Podcast
Advice Architects Ep. 6 with Will Trout, Javelin Strategy & Research
Grand Strategy, New Advisor Capabilities and the Competition for Clients
January 6, 2023
Grand Strategy, New Advisor Capabilities and the Competition for Clients
The competitive landscape for wealth management and advice providers has seen tremendous changes in recent years. With the rise of robo-advisors and new competitor models, traditional advisors face a number of challenges when it comes to attracting and retaining clients. To stay ahead, advisors must redefine their strategies – both in terms of products offered, service delivery methods, advisor capabilities and market positioning.
In this episode of Advice Architects, Day Wachell takes a deeper dive with wealthtech analyst Will Trout of Javelin Strategy and Research into how advisors can broaden their advice offering to help them stand out among the competition while providing more value to clients. We discuss what roles new technology solutions can play in making those plans a reality – from high levels of personalization through automated data gathering processes, as well as the specific capabilities wealth managers need to embrace at each stage of client engagement journey.
Listen to the full episode here or on Apple or Spotify.
For more information about Will Trout, you can find him on LinkedIn, or check him out on Twitter.
For more information on Responsive AI’s solutions for advice providers, contact us.
Day:
Okay. Welcome to Advice Architects, episode 6, titled “Grand Strategy, New Advisor Capabilities and the Competition for Clients.” This is Day from Responsive, and today we are speaking with William Trout, director of the Wealth Management Practice at Javelin Strategy and Research. Will has been widely quoted for his sharp and salient perspectives on the wealth tech market in publications such as Bloomberg, CNBC, Financial Times, New York Times and the Wall Street Journal. Will, always a treat to catch up with you, welcome to Advice Architects.
Will:
Hey Day, great to see you again. How was your pandemic?
Day:
It was a growing and learning and churning experience, but today I feel very energized, calm but energized.
Will:
Same here. Well it's been a couple of years, and I know we've spoken in the past, and I'm super excited to connect with you and share some perspectives on where the industry is going.
Day:
Excellent, welcome. So at the top of the show we kind of do this pros questionnaire, we call it the Advice Architects questionnaire, just to learn a little bit about you, it's fun for the listeners. So first question, what's your job title, and what do you actually do?
Will:
The second part of that question is definitely the tough one. So my title is simply as you put it, director, wealth management, director of our wealth management practice at Javelin Strategy and Research. Actually we have two practices, or I oversee two practices with teams spread across the US and Canada. One is focused on technology adoption preferences, behaviors of the retail investor, so both advised and self-directed investors. And the other is focused on advisor technology adoption. So sort of the LPLs of the world, the Bank of Americas of the world, all channels and the Canadian market as well.
Just to continue a bit more, I mean what we do is, or what I do is produce research. And this research is based on our robust survey capability, again both investors and advisors, and take that data and translate that into insights. So these insights center on the intersection of strategy and technology, and how large vendors and financial institutions can leverage technology to, ultimately to leapfrog their competitors. And happy to drill down on that as we go.
Day:
Awesome. So you have the answers to the questions, and you have the questions that we should be asking?
Will:
I think that second part is the key, Day.
Day:
Yeah.
Will:
I think I'm paid to, at the end of the day to identify the burning topics surrounding our industry. And so podcasts like this are a great forum for diving into some of them.
Day:
And how long have you been in this trade for? How long have you been doing that?
Will:
Oh gosh, that's an embarrassing question. So actually as an analyst, about 10 years. Before that I worked for a large global financial institution, BBVA, which was in the US for about 10 years and recently sold its footprint to PNC, but is quite active in Latin America and Spain in a variety of strategy and operational roles.
So I really, not a technologist by training, but have worked with all facets of the delivery chain, in terms of from product manufacturing to distribution down to the sort of mass market retail investor. And in a variety of contexts, bank, we owned a few RIAs. So I think I have a good purchase or viewpoint on the industry, the various channels, and the challenges facing wealth managers today.
Day:
It's good to have that kind of multi-channel view and think the meta game of wealth management, rather just sort locked into one.
Will:
It is. And as you know, I mean every market is different. I mean we've spoken about Canada, or I've done a lot of work there. I was a couple years over in the UK at my former shop, and have worked with clients in Japan quite extensively. So I think everyone is behind to one degree or another, or rather racing to get somewhere at various stages of evolution. And having sort of a perspective on the different regulatory environments and challenges facing the industry, which are universal but also quite distinct by market and by jurisdiction, I think is really helpful. So you don't get into your sort of silo where you're just talking about RegBI on and on, just to pick an example. You're able to compare and contrast with what is happening in other parts of the globe.
Day:
Awesome. So when were you happiest in FinTech and wealth tech? Do you have a great moment?
Will:
So, you'll laugh at this Day, but when we first met or shortly before we first met, I was kind of cutting my teeth as an analyst. So this was sort of 2013, 2014. And this is when digital advice or robo advice was sort of gaining steam, and I kind of lucked into it. I mean I sort of vacillated between being an enthusiast, true believer, how wow, this is the power of automation, to having a more sanguine perspective, which I guess is fortunate because that's kind of where we've ended up. I mean I don't want to preempt our conversation, but probably you would agree that sort of the needle has shifted from "robo advice" to sort of a more hybrid approach where it positions the human advisor at the center of the client experience, and digital tools serve as enablers.
But just getting started in that business in the US you had a lot of the direct to consumer platforms or B2C, I mean Wealthfront, which is still around and a bunch of others, many of whom aren't, were really kind of waking up the industry. And waking it up, not just in terms of automation or portfolio management, I mean that's boring. But things like turnaround risk profiling and paperless onboarding, which for the time were really radical and even today Day, 10 years later, remain fairly unresolved. So that epic, 2013, '14, '15, were really exciting times for me.
Day:
The beginning of the change. So why do you care about WealthTech?
Will:
That is a great question and there is no pat answer. I think from a sort of narrow perspective, FinTech... So I've been in the industry since the late 1990s. You had a lot of innovation in banking and payments, and really until the great financial crisis of 2008, '09, '10, WealthTech really lagged. I mean it was just boring.
Everyone thought, well okay, you have an advisor. And except for self-directed brokerage, which was big since the 90s or even the 80s, really there wasn't much to talk about in terms of tools. And then we had this rapid evolution or revolution in terms of technology and adoption, and a lot of these digital tools, or WealthTech as you put it, really woke up the industry and democratized what had been a very white glove trust bank type of industry. Sort of the old trust company that used to manage investments was at center stage of the industry. Now, what is it 10, 15% of market share are very much to the sidelines.
So wealth management might have a connotation of wealth, but really it's about investing, planning, making accessible the realization of not just financial goals Day, but heartfelt personal goals. Putting a child through college, helping a special needs grandchild, whatever it is, making those real. And you don't have to be a millionaire to be able to do that anymore, quite the contrary.
Day:
Good answer. So when we first started talking, Responsive was a robo advisor, and the world has obviously turned since then for the world and for Responsive. The hype on WealthTech has maybe crested, but the competition and innovation demands for traditional advice businesses seem to have intensified. So that seems to be the outcome of that wave you were just talking about. The market's obviously going through a lot of changes today.
I'd like us to maybe approach a grand strategy of how advisors can not just survive, but thrive in this market by adopting capabilities that will win and grow the business. So to turn our minds to some of your research, the line between advised investors and their self-directed counterparts is disappearing. Can you tell us what you've seen with investors leaving their primary platform, and maybe what are some of the drivers for that, what's the consumer need?
Will:
Yeah, I think that's a really important observation or question Day. And basically advised investors, again speaking to that sort of change we noticed over the past decade of advisors and advised clients accessing technology, that trend has really accelerated. So advised investors are among the most active type of investors in terms of seeking out aggregation tools certainly, but also self-directed planning, functionality like a Money Blocks is offered by Money Guide Pro. There's another tool called Elements which you may have seen.
I think I attribute that partly to generational change and the rise of the millennials, who are by nature questioning, they don't stand on ceremony. They're unlikely to be impressed by a wood paneled office. In fact, they're probably asking why, who is paying for this wood? And they're intrepid. And I sometimes call them the YouTube generation, although in fairness you have a lot of YouTubers who are older and just want to figure things out on their own.
So we're seeing that, I think. So there's sort this cultural shift in the advisory relationship from the paternalistic approach of yesteryear to a more balanced approach. And we're seeing that even when the client stays on platform, so to speak, and engages with the advisor. Collaborative planning tools, for example, the ability to tweak assumptions in the client portal and visualize data. So I think more than ever investors and particularly those who are already getting advice, do not feel circumscribed by the sort of parameters of their relationship with the advisor, but rather want to go off platform, want to explore new tools and are ready to do that. Now do they always share what they're doing with their financial advisor? Not at all. And that's an interesting story in itself.
Day:
So it seems like there's a need, and maybe this is to do with greater familiarity with the power and use of software, why it's valuable to explore, learn things on our own to form comprehension. But then there still is the desire to have an expert in the room, one required, but that's not a single source of... Maybe it's not a single source of truth, but it's not total, right?.
Will:
Yeah. I can run with that if you want. There are a couple things going on. So I think the needle has shifted or the advice paradigm has shifted from portfolio manufacturing and maintenance Day, which I think it's implicit in your question. Sort of going from robo advice to more holistic advice or hybrid advice. That's been commoditized. In fact, arguably from the outset, robo advisors did what was already happening behind the curtains anyway, automated construction of portfolios and just put it out there for the end investor to see.
So I think the advice pendulum has moved, and so the client looks to his or her advisor for more holistic guidance. And increasingly we've done surveys, we're seeing for example, Delta between what advisors are providing and what clients want. For example, relatively few advisors provide what I would call life coaching, like being able to talk about very sensitive personal subjects; mental health, an ill parent or child, and how to plan for that.
Financial planners or financial advisors tend to be trained in the mechanics of portfolio manufacturing and maintenance, financial planning, cash management strategies, these type of things. So there's definitely a need among clients for advice on things they may not necessarily be able to discuss with their advisor either for their own reasons, or more likely the advisor just can't put their arms around, or doesn't want to, a sensitive topic.
Another issue, which I alluded to in my response to your previous question Day, is that clients don't always want to share what they're doing with their financial advisor. And so that may relate to issues of trust. I mean gee, if my advisor knows I have a million over here with Fidelity, maybe he'll pressure me, or he'll want to me try to bring it over. Or I want to have my own space to explore. I mean we have a really strong equity culture here in North America, and I think in the prelude when we talked about other markets; I mean I've worked in Japan where it's like going back into the 1980s with stock brokers pedalling stocks and funds.
But here I think clients are very engaged and very likely to explore and look for their own solutions. So I think at core, however, while there's been a shift in the generations and the mindset of the investor, a lot relates to the advisors' sort of lack of tools to serve the investor in the way they want to be served. And so that's an ongoing story, I think we'll come to that happy medium at some point, but that's a few years down the road.
Day:
So some of this intrepid qualities of the client going in a more self-directed direction is that they are taking on more risk. You identified that in some of your trends and now we're seeing some interesting things in the past week. What do you think, to put on your forecaster's hat, what do you think the reality is moving forward? When beta's hot it's hot, and then when it's not, it's not. What do you think this means given the state of the market and, you know?
Will:
Absolutely. And while I don't generally comment on the market per se as opposed to technology, I can point out several trends that I think are relevant Day. Look, by taking on more risk, really I'm referring to new emerging asset classes. So the democratization of investments and something like private capital investments or alts, I mean you've seen the growth of platforms like iCapital. That's not really new, but it is based on our survey results of investors and advisors really gaining adoption, both from the standpoint of the advised investor who's going to his or her advisor and who then calls up case or I capital or one of these other platforms to access private capital investments. But also from the standpoint of the self-directed investor who goes to, I don't know, Moonfare in Europe is coming over here and other platforms, Yieldstreet that offer access to a secondary market of alternatives.
And so that's accelerating. Well, what's behind that? I mean we're at the tail end of a 10 year bull market or essentially we've seen the end of that bull market, and I think there has been sort of a shift in mindset among investors who may, in the case of younger investors, may not remember 2008, which you and I do. So that's sort of the risk mindset might have shifted. But also keep in mind the macro environment and inflation. And so investors want to keep up, they want to outperform, they want diversification or non-correlated investments as opposed to the S&P 500 or the TSX in Canada or whatever benchmark you use. And so I think it's, crypto is crypto, and we haven't seen the end of that narrative. That emerged to become a sort of north star for a lot of investors. But to me, in a way it was almost inevitable that the process of diversification outside public securities would expand to new types of asset classes.
And so you see for example, annuities, structured notes, the growth of platforms like Halo, all of this is part of a larger story. And the investor understanding his or her portfolio, not as again a portfolio of liquid investments, but as all sorts of investments including physical assets like wine or art in which you can either buy them as a physical asset or by shares on a platform like Masterwork. So we've entered a new epic in terms of opportunity for the investor. But to your point, Jay, a new mindset among investors in terms of how they understand risk.
Day:
So the portfolio is widened in when people are searching for exotic yield, exotic returns, stepping away from co-linearity with equities. It's not just a portfolio that's widening, in some of your research we've seen its services are widening. There's more out there an advisor can provide at the FS level, and therefore there's an opportunity for more advice. Maybe we can just start with what you're seeing in lending.
Will:
So with the shifting expectations of the investor, and of course I'll refer back to the millennial generation of investors as an example, but at the same time not pigeonhole or stereotype certain types of investors. Because you've certainly a lot of Gen X or even boomer investors who are extremely open and aggressive and exploratory in how they manage their financial lives.
But yeah, I mean to your point, I think that investor expectations of the advisor in particular are shifting. I mean there was originally the Swiss banking model where you had your relationship manager, private banker, and they would pull in their state planner and the tax advisor and all that. I mean that's fine for high net worth investors, but generally wealth managers are trying to, or banks, brokerages, other wealth managers are trying to accomplish three things, right, through the use of technology. Improve the client experience, scale delivery, and stay on the right side of the law, remain compliant.
And so it's great if you've got a team of specialists scattered across North America or Europe that can serve the high net worth or ultra high net worth clients, but in most cases it's incumbent among the individual financial advisor, whether with an RIA or bank or brokerage, to serve the client in a more comprehensive manner, what I would call address all sides of the balance sheet. And so you know, you have advisors looking not just at investment management needs or portfolio management needs, but also credit needs, also protection or insurance needs, liquidity, cash management. And we have seen at the tail end of this great bull market, what I would say is the rise of the lending advisor, Day. So specifically securities based lending. This isn't going to stop either. Investors have these swollen or inflated portfolios, great, maybe they'll get right sized with market conditions, who knows?
But the need to borrow is not going to go away. And given the friction involved in say, taking out a home equity line or home equity line of credit, or the high cost of unsecured lending, it makes sense. Well you can borrow against your portfolio, and that's fast and easy. And we've seen a boom in securities based lending, which is interesting because it's almost emblematic of some of this larger change, in that you need to marry two different worlds or systems, the world of investments and the world of credit.
And so there's often a technology overlay involved. But look, I am not just an investor who comes to you, Mr. or Miss advisor with cash to invest. As we've been saying all along, the investment journey doesn't start with a six figure investment account. It comes with my first paycheck, it comes with credit needs, and it's almost natural that clients will look to their advisor to support those needs. If I need $50,000 for a down payment on a second house, well you're my advisor, I'm going to come to you. And if you don't want me to come to you, that says something in itself. So advisors are being tasked with providing that flexibility and that larger whole wealth perspective that they simply didn't need to have in the past.
Day:
Do you have a couple examples of leaders in this space right now in the US that we should be looking at or thinking about or fast following?
Will:
I mean in terms of lending in the US there's really two large vendors of note. I mean there's Broadridge, which bought a company called Rockall a few years ago. There's also another company called Supernova. And these vendors sort of integrate, again for lack of a better term, the credit and investment side of the business.
Banks, even banks who you would think have an embedded technology facility, say for lending and investments, they still need someone to help them connect those two processes and workflows. So there's a lot of tech and there's a lot of data flow involved. In who, in terms of the financial institution, who's doing it, who's doing it at scale, it's the wirehouses, Day.
I mean traditionally securities based lending has been a service delivered to high net worth individuals who've had large portfolios. And so you've got Goldman Sachs, you've got Morgan Stanley who do this and do a lot of this business. But again, it's being democratized. You're seeing it in the regional banks, you're seeing it in the RIAs, this capability. You've got a portfolio worth $100,000, you need $20,000 to buy a boat or buy whatever, or even just to plug a cash shortfall. You don't need to go out and get a separate credit facility, you can come to the advisor and the advisor will help you borrow against that $100,000 portfolio. It's cheap, it's fast, and compared to other forms of credit, it's painless. So it makes all the sense in the world.
Day:
It makes me wonder if it's going to change the sort of internal dynamics of bank, because lending sort of was the bell of the ball and led the ship, and now wealth is kind of going to generate that sail and be the center of the conversation.
Will:
Yes, I agree completely Day, and I think it offers a lot of runway for the wealth manager who can define himself less in terms, or herself less in terms of commoditized portfolio management. I mean the robos proved that. It's hard to charge for that, for rebalancing, for portfolio manufacturing and maintaining it. But this has been going on for a while. I mean you had providers like Betterment that would sort take a chunk out of the business of traditional providers that, cash management services like Stone Castle, MaxMyInterest, that are essentially serving as repositories for investor cash and in a way replace the traditional liquidity function of the bank.
So there's competition for the investor dollar, and I think traditional categories, bank, brokerage, financial advisor, don't hold so much water anymore. So all that means to me is that those incumbents, those wealth managers who can't adapt in the way you and I have been talking about are going to be in a lot of trouble. Because new entrants will come in and grab customer assets, and those will be increasingly fintechs.
Day:
So moving on, so we talked about services are widening, they can widen to lending, they can widen to savings, there's more to advise. Engagement is really front of mind here, how the advisor is communicating with the client, and messaging is becoming really kind of central to that relationship. Can you talk about this trend, and then also what it might mean for the compliance demands of these businesses?
Will:
Yeah, Day I certainly can, and this is something I got into rather gingerly as a subject and in our research and our surveys. Because instant messaging, insofar as it's a communications tool and there's a heavy compliance and archiving requirement, is not sort of the first thing I would associate with wealth management or the client advisor relationship. But it has become so, and you saw a few years back the rise of vendors like Twilio that would address text messaging, and Redtail had won as well. There were a few solutions, MyRepChat, things like that. But instant messaging, WhatsApp, WeChat, even things like Facebook Messenger, you don't need a phone number for that, have eclipsed text. And I think everyone's seen the fines that have been assessed wealth managers, I think it's... Or banks especially, it's approaching $2 billion.
Well, did these banks not have archiving, right? There's a requirement to archive client communications. Did they not have archiving and recording and other guard rails in place? Of course they did, but advisors just ignore them. It was too much of a pain in the neck, or they didn't know how to deal manage that process or whatever. And now the piper is being paid, right? The SEC and other regulatory organizations are going after these firms. And so wealth managers to a large degree or banks and others, some are getting on the bandwagon and working with Smarsh and Global Relay and other well known providers of one stop shop archiving and messaging tools. Others are just putting their head in the sand, Day, and telling their advisors, you may not message their clients.
Well that's kind of a problem. If you're not willing to go where your clients are in terms of how they live, work and play and how they communicate. And we have data on how clients are using these apps, these messaging apps for their day-to-day lives. To order pizza, right, this is not about wealth management. If you're not willing to go there and meet the clients on the terrain that they operate on, you're going to have a problem, particularly with younger clients who want to communicate with their advisors via messaging.
And by the way, it's not just sort of communication. There's real use cases around order execution, around enabling a money transfer exercise with WhatsApp. And we see this in the Asian markets, especially where these platforms are quite well established. So there's a communication standpoint, but there's also an operational standpoint. And balancing that with the compliance requirements, which are by no means in insurmountable, imposed by the SEC in the US, has been very challenging for financial institutions.
Day:
So into all of this wider portfolio, wider services, wider and broader communications that have to integrate with operational concerns, and then all that has to be compliant and archived. My business is here because we think that there's a solution that fits into this space.
I guess my question is, and maybe this is too leading and I have to say it. How, I don't understand how businesses can't not use next best action with all this going on. Or some form of it that is organizing this increasingly complex world for the advisor who has more and more to carry. You did some research on that last year, I think with messaging and communication and archiving in mind. Do you have any thoughts about next best action and maybe more from the perspective of what's working, what's not working, and what you'd like to see?
Will:
Yeah, I think next best actions, sort of like securities based lending, you wouldn't really connect those two. But it was traditionally sort of something that the wirehouses were focused on, right? Morgan Stanley, Bank of America, Merrill Lynch, and they went through massive data hygiene exercises and spending in the hundreds of millions of dollars to effectively get their different business silos aligned from a data standpoint, get their data houses in order.
And to enable, and Morgan Stanley will tell you this, enable sort of the seamless connectivity between data sources to get a snapshot of the client position, be able to look at what, say just as an example, how that client's financial position or opportunity compares to another client's opportunity and maybe in a sanitized way come up with the next best action or recommendation. I think next best action, from what I'm seeing and I'm curious to hear your perspective, has also become democratized.
You have platforms and a lot of this is based on the CRM that captures different clues from messaging apps, from other forms of communication, from portfolio management decisions, the whole client life cycle, and is able to effectively prompt or enable the financial advisor to make a recommendation. Not necessarily, this is not next best, what was it called? Next best trade, but next best action in the sense of, well have you considered looking at whatever insurance or credit or this type? And so I think my perception of next best action is being radically democratized. Now, am I seeing it deployed across the industry, at least in the United States? Not really. You have some sort of larger RIAs like Hightower that have kind of noodled on it and tried to do things. I haven't seen much traction, and I'm looking for use cases. So those, more use cases. So outside sort of the large banks and wirehouses. So audience members please come to me with any more thoughts. I'm still waiting for that nirvana moment day. Maybe you've gotten there.
Day:
It's a process. It's a process.
Will:
Yeah. CRM's a huge part of it. And we see everyone from Salesforce to sort the wealth boxes and smaller platforms of the worlds trying to enable, I would say, get away from the buzz words and say client intelligence, and relationship management intelligence, and enable the advisor. Because again, three things from where I stand. Client experience, scaling delivery and staying compliant. All wealth managers want to be, need to be able to do those three things, and data and CRM and client intelligence is very much part of that story.
Day:
Definitely. Definitely. Okay, we're, we're onto the last question of the day. It's the deep question. If you had to choose one theme or anthem for advice-led businesses in 2023, what would it be?
Will:
I think a big theme here is going to be liquidity and enabling liquidity for clients. So whether that's cash management, taking advantage of rising rates, or unlocking liquidity in the form of credit or getting dividends, being able to ride out the financial tumble that's pretty much clearly ahead of us is going to be pretty darn important going forward. And hey, in its simplest form, cash is king. I think that a lot of investors may have found that they were either too early or too late in terms of some of their investment decisions. And as per 2008, no matter what happens, the world is not going to end. But I think the ability to marshal resources from different pots, again insurance, investments, structured notes, other yield bearing instruments ,is going to be really key for investors seeking to ride out what promises to be dramatic volatility in the year ahead.
Day:
Okay, very, very good advice. Thank you for the conversation today Will, it's always really wonderful to talk to you, and looking forward to the next one.
Will:
Day, it's great to see you. Always enjoy it, thank you so much.
