‘Disruption’ Could Get Advisers Back in Sync

The rocky financial markets of the past few years seem to have fundamentally altered the mindset of mass affluent investors, Deloitte Center for Financial Services said in a paper. Many have become skeptical of financial advisers, and the number of people turning down financial advice, or non-consumers of advice, has remained stable or is even on the rise. Traditional wealth managers appear to continue struggling to regain their footing as their market share dips.

The concept of disruptive innovation—one that helps create a new market and is intended to disrupt an existing market over a period of time—is occasionally invoked to describe a firm’s intention to break with tradition and try to improve a product or service in unexpected ways, often to reach a new or underserved consumer segment.

Deloitte has applied the notion to the segment of mass affluent investors who have turned their backs on financial advice, preferring to go it alone. A recent webinar conducted by Deloitte explored why people are turning away from advice and how disruptive innovation can be used to target non-consumers.

“The Out-of-Sync Advisor: Applying Disruptive Innovation to Serve Non-Consumers of Wealth Management Advice” was co-authored by Ed Tracy, a principal with Deloitte Consulting LLP and the leader of the wealth management and private banking team, and Val Srinivas, the head of banking and securities research for the Deloitte Center for Financial Services.

Several factors underpin the do-it-yourself investor trend, according to Tracy. First, a significant portion of those who departed felt the cost of advice wasn’t worth it, or perhaps some felt the portfolio itself, because of the drop in value, did not warrant it, Tracy told PLANADVISER. Investors became much more conservative after 2008. According to Deloitte’s research, 12% of people in the mass affluent segment describe themselves as very conservative.

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There is a need for lower-cost solutions, Tracy said, and perhaps pricing needs to better reflect more fairly the value of the services consumers receive. It makes sense for people to gravitate more toward a flat fee or a percentage of the income generated, since investors feel that is a fairer way to price advice. Advisers who want to address cost might want to tweak their pricing, Tracy suggested, “maybe even modify your platform so that you can price in a manner and at a point where those folks feel the cost is worth it,” Tracy said. “It’s not easy. Re-engineering a platform is complicated, but necessary.”

A big bone of contention and frequently quoted reason people have departed the ranks is trust. “They simply don’t trust the adviser anymore,” Tracy said. Some consumers felt the adviser was putting his own interests ahead of clients. “Larger wealth managers with a sell side have to be sensitive that the proprietary product has a higher margin than a third-party product,” he noted.

Countering cost issues can be tricky, but providing greater transparency is good practice. Clients want to be assured a manager is not just pushing proprietary products, Tracy said. Transparency around making investment decisions and product benchmarking are two ways to build client trust.

Another issue is the perception that exists among clients that advisers were not giving advice and guidance that is tailored to their specific situation. Retirement is, of course, a top priority, but it is getting pushed to the side for mass affluent clients who have other financial priorities that are just as pressing.

“It’s hard for someone to think about retiring when they are focused on college education, or building up an emergency fund or paying for the health care of an aging parent,” Tracy pointed out. In order to respond to this criticism, advisers have to shift to conversations that directly address a client’s more current liabilities. They might bucket the portfolio, establishing a set of portfolios with different goals and different capacities. “They have to fundamentally change the nature of finance wealth planning,” he said.

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Tracy said he thinks advisers will have to accept a lower margin, and build the tools and processes to make giving advice more efficient. “You want to be able to able to preload as much information as possible, and then you want to efficiently model liability events, pull in information such as what college is going to cost you, or health care. You want to be able to action that plan into a set of portfolios,” he said. With those goals and data in mind, the adviser needs to be able to keep track to see if the goals are being met. “The whole nature of that is quite substantial. But it’s absolutely necessary to reach those disenfranchised clients.”

Do-it-yourself investors perform quite badly. “They do not even come close to indexing the market,” Tracy noted. “And they’re aware [of that], but they’re giving up investment performance for the trust piece or short-term focus or the perceived unfairness of pricing.” Advisers who can sync with their needs have a significant opportunity to reach a large underserved segment of the marketplace.

He recommends taking the best tenets of a successful model, such as the multi-family office. “Scale the services and create a platform,” he suggested. The four things that a model would have are: no proprietary product; objective, conflict-free advice; flat-fee pricing; and multi-generational planning—in other words, instead of dealing simply with the principal decision-maker, help to educate the next generation.

On the lower end of the scale, Tracy said, this could mean conducting webinars. Hundreds of people can attend, and the cost to conduct them is one person’s time for an hour. Another practice Tracy knows involves a deck of playing cards. Each card has a financial literacy question and answer, like the game “Jeopardy.”

Always return to the root causes of why people are disengaged, Tracy said. Address trust, make a connection on the tailored advice, and use goal-based investing. Those three things will help wealth mangers to penetrate a segment that has not recognized the value of financial advice.