FinTech, backlash, proliferation and winnowing. When our team is asked about wealth management trends and what the future may hold, the following ideas keep coming up.
I’ll take two lessons from our own communications research—be brief and be bulleted—and will skip additional preamble. Without restriction on topic or time period, and in order of increasing votes, the predictions:
- Image-based emotional assessments will replace traditional text-based risk tolerance questionnaires.
A response close to my researcher heart. Whether or not the solution is image-based or happens in the short-term, it’s clear there is opportunity to improve risk assessment questionnaires as they often have little correlation with actual investment behavior during volatile markets. There are ways to optimize the text-based approach, such as by focusing on loss aversion questions and reassessing in later years, but this is an area primed for a disruption in measurement style.
- There is even greater use of technology behind the scenes for building client portfolios. Advisors as Portfolio Managers will become less common.
With the increased number of model portfolios and increased dollars in models, you could say this is already happening. The trend will continue in the near future, and while this may lead to fewer client-facing advisors who construct portfolios, the need for this skill set in the industry will actually increase. Advisors will either transform themselves or move to home office or third-party strategist roles.
- Individual portfolios will allocate a higher percentage to start-ups and small businesses.
Prediction voting time matters here. The cautious economic optimism that put this item on the list originally now bends to uncertainty as all seek to determine precisely how the tax proposal may impact them. There is reason to believe small businesses will be hard-hit, which admittedly raises some doubt about this increased investment interest, but we’ll stand by the claim.
- There is backlash against robo-advisors, and use of them plummets. Human advice is good enough again.
This one is cheating a bit since the hybrid model is already here, and we see a convergence of traditional asset managers adding robo offerings, and companies like Betterment launching more human advice options. But a strongly-worded plummeting of robo use is more than just a move to hybrid models. Instead, we foresee a substantial market decline that reveals inappropriate risk management with some automated investment portfolios. The general lack of trust in the industry is extended to these offerings, and the robo market takes a significant step back as investors fall back on what they know: people and relationships. Though strong, the setback will be temporary, and robo 2.0 will come roaring back.
- Amazon will enter the investment advice market. With a Prime account you get real-time market data as you shop for books and paper towels. The service gains instant trust with younger generations but fails to deliver adequate performance. Amazon retains ownership but moves from insourcing to outsourcing its investment management and prominently co-brands.
We know, this one is specific. Simply entering the investment advice market almost feels like a no-brainer for Amazon—or Google or Facebook or Microsoft or Apple—and so we needed to push further. As my colleague, Mike Berinato, notes when forecasting a similar phenomenon with banks, “if the trust is there and the execution is there, then non-traditional providers pose a significant threat.” Amazon has a similar leg up on trust and execution when thinking about investment management, and that makes it an easy entrant into the space. But is it an easy survivor? We don’t think Amazon will get it exactly right at the start, just like robos, but we do think it has enough trust equity to hold onto existing customers until it tinkers itself to the right offering.
- The Patriots win the Super Bowl again.
Though I’m dismayed to see that there were zero votes besides my own for Atlanta to win the Super Bowl, and that it wasn’t only my Boston-based colleagues who voted for this one, I chalk it up to emotion triumphing over reason, which certainly has no place in wealth management.
- ETFs continue to proliferate. You will be able to invest in hyper niche and personalized funds, such as investing in your own zip code.
There is no question about the trend in ETF inflows: it’s going up. 2017 has already been a record year, with inflows over 50% higher than the full 2016 year. The direction of the number of ETFs is a muddier question. Even as new products are launched, platform managers in the post-DoL fiduciary world are increasingly questioning the type and number of funds that are offered. The type of ETFs being launched are having an impact, as well, with active and smart beta strategies now leading to an inflow rush. However, we believe there is a place for hyper niche funds, and the ability to use them for a more personalized investment portfolio is the reason we see interest in areas like ESG and companies like Motif and micro-investing platforms.
- Ten years from now, investors will have the same base level of financial knowledge on average that they have today. Advisors and plan sponsors will still be figuring out how to get them to understand and properly prepare for retirement.
This prediction isn’t as depressing as it sounds. As we gather a greater body of financial services industry market research on investor behaviors, it is—or should be—becoming doctrine that investors on the whole have a ceiling for how much they can be imbued with investment knowledge. As just one proof point, fewer than 4 in 10 affluent investors agree that “I consider myself to be knowledgeable about investing.”* If the desire is not there, and it’s not your day job, there simply isn’t a level of education possible that will “solve” for this for everyone. However, the best advisors and plan sponsors will find solutions that work within this knowledge and desire framework (e.g., auto retirement plan features), and this will be a constantly evolving improving process.
*Cogent Wealth Reports Investor Brand Builder 2017
- 75 is the new 65. Older workers continue retiring later, creating a challenge for companies trying to bring new voices into the organization. In response, pensions make a comeback. New “late-stage” pensions begin at age 50 but are only paid out if the employee retires at age 65.
Another lesson from our communications research: be bold. Predicting the introduction of a new pension scheme is nothing if not bold, and yet it receives the highest number of votes. Despite being a form of “incentivized ageism” on the surface, this could be a positive outcome for the company and the individual given trends in “unretiring” and reports from the recent DCIIA Academic Forum that unretiring may slow cognitive decline. A late-stage pension could catch workers at the right time for a change, and it provides a financial safety net to facilitate that change. An influx of second-career workers removes the stigma around employing older workers, leading to a healthy employment cycle.
What are your predictions for wealth management in 2018?