Journal of Financial Planning: February 2022
Chris Heye, Ph.D., is founder and CEO of Whealthcare Planning and Whealthcare Solutions, and an FPA member.
“Prediction is difficult,” goes an old Danish proverb, “especially when dealing with the future.”
Having worked in the economic forecasting business early in my career, I have a little experience making predictions. It’s safe to say that some forecasts were better than others. While you can debate the value and accuracy of any single prediction, the process of generating a forecast itself, done carefully, has merit. It forces you to dig deep into the relevant data, make your assumptions explicit, and work hard to remove any pre-existing biases about what you want to happen. Making predictions also involves searching the past for trends that provide clues about how events could unfold in the future.
Applying a historical lens to predictions about the future of wealth management, it is difficult to see anything but major changes down the road. Let’s take a look at four factors that have historically propelled industrial growth, transformation, and decline, and then see how each might impact the future of the wealth management sector.
Four Factors of Industrial Growth
Demography. Population shifts invariably play an important role in determining the evolution and character of many industries, largely via their influence on consumer demands and preferences. The growth of baby boomers into a significant buying force beginning in the 1960s influenced a broad swath of industries from automobiles to healthcare to consumer products and entertainment. Members of the “me” generation sought freedom (more cars), personal self-improvement (better healthcare and “alternative” therapies), and individual expression (cooler clothing and music). Baby boomers’ purchasing power persists to this day and is already impacting the wealth management industry.
Technology. Technological changes are always lurking in the background and can transform industries almost overnight. The most obvious recent example is the internet, which rapidly and severely disrupted entertainment, travel, publishing, paper, retail trade, and telecommunications businesses, among others. Since 2000, employment in the telecommunications sector has declined by 54 percent, by 75 percent in the newspaper industry, 70 percent among bookstores and news dealers, 41 percent in the paper industry, 41 percent in photographic services, and by 65 percent in travel agencies.1 There are of course many examples of inventions that transformed or created whole new industries, including electricity, the internal combustion engine, GPS, gene mapping, and semiconductors. Technological change is neither linear nor immutable, but it is almost always at least part of the reason why industrial sectors grow and decline.
Government regulation. Regulation of economic activity is as old as the country itself and has frequently acted as a catalyst for, or blocker of, industrial development. Perhaps no industry has been as closely scrutinized, especially since the Great Depression, as the financial services sector. The Glass-Steagall Act of 1933, the Investment Company Act of 1940, the Depository Institutions Deregulation and Monetary Control Act in 1980, and the Gramm-Leach-Bliley Act of 1999 are but a few examples. Over the years, changes in the federal and state regulatory environments have had significant impacts on the scope and nature of financial products sold and advice services offered, and thereby the fortunes of many companies.
Triggering events. Sometimes industrial transformations are initiated by highly impactful and unanticipated “exogenous” events. Some triggering events have an “act of God” character, while others are more political in nature. COVID-19 will undoubtedly be seen as a transformational event. In the past, World War II dramatically accelerated the development of the commercial aircraft, nuclear power, radar, and computer industries, among others. The Arab oil embargo of 1973 and the Iranian revolution in 1979, both of which led to major energy supply shortages, were triggering events that reshaped the oil and gas, steel, and automobile industries.
In short, these four factors, separately or in combination, have consistently disrupted industries and created new classes of winners—and inevitably, a large number of losers. Winners can be new firms that seemingly come out of nowhere (e.g., Microsoft, Tesla, or Google), but also existing firms that recognize the need to make major changes and adapt to the new demographic, technological, or regulatory realties (e.g., Apple, Disney, or IBM). The winners are most often characterized by an ability to successfully employ (emerging) technologies to meet the (changing) demands of their customers. They exploit opportunities afforded by triggering events, and leverage government regulations to their advantage.
The losers also tend to share common features: a failure to recognize the shifting nature of consumer preferences, a belief that what has worked in the past will continue to work in the future, a sluggish adoption of new technologies, and a propensity to blame others—often government actors—for their misfortunes.
So what does all of this suggest for the future of the wealth management industry?
Some financial services companies are starting to take on the look of historical losers. Many continue to operate in the same way that they have in the past by focusing almost exclusively on managing investment portfolio risks, while being slow to adopt new technologies and blaming government for their lack of success.
Most importantly, many firms have not yet fully acknowledged how longer lifespans and an aging population are affecting the demands, preferences, and concerns of their clients. Investment portfolio volatility is only one class of financial risk confronting older adults—and arguably not even the most consequential. Health- and longevity-related risks now constitute a major threat to the financial security of adults over the age of 50. Investor surveys demonstrate that most adults are more worried about high healthcare costs or outliving their savings than they are about a stock market decline or inflation.
A recent survey conducted by the Spectrem Group is especially noteworthy.2 Spectrem asked investors what services they expected to receive from their financial adviser versus what services they actually receive. There were striking gaps, including in wealth transfer advice (96 percent expected to receive versus only 24 percent who actually receive), estate planning assistance (93 percent versus 22 percent), trust services (94 percent versus 10 percent), and long-term care insurance advice (83 percent versus 14 percent). Not surprisingly, the largest differences were in services related to health, longevity, and wealth transfer planning, precisely those areas that you would expect given an aging client base.
This mismatch between what clients want and what most advisers are providing poses a major threat to wealth managers. The inability to meet the changing demands of consumers historically has been a leading cause of the decline of companies. Digital Equipment Corporation (DEC) was once a thriving company, producing “mini-computers” that could often compete with larger and more expensive mainframe computers. In the 1980s, it was the second largest computer manufacturer in the United States. But DEC failed to meet the growing demand for computers that used even smaller microchips—PCs. It was acquired by Compaq in 1998, which was subsequently purchased by Hewlett Packard. The ability to successfully meet the needs of the older adults who control the vast majority of wealth in the United States will undoubtedly be a characteristic of the winners in the wealth management sector.
Slow technological adoption also poses a threat to wealth management firms. Not only has the adoption of client-facing tools like CRM systems and financial planning applications often been slow, few companies are taking full advantage of new investment portfolio management technologies, including automatic rebalancing and tax-loss harvesting algorithms, model portfolios, direct indexing, and fractional trading. These innovations offer financial advisers cheaper, simpler, and more personalized investment management. Most importantly, they free up adviser time to focus on their clients’ health- and longevity-related financial risks, which tend to be highly personal and less easily addressed by current technologies. In fact, most firms that outsource portfolio management are doing so precisely so that advisers can spend more time providing personalized financial planning and risk mitigation services.
Given the partisanship that characterizes much of American politics, it is difficult to predict the course of government regulation. But one area that is likely to receive increased scrutiny, regardless of which party is in power, is older adult financial protection. The recently passed Senior Safe Act was sponsored by Republican Senator Lisa Murkowski and had 16 Democratic and 12 Republican cosponsors. In the House, it was sponsored by then-Representative and moderate Kyrsten Sinema from Arizona. Since older adults are one of the most reliable voting blocks, it’s likely that politicians on both sides of the aisle will try to score points by taking measures to protect them.
Even if regulatory initiatives at the federal level get sidetracked, the states are already stepping in. Massachusetts recently enacted its own fiduciary standard for financial advisers, and other states are likely to follow. It is not hard to connect the dots from being a fiduciary to protecting older adults from high healthcare costs, financial exploitation, and diminished decision-making capacity. So, greater regulatory oversight of how advisers are interacting with older adults is almost certainly in the cards.
There is little doubt that COVID-19 will be an “act of God” event that shapes the fortunes of many industries. For wealth managers, one silver lining is that the pandemic has increased the demand for financial advice. About 44 percent of people who do not currently employ a financial adviser now say that COVID-19 has made them realize the benefits of working with one.3 On the flip side, COVID-19 has hit the older adult population especially hard. Adults over 65 account for roughly 75 percent of all COVID-19 deaths in the United States, with a startling one in every 100 people over 65 having died of the disease, as of late December 2021.4 Most experts expect that COVID-19, in one variant or another, will be with us for a long time. Its impact on client health-related financial fears is therefore likely to persist for the foreseeable future.
The Future of Wealth Management
The wealth management sector is unlikely to go the way of the newspaper or textiles industry. There is simply too much money that needs managing and too many people who want help managing it. Financial advice is a personalized service that is delivered within the context of complex state and federal regulatory environments. It’s not a manufactured product that you can buy at Walmart. These characteristics provide substantial protection from international competition. To the extent that foreign players get involved in the wealth management business, they will need to base most of their operations in the United States. So, a GM-like scenario, where products produced outside the United States displace the demand for advice professionals’ services, is unlikely. In fact, the number of financial advisers in the United States is forecast to grow by 4 percent between 2019 and 2029, about the same rate as the overall economy.5
But who will be providing financial advice in the future?
The struggles of “robo” advice firms suggest that a Tesla-like scenario, where a new player with a new technology comes in and (relatively) quickly becomes a dominant force that disrupts the entire industry, is unlikely. Robo platforms are starting to look more like traditional wealth management firms. Will there be more DIY financial and investment management service offerings in the future? Sure, but in and of itself, robo-advice technology does not appear to be a major industry disrupter.
A Disney- or IBM-like scenario, where an existing player changes its product and service offerings to more effectively meet new or changing consumer demand, leveraging new technologies along the way, seems more likely. Insurance companies, for example, are already providing protection products, like life and long-term care insurance, that mitigate the health-related financial risks that we know adults care about most. Moreover, while many people are skeptical about annuities, virtually everyone is looking for some kind of guaranteed income solution for their retirement years. Innovations in protection products could pave the way for insurance companies to take away large segments of the advice business from banks, wirehouses, and broker-dealers. Employment in the insurance industry has been increasing steadily of late, up 63 percent since 2010, perhaps a sign that a transformation is already underway.6
Asset managers also appear to be well-placed. They have products, and there is little preventing them from getting involved in the business of selling guaranteed income solutions. They also have assets, many of them in retirement accounts controlled by the same people who are most concerned about health- and longevity-related financial risks. The ability to include safe, affordable, and effective guaranteed income solutions as an integral part of an overall retirement plan package would no doubt be a key differentiator.
Is there a chance that a non-financial company successfully makes major inroads, the way Apple did with the entertainment and music businesses? Such a scenario does seem plausible. Companies like Apple and Google certainly have the financial resources, but it’s not a slam dunk. Most tech companies do not have the service model required to meet investor demands for in-person, professionally educated and trained advice. The leap from a relatively unregulated tech sector to a highly regulated financial services business may be too much. If an outside player does decide to take the plunge, it would likely be a firm with a well-developed service model and a willingness to adapt even further. Amazon, with its relentless focus on the consumer, might be best positioned.
Mark Twain famously said, “History doesn’t repeat itself, but it often rhymes.” I expect major changes ahead for the wealth management industry. COVID-19 will be an important part of that evolution, accelerating the shift in consumer demand for better protection from health- and longevity-related financial risks. The regulators will be watching, and there is plenty of financial incentive for further technological innovation. So, jump in your Tesla, plug in your iPhone, and buckle up.
Endnotes
- Bureau of Labor Statistics Beta Labs. BLS Data Finder 1.1. U.S. Department of Labor. https://beta.bls.gov/dataQuery/find?st=0&r=20&fq=survey:[ce]&more=0.
- Spectrem Group. 2021, July 7. “Expectations Not Always Predictable.” https://spectrem.com/Content/expectations-not-always-expected.aspx.
- Goforth, Alan. 2021, March 10. “Infographic: Americans’ Evolving Financial Priorities Create Opportunities for Financial Advisors.” BenefitsPRO. www.benefitspro.com/2021/03/10/infographic-americans-financial-priorities-create-opportunities-for-financial-advisors/?slreturn=20210622100615.
- Bosman, Julie, Amy Harmon, and Albert Sun. 2021, December 13. “As U.S. Nears 800,000 Virus Deaths, 1 of Every 100 Older Americans Has Perished.” New York Times. www.nytimes.com/2021/12/13/us/covid-deaths-elderly-americans.html.
- Bureau of Labor Statistics. “Occupational Outlook Handbook: Personal Financial Advisors.” U.S. Department of Labor. www.bls.gov/ooh/business-and-financial/personal-financial-advisors.htm.
- Bureau of Labor Statistics Beta Labs. BLS Data Finder 1.1. U.S. Department of Labor. https://beta.bls.gov/dataQuery/find?st=0&r=20&fq=survey:[ce]&more=0.