Wealth / Asset Management: Fast-Forward Your New Business Model Now

Through our Tuesday TouchPoints series, we are sharing a diverse set of content we hope will be helpful to those managing through volatility, working from home, or just connecting.

By HPA Project Leader Peter Fisher

The C19 downdraft is the most sudden and deep economic downturn in modern history.  It has already presented existential challenges to some sectors and will dramatically transform future business models in many others as the uncertain recovery unfolds over the next 12-24 months.  Wealth & Asset Management will experience a rapid acceleration of current trends, including growing fee pressure, intense cost reduction imperatives, and industry consolidation. It will see wider adoption of new practices such as virtual client/advisor engagement and broader use of a remote workforce.  And it will face a restive client base whose financial plans are shaken by the downturn, in need of new financial plans, and receptive to new operating models and providers.

In the near term there is an urgent need to ensure business continuity of operations, client service, and workforce configuration, and to secure liquidity to weather the lockdown period. But once continuity is assured, priorities should shift rapidly to anticipating permanent changes in client needs, industry practices, and market structures. It is time to begin navigating to the best strategic position in the emerging market order and to pursue opportunities for growth and expansion.

To navigate this new marketscape, we first outline key observations about the current environment for clients, markets, and operating models; leading next to strategic implications for the sector and for specific competitor types in the new order.

Current Environment Observations

  • Clients: … are financially distressed with dented investment portfolios, current liquidity needs, and threatened income sources.
    • Clients have never seen an environment like this in its suddenness and depth and may be tempted to make dramatic long-term financial changes in the midst of market volatility and unsettled valuations.
  • Markets: Financial markets, businesses, and the macro-economy are reeling from the sudden lockdown, with valuations, volatility, and macro-indicators in ranges never before seen.
    • Economists and epidemiologists have outlined recovery scenarios ranging across V, W, U, L, and swoosh trajectories. Disease progression, economic behaviors, and public policies will determine the path forward and there are no on-point historical analogues. These scenarios will play out differently across multiple dimensions: the macro-economy, by metro areas, and by industries. So the recovery trajectory will likely be different nationally than it is locally in Los Angeles or Chicago, and will be different for financial services, manufacturing, and consumer goods.
  • Operating Models: … have shifted suddenly to a remote workforce and virtual client engagement by necessity and to dramatic reductions in cost structures as an imperative.
    • Virtual models, once proven, will permanently change future practices. Public health realities will make virtual models a critical element of future operating models.
    • High cost structures, previously a priority for reform, have become urgent targets of immediate change.

Implications for Wealth / Asset Managers

  • Triage Urgent Matters Now
    • Engage clients immediately and continuously until markets are more settled to prevent serious self-inflicted harm. Emotional responses to market losses cause many investors to sell at the bottom and buy near the top. A critical value provided by the best advisors and wealth managers is to prevent self-inflicted harm from heat-of-the-moment, emotion-based decisions by spooked clients. Next, work with clients to begin recasting long-term financial plans to incorporate the current state of balance sheets and forward-looking economic scenarios.
  • Prepare for an Engineered Re-Opening
    • Recast operating models and cost structures to provide maximum flexibility in ramping operations up and down in accordance with public policies on re-opening of the economy. Seek to minimize fixed costs and convert to more variable cost structures via variable compensation, rent re-negotiation, contingent talent models. Weathering the storm will require lean cost structures, the ability to “accordion” operations coincident with policies and disease progression, and retaining top clients and key talent.
  • Position Strategically for the New Normal
    • Market pressure on asset management and advisory fees that was gathering momentum pre-C19 will become even more intense with the market downturn, requiring aggressive operating cost reductions and driving further industry consolidation. Use the current market opportunity to drive costs down in ways you didn’t previously consider – smaller real estate footprints, automation of operations, delegation of lower-value activities to lower-cost staff, use of contingent staffing to augment talent models, greater use of variable compensation. Legacy structures with high fixed costs will not be viable at smaller scale as fee declines gain momentum in a recession environment and at-scale competitors begin aggressive acquisition to consolidate the industry. Future market structure will be bifurcated into very few large-scale firms and satellite clusters of smaller firms with unique offerings running very lean, variable cost structures. Business models in between will perish.

This transformation began before the downturn with the Schwab/TD, Morgan Stanley/ETrade, and Franklin/Legg Mason acquisitions.  And it will accelerate soon as firms begin addressing strategic imperatives. How should you proceed?  First, identify your current position. Are you a large incumbent with the ability to build scale through growth and acquisition? A smaller niche firm or fintech with a unique offering where scale is less critical and partnership possible? Or a midsize provider with neither sufficient scale nor uniqueness? Choosing the best future strategic position in this new market structure was previously a long-term imperative with time to adapt; now it is an immediate, urgent requirement. The C19 downturn has accelerated the timeline, and firms need to choose their position or risk having it chosen for them by powerful market forces.

  • Position strategically for rapidly redefined geographic markets. The greater use of virtual engagement will cause location to be much less important in defining addressable markets – for recruitment of staff, client acquisition, and competitive landscape. As James Gorman, Morgan Stanley, noted recently – most wealth managers are operating highly effectively with 90%+ of staff off-site: “We’ve proven we can operate with no footprint – that tells me an enormous amount about where people need to be physically; we will have much less real estate”. Where before your advisor-level markets were frequently local to a metro, state, region, your future addressable markets will be much more national in scope – creating dramatically increased client growth opportunities, reinvention of talent models, and a broader set of relevant competitors.

Firms with robo-advisor capabilities will be among the first to pursue these opportunities: they already have an automated, remote model and will be strategically well-positioned for the New Normal as they continue to add personal advisory services with a national reach for client acquisition and top talent. But these growth opportunities are available to any firm with strategic vision and enough conviction to act. Move now to seize these opportunities before your competition understands where the New Normal is headed. Strategic foresight and swift action will be rewarded in an environment where many are struggling to see through the fog.

This is an incredibly stressful period for our economy and society as we grapple with new public health challenges, deep uncertainty about the future, and an economic toll required to keep us healthy.  It is also a turning point for the creation of new business models, new markets, and a building wave of economic transformation.  We will look back on this period as a turning point for our economy and society. Building the next-generation business model in wealth and asset management to deliver highest value at lowest cost is a valuable component in that rebuilding to restore financial security for both retail and institutional clients and in building a resilient wealth and asset management sector.

Peter Fisher is a former Fidelity Managing Director and Bain Case Team Leader with more than 20 years of experience leading efforts in strategy, business development, restructuring, product development, and market entry for companies across the financial services sector.