Asset management firms may be poised to disrupt wealth management.
We’ve spoken with a half a dozen asset managers in the last few months, all with a similar vision of where wealth management is headed. They plan to pivot their business so that in addition to selling product, they sell “solutions” — strategies combining both asset allocation and product selection. As one asset manager put it, they’ve got a supermarket, and they want to open a higher-margin deli counter.
This pivot is motivated by an ominous (for them) trend: they see product-oriented value propositions in decline. Advisors increasingly doubt the ability of asset managers to outperform benchmarks and place less value on their product.
However, this same de-emphasis on product potentially has a silver lining for asset managers. Firms will still need to select product. They’ll still need to decide on strategic and tactical asset allocations. And they’ll still need to trade and rebalance accounts. But it’s not clear that advisory firms can really exploit competitive advantages with any of these functions. So why not outsource them? In particular, why not outsource to an asset management firm?
Asset management firms are already specialists at security selection and trading. Strategic and tactical asset allocation are reasonable extensions of their current competencies. That leaves only “mass customization” — managing large numbers of highly customized accounts — as a functionality gap (hence their conversations with us).
But asset managers face some barriers to bringing this service to market.
First, they need to make it easy for advisors to transfer control of their accounts to a third party. Robos are showing the way for easy account opening and funding, but it’s still not easy for advisors, especially multi-custodial advisors, to transfer trading discretion to a sub-advisor. It usually requires client and custodian paperwork. If asset managers really want to give advisors an “easy button,” they may want to let advisors leave investor accounts at their current custodian and trade them on behalf of the advisor using a limited power of attorney. None of this is yet seamless and easy.
Second, asset managers need to decide on the scope of their offering. For example, do they provide prospecting tools? Proposal generation? Performance reports? How much sales support?
These asset management firms manage trillions of dollars. They have deep pockets, established brands and large distribution networks. They have the scale to price aggressively — possibly even offering their services for “free” in return for using their underlying products. It seems safe to predict that if they carry through with their plans, asset managers will be able to disrupt current portfolio management delivery models, delievering more choice and (possibly much) lower prices. Worrisome for existing providers of outsourced portfolio management, but good for advisors. And good for their clients.