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

July 23, 2012

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)]

Today we will bring this three part series to a close, but we will revisit often the idea of the changing nature of the wealth management business and discuss how firms and advisors must adapt to compete in this new era.

Wealth Management 3.0 (2008-?)

If the forces of change burgeoning at the beginning of this current decade stuck out their collective feet and tripped the industry and sent it reeling, then the global financial crisis begun in 2008 and its resulting round of bank failures, mega-mergers and new regulations knelt down behind the backs of the industry’s knees and sent it tumbling noisily and unwillingly into the latest era, Wealth Management 3.0.

More banks failed in the last four years than the prior 15 years combined. Financial giants like Bear Sterns and Washington Mutual went out of business, once swaggering players like Merrill Lynch and Countrywide Mortgage ran to the protective arms of a lowly commercial bank, and Masters of the Universe like Goldman Sachs and Morgan Stanley actually sought bank charters.

Brokerage firms all but hired costumed characters to stand outside suburban strip malls and dance and twirl signs that said “Giant Clearance Sale! Stocks as much as 80% off!”. It was, as Bill Murray’s character Peter Venkman said in Ghostbusters, a “disaster of biblical proportions”.

“Human sacrifice, dogs and cats living together… mass hysteria!”

–Dr. Peter Venkman, Ghostbusters

Frogs in boiling water

Even firms that weren’t dying from mortal wounds– self-inflicted, or otherwise– began to realize that they were like the proverbial frogs in water that was approaching the boiling point. The persistent bull market and deregulation of the previous era had masked the steadily rising water temperature.

Former Citigroup Chairman Chuck Prince famously remarked in 2007 that “..as long as the music is playing you’ve to get up and dance”. But even MC Bernanke’s extended dance mix had to spin down sometime. And when it did, even firms without severe asset quality or liquidity issues came to realize that they had a problem in their cost structure.

The troubled airline industry provides an apt, if unfortunate, analogy. All clients deserve a safe, courteous and on-time flight, but wealth management groups were designed to deliver an experience above and beyond the minimum– they are the first class cabin of the firm. But many firms began to realize that in their blind quest for growth that their gate agents had been allowing some holders of deep-discount coach tickets to take up first class seats and drink all the champagne.

In other words, there was not always the discipline to ensure an appropriate matching of marginal expenses to marginal revenue. Worse, the industry conditioned clients to expect the first class experience for blue-light special pricing. The talent and technology needed to provide comprehensive wealth management services are not cheap; and providing them economically is a challenge (though not impossible).

But the crude cost cutting axes swung in the prior era won’t work today. Managers instead must skillfully wield a discriminating scalpel to trim away unjustified and unproductive expenses, while simultaneously investing in the things that matter to the clients. (Hint: It won’t be mahogany, marble and fine china for the clients of the future.) Firms that cannot do that will likely attract a new management team that can. (See Is Bank Merger Mania Imminent?)


Just as deregulation was a driving force in Wealth Management 2.0, reregulation will be a driving force in Wealth Management 3.0. This past Saturday, July 21, marked the two year anniversary of President Obama’s signing into law the Dodd-Frank Wall Street Reform and Consumer Protection Act.

So far Washington’s paper multiplication machinery has managed to turn the 848 pages of the bill into 8,843 pages of rules– and they are only 30% done with writing the rules and regulations! If this pace continues, we will have nearly 30,000 pages of new rules for firms to wade through by the time they’re done– likely sometime early in 2017.

When I was a young boy I was always intrigued with the ad in the back of my Archie comics for the machine that turned ordinary pieces of paper into $5, $10, even $20 bills! They have that machine’s evil twin in Washington. It turns massive stacks of money into prodigious piles of dense prose.

Many of the new rules will, at best, fight the last war in 20/80 hindsight; and it is very likely that the next crisis will not be anticipated therein, let alone thwarted. Nonetheless, today’s firms and and advisors are already spending time, money and cultural energy ensuring compliance with all of the new rules and regulations.

Firms and advisors also need to devise new ways to generate revenue, as some provisions severely curtail some of the most profitable business practices of the past. No wonder so many firms are looking to new wealth management initiatives to offset these challenges. (See Banker Jones and the Last Crusade: Is Wealth Management the New Holy Grail?)

For extensive reporting and resources on Dodd-Frank, excellent information is available from the law firm DavisPolk, and this infographic is a good primer on the current status.

The next generations

As formidable as are the heaving changes wrought from within the industry, those generational and technological changes from the outside may be even more profound and devastating if firms and advisors do not embrace the winds of change rustling through their own Rolodexes.

Advisors: Generation Y, the Millennials (born roughly from 1982-2000), are joining your workforce and your client base, and they will not even consider your firm’s services if you aren’t relevant to them. As my friend David Stillman likes to say:

“This is the most connected and most collaborative generation ever… They not only accept diversity, the expect it… Millennials will experience as many as 10 career changes in there lifetimes. That’s career changes, not job changes.”

— David Stillman, co-author, When Generations Collide

They have all but ditched email because it’s too slow. They communicate not only with their peers, but with other modern firms, via text messages and directly through Facebook. Your paternal smile and shake of the head as you explain that those things really aren’t your style will only confirm their suspicions of your paleontology.

They “crowdsource” recommendations for everything from restaurants to car purchases and they trust the wisdom of the crowd far more than any marketing message you can possibly craft. If other people they trust aren’t talking about you, they will will look at you like someone crashing their favorite hipster music festival in sandals and black socks (which is to say, you actually have a shot if you are cool enough to pull it off).

If they are unhappy with their experience with you, it can hit their Twitter feed and their Facebook wall, and in the matter of minutes, you and/or your firm have some viral bad PR on your hands before you can even say “Do you want those funds wired, or do you want a check”? And no, they do not want a check, thank you.

Some firms still aren’t even present on these social networks, so they aren’t even aware of the conversations underway about their brand (good or bad). Others are present, but mistake social media as merely a soapbox to push their own one-way marketing messages.

The firms best positioned to thrive in this social era are actively participating in the conversations and using these interactions as ways to build relationships and deepen client engagement.

Key attributes of Wealth Management 3.0

  • Key characteristics: disruptive innovation is the new norm; rise of mobile, social media, big data and analytics; reregulation
  • Key firm capabilities: transparency; acting in clients’ best interests; active and relevant social media presence; clear value propositions; goals-based advice
  • Key client goals: mass luxury; seamless integration for self service and full service; social responsibility (in many forms), capital preservation; social and peer validation of advisors and strategies
  • Key advisor skills: comfort with technology; social media literacy; not being lame
  • Key advisor activities: customized client intimacy; monitoring social media for risks and opportunities; tailoring holistic advice (and reporting) to relevant goals

 Coming Up: Becoming an Advisor 3.0

In upcoming posts we will continue to explore the rapidly changing landscape and discuss the skills and activities needed to move beyond Advisor 1.0 or 2.0. To be relevant and successful in the new era, you must be an Advisor 3.0.

© JP Nicols – 2012


  1. […] Next: Wealth Management 3.0 (2008-?) Where do we go from here? Share this:Share on TumblrDigg Pin ItEmailPrintLike this:LikeBe the first to like […]

  2. As I see it, when you walk into a bank, you can get three different types of service:
    1) If you visit a CFP, RIA, or Trust Officer, you get advice that has a duty of prudent wealth management advice
    2) If you visit the registered reps which may include the platform staff, you get their advice which only has a duty of “suitability
    3) If you visit anyone else in the same bank including the president, the duty would be “caveat emptor”
    Is this correct?

    So how can the public know who to trust when they visit a bank unless the person has a neon sign that tells the customer up front the type of duty to serve to expect from them?

    • Thank you for contributing to the conversation. The tangled web of financial regulations and regulators that govern various aspects of financial services are outside the scope of what I usually write about here. I am not an attorney or compliance expert, but I will be happy to briefly share my thoughts and experiences.

      In general, you are correct. A broker/dealer is under an obligation to make recommendations that meet “suitability” standards, while a registered “investment adviser” and anyone acting as a “trustee” is held to the higher “fiduciary” standard. There is considerable conversation going on these days about raising the standard for brokers to that of a fiduciary. Bank employees who do not fit either definition are typically prohibited from giving “investment advice”, at least in the traditional sense, regarding “securities”.

      The legal requirements provide some comfort of standards for professional conduct and a manner of recourse in the case of misconduct. Another layer of comfort can be gained by working with professionals who have earned professional designations with ethical standards of their own, such as CFP®, CFA or ChFC® designees.

      Unfortunately, there is no guarantee. I have known highly qualified and ethical advisors (using the term generically here) of all stripes, and I know of cases of incompetence and fraud in nearly every job description. Bernie Madoff was a registered adviser who was bound by the fiduciary standard.

      Of course, that goes outside of the financial industry too. Think of the doctors, lawyers, clergy, and others who have besmirched their own professions through the years.

      Bottom line for me is checking records and references for advisors, and as you say—buyer beware. I encourage all clients of advisors to be as knowledgeable and as engaged as possible in their finances. Ask good questions and don’t be afraid to move your money if you don’t trust the answers.

      One of the key characteristics of Wealth Management 3.0 is that today’s clients are better informed, more engaged, and have access to more information and opinions than any prior generation. Advisors can no longer be successful simply by collecting tolls as a gatekeeper of asymmetrical information.

      I think that’s a great thing.

      • JP,
        Thank you for a very helpful reply. But how does the average person in America know what the standard of care is when they enter a bank? Banks communicate that they have products that are good for you. They may have advertisements for the “trust” department that set an image of care. When the public sees such an ad, they probably assume that the bank is looking out for them too; yet, the employees that the general public interfaces with (tellers, new accounts, manager) have no standards and may be in a sales contest to sell a product. Because those people have no suitability standard, I am not aware that they need to disclose that they may be compensated for their “advice”. And that any credit product recommendations have no standards. Have you done or do you now do any training work for banks that may address these issues?

        Or is the average person in America just left out in the cold to fend for themselves?

  3. […] Next: Wealth Management 3.0 (2008-?) Where do we go from here? Share this:TwitterFacebookLike this:LikeBe the first to like […]

  4. […] Wealth Management 3.0 is Here, Are You Ready? […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: