.
Most of the companies have only about three to five years to reinvent themselves if they want to stay relevant to financial advisors. But those that do survive, the ones that can deliver the value advisors are looking for, will find their opportunities dramatically improving as other players drop out. That means the survivors will become essential players in the industry and be extremely well compensated.
Top Value From Wholesalers
But those that succeed must be able to offer a lot more than a menu of products. When it comes to the type of help financial advisors are seeking most from their wholesalers, the needs are evenly split between product support and client acquisition help.
Product support involves getting information on the investment products from wholesalers, including information on how the products compare with the offerings of other asset management firms. It also means support in the form of portfolio construction and market analysis. This aid is most valuable to financial advisors with fewer assets under management (less than $100 million).
Advisors handling more assets are generally more interested in wholesalers that can help them with client acquisition.
In a survey of 294 advisors, about half said financial product support was the top value they get from wholesalers, a figure that rose to 79.9% among advisors with less than $100 million in assets under management (who represented 47.3% of the respondents). About half of all advisors in the survey also said that client acquisition support was one of the top values offered by wholesalers, a number that rose to 93.9% among advisors with more than $200 million in assets under management (who represented 16.6% of the respondents).
Client Acquisition Support
It’s not surprising that financial advisors find client acquisition help an attractive quality in a wholesaler. Advisors handling larger pools of money tend to already have the expertise and resources to address investment issues. So new client acquisition is a higher priority.
A recent survey of 212 financial advisors revealed that 61.8% of them had seen negative growth over the previous five years (after market appreciation was taken out of the equation). That is, they were not adding clients and assets to replace the clients and assets they were losing. For some financial advisors, this is not a problem because the rising financial markets have made up for their losses (and then some). On the other hand, there’s a large percentage of advisors who want to seriously grow their practices organically but who are having a hard time doing it.
Another study of 303 financial advisors found that their top concern was garnering assets to manage from new, wealthier clients, something 95.4% of them wanted.
Those wholesalers whose solutions help financial advisors source wealthier clients and gather more assets will increasingly be in great demand (as long as the financial products they offer are competitive too).
Educational Programs
There are three ways wholesalers can help financial advisors acquire new clients.
First, they can provide educational programs explaining how advisors find and convert “ideal” prospects into clients. One source of clients is other professionals, such as accountants and attorneys.
These programs are of varying quality and often differ little among wholesaling companies. Their quality depends on the support they get from the asset management firms. But even the best educational programs are worthless if financial advisors fail to act. And even when financial advisors embrace an educational program and implement the ideas, there are a number of other things that can stand in their way of success. So it can be difficult to determine the success of the programs themselves.
Resource Coordination
Wholesalers can also connect financial advisors with specialists in other fields, which can help them find new clients and generate new business. For instance, wholesalers stand out if they can offer introductions to people like crisis managers or personal wealth creation coaches. It helps if the wholesalers can proactively identify opportunities and help frame the conversations in these searches.
These types of introductions can be very powerful and will sometimes lead to new business. But despite the value they add, they cannot be tied directly to asset management growth.
Direct Support
The most effective way wholesalers can help is to work closely with financial advisors to bring in new clients and new assets to manage. In these cases, the wholesaler or the specialist is a coach and sometimes even a “team member” of the financial advisor.
By coaching financial advisors, wholesalers can build on their educational programs and resource coordination to better help the advisors implement and provide expertise, which will garner them new business. As a team member, the wholesaler or specialist can speak to or make presentations directly to prospects, clients and other professionals.
The direct approach isn’t currently very common, and that means some wholesalers can seize an opportunity by doing it, using it to meaningfully add value to the practices of financial advisors and differentiate themselves from other wholesalers. But since it’s a powerful approach, it will be increasingly adopted by leading wholesalers and asset management firms over the next five years.
The direct approach of wholesalers offers a clear connection to business outcomes. The prospects, clients and referral sources involved can be tracked, and the level of success evaluated. There is also likely to be an “expansion effect” as the approach leads to business beyond the contacted clients and other professionals.
Combining Approaches
The world of financial product wholesaling is changing, and the pace of change is only going to accelerate. If a wholesaler is offering things similar to what others are offering, it is going to have to do much more in the future to win the business of advisors.
It’s still important that these companies can offer support for financial products (again, that will be more appealing to financial advisors with fewer assets and newer to the business). At times, it will also prove valuable to more experienced and capable financial advisors.
But financial product support will increasingly mean integrating the products into more all-encompassing wealth planning solutions. For instance, wealthier clients will be interested in strategies that eliminate taxes on investment portfolio gains. Business owners, meanwhile, might want to take income tax deductions, perhaps on hundreds of thousands of dollars, and receive nearly all of these monies, including the investment returns on these funds. Wholesalers that can show advisors how the products work with these wealth management solutions will likely do significantly better than their peers.
Education is always important to client acquisition support, and it’s been institutionalized in what is referred to as “value-added wholesaling.” Today, educational programs abound; some of them are very good. A great many of them are less so.
Resource coordination is also becoming more common, but many times lacks systemization and institutional support.
In the future, the most powerful way wholesalers will distinguish themselves (as well as best serve financial advisors and their clients) is through direct support—by combining and seriously upgrading other approaches.
The Bottom Line
Over the next half-dozen years, the industry of wholesaling financial products is going to seismically change. Those asset managers and wholesalers failing to adjust will become less and less successful. Many will become redundant.
But those embracing the trends will be able to exponentially increase the value they offer advisors. As long as the products are competitive, the successful asset managers will find much larger audiences. And the wholesalers will become more integral players, delivering considerable value to financial advisors and being well rewarded for their efforts.
Russ Alan Prince is president of R.A. Prince & Associates. Brett Van Bortel is director of consulting services for Invesco Consulting.