Advisors: Build a Business not a Practice

Advisors: Build a Business not a Practice

by Richard Owen, Regional Director for Business Development at Croesus

The End of Practice

The investment industry is in constant evolution and advisors are being forced to rapidly adapt. Declining revenues, increased regulatory costs and a growing digitally-oriented client base have created a tipping point.

In many ways, advisors are now facing the reality of “Peak Wealth”. As with peak oil, the traditional wealth management business is showing signs of shifting into a secular stagnation, which could even lead to decline if the industry does not respond in time. Experts cite four main trends underlying the shift.

Digitization of the Wealth Management Process

The wealth management industry has been innovating to enhance customer experiences through more effective use of technology in many of the same ways that Uber has disrupted the traditional taxi industry.

Many regard the rapid growth of the digital advice/robo advisors as harbingers of that process. Predictions abound of clients abandoning traditional advisors for platforms that offer ETFs, automated rebalancing and machine learning.

That said there are signs the threat may prove to be overblown. While some robo offerings in the US market have reached scale – Vanguard, Schwab and Betterment come to mind – most are struggling to break even, and the flood of clients from traditional advisors does not seemed to have happened – yet.

Analog vs Digital

Nevertheless consumers are increasingly demanding more convenient, integrated and sophisticated technology solutions. Mobile access to portfolios and transaction data, integrated financial planning, paperless applications and client-centric account management 24/7 are soon going to be “musts”.

Advisors that base their value propositions on pushing information and communications to clients (annual meeting reports, commentaries etc…) through analog (paper-based reporting) rather than digital technology won’t last long.

Fee Pressures

We believe that the biggest threat to the traditional advisor model isn’t robo-offerings or digital transformation– it is downward pressure on advisory fees. However robo-advisors are driving the process; by creating a “wealth management Uber” they are pushing down revenues throughout the sector.

Robo-advisors generally charge 15-25 basis points per year for each $100 worth of assets under management for asset allocation services and an additional 15-25 basis points for security selection. That amounts to a total money management fee of 40-50 basis points – which is de facto the current market price of basic money management.

That means advisors and money managers who traditionally charged between 100 and 200 basis points per year for asset allocation and security selection services will need to either reduce their fees, or demonstrate to customers the value they delivered for the additional cost.

An Increasing Regulatory Burden

Recent developments on regulatory front– including implementation of CRM2 guidelines in Canada, DoL in the US and RDR in the UK – are set to increase the cost of running a wealth management business in a big way.

Building and implementing the systems and reporting structures required to comply with the current round of changes, – within the window defined by the regulators, – will materially impact bottom lines.

While some of these costs will be passed on to consumers, firms with older, legacy systems that require significant and ongoing upgrades and development, will be at a significant disadvantage.

Taking on the Challenge

Many advisors are responding by creating new advice models that focus on building businesses, instead of practices. These new models are increasingly digital, flexible and generate revenues from services and functions that are not dependent on money management alone – planning services will be key.

Advisors also need to effectively rethink their business to respond these new trends. That means figuring out which clients are profitable, which segments and products are growing, what their revenue streams are and what predictive analytics can be used to better manage long-term revenue growth.

After all – that is what managing a business is all about.


Experience it yourself, see the difference