Wealth Management 3.0 Is Here– Are You Ready? (Part 2 of 3)

July 17, 2012

Last week in Wealth Management 1.0, we explored the origins of the wealth management business in America. As in that post, I will again disclaim any notion of deep academic research and thorough economic analysis in favor of getting to the point.

The most important formula in banking used to be the 3-6-3 rule. Bankers brought in deposits by paying 3%, they lent that money back out at 6%, and they were out on the golf course by 3PM. Economic conditions were generally supportive of this plan. Periods of high unemployment had the good manners not to be associated with such distasteful concepts as high inflation. But they joined the same commune in the 60’s and 70’s, and Keynesian economists shook their heads and clucked their tongues as disapprovingly as if a Jefferson Airplane concert had broken out down at the local VFW hall.

Things got so bad that we had to invent a new formula to describe the economic mess– the misery index, which combined the unemployment and inflation rates. It peaked in 1980 at 20.76 (7.18% unemployment + 13.58% inflation), as did the U.S. Prime Rate, at 21.5%. Bankers, particularly those of the S&L variety, found themselves stuck with paying double digit deposit rates while they still had 4% 30-year mortgages on the books. Presumably, golf handicaps spiked as well.

Wealth Management 2.0 (1982-2008)

A 1982 reduction of income tax rates, combined with various rounds of deregulation for financial firms and markets, ushered in the next era of wealth management; amidst a booming stock market and falling interest rates. Most experts agree that the launch of MTV on 8/1/81 did not have an appreciable impact on  financial flows, even as it was implicated in the death of the radio star.

Demographics also came in to play as Baby Boomers moved into the management ranks and characteristically began to make sweeping changes to the institutions they encounter– financial institutions, in this case. Formalized bank training programs were cut in favor of higher profit margins, and branch banking became more focused on the mainstream consumer. Branch automation– everything from ATMs to electronic ledgers and loan accounting systems meant that you could now sell home equity lines to suburbanites without having to spend 10 years working your way up from Assistant Cashier to Associate Loan Teller.

This rapidly grew the profitability of consumer banking, but it also meant that the wealthy business owner who was used to his three martini lunch with the local bank VP down at the club was now seeing his 23 year old ‘Branch Sales Manager’ carrying his tuna melt into the branch break room after the owner renewed his term note.

The rise of comprehensive wealth management

Those local businesses were important to the commercial side of the bank, so teams of experienced bankers were assembled to take care of those business owners and other VIPs, often as a loss leader. ‘Private banking’ departments for the affluent became widespread in U.S. commercial banks, though they were not typically built for purposes of secrecy and private investment arrangements like their Swiss inspiration. A typical day in a U.S. firms was much more likely to involve converting a Kroger executive’s bonus into a Swiss chalet style vacation home, rather than converting Krugerrands into Swiss Francs.

Before long, private banking departments were being merged with trust departments and investment operations (many of which also managed the investment of the banks’ own assets), and even brokerage and insurance subsidiaries. Bank trust departments whose most sophisticated investment strategies to date were a couple of variations of domestic stocks, bonds and cash now had to confront the rise and proliferation of mutual funds. Financial innovation continued on throughout the era to include a panoply of packaged and structured products– hedge funds, funds of funds, separately managed accounts, unified management accounts, etc.

The more innovative firms began separating ‘manufacturing’ of financial products from ‘distribution’. This meant a tremendous expansion of choice and capabilities; as if the local diner with a blue plate special and three standard entrees on the menu could now suddenly serve you virtually any meal, prepared by your favorite celebrity chef from the other side of the country. This was great news for the clients, but the advisor now needed a lot more than a green ticket pad and a pen behind her ear to be successful.

Exogenous factors

Consolidation was a driving force in the industry throughout the era– banks, brokerage firms, insurance companies, investment advisors and financial planners established competing operations and bought one another in every combination imaginable. As in other industries, the strong bought the weak and the big got bigger, but there were lots of strategic drivers as well. Firms sought capabilities they didn’t have to retain and attract clients.

Other factors exogenous to the industry also begin to chip away at traditional ways of doing business. Large firms established modes of self-service during the era such as ATMs and online banking and brokerage, usually to reduce operating costs. Now, Generation X , whether through their stereotypical skepticism of large institutions or by necessity, embraced the control and flexibility of doing things themselves. Technology pioneers such as Quicken, Fidelity, Schwab, Ameritrade and others began to build new business models. Suddenly many traditional firms were bloated with too many people who couldn’t do enough of the things their clients were actually willing to pay for.

Some of the best advisors established their own Registered Investment Advisor (RIA) firms to cater to niches and the industry simultaneously became even more fragmented even as it continued to consolidate.

Key attributes of Wealth Management 2.0

  • Key characteristics: Consolidation of services into ‘financial supermarkets’, separation of manufacturing from distribution, rise of self-service
  • Key firm capabilities: Distributing and coordinating a broad array of products, eventually from multiple partners
  • Key client goals: Accumulation of wealth, rise of investment niches and specialists, philanthropy for the masses
  • Key advisor skills: Holistic financial planning, coordination of multiple specialists and strategies, sales  and ‘cross-selling’ skills
  • Key advisor activities: New client acquisition and expansion of existing relationships from transactions to fee-based business, dealing with the pressure of sales and cross-sell goals

Up Next: Wealth Management 3.0 (2008-?) Where do we go from here?


  1. […] to improve financial services « Wow, I’m Actually Leaving My Day Job! Wealth Management 3.0 Is Here– Are You Ready? (Part 2 of 3) » Wealth Management 3.0 Is Here– Are You Ready? (Part 1 of 3) July 12, […]

  2. […] Over the past couple of posts we took a fairly irreverent whirlwind tour through the last 150+ years of those financial services oriented specifically towards helping successful families grow, protect and share their wealth– the very essence of wealth management. [See Wealth Management 1.0 (1853-1982) and Wealth Management 2.0 (1982-2008)] […]

  3. […] Up next: Part 2– Wealth Management 2.0 (1982-2008) […]

  4. […] Over the past couple of posts we took a fairly irreverent whirlwind tour through the last 150+ years of those financial services oriented specifically towards helping successful families grow, protect and share their wealth– the very essence of wealth management. [See Wealth Management 1.0 (1853-1982) and Wealth Management 2.0 (1982-2008)] […]

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