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Disruption is cracking wealth management's fortress

CHICAGO — Advisors need to prepare for more disruption ahead. The wealth management industry has been protected against forces of change for too long, Schwab’s top executives say.

“When we’re building, there’s no more building the fort. We’re building tents, so we can keep moving,” Bernie Clark, executive vice president of Schwab Advisor Services, said at Schwab’s Impact conference in Chicago this week. “We have to keep on that message, because technologies are moving quickly. [Schwab is] on par or ahead, but I think this time, there are going to be some firms left behind.”

Joining Clark on a panel about the future of advisor technology was Neesha Hathi, chief digital officer at Charles Schwab, and Ed Obuchowski, senior vice president of Advisor Services Technology Solutions.

Hathi relied on a similar analogy to describe the reason Schwab has invested millions of dollars in technological upgrades, such as e-authorization workflows, and launched its robo advisor and hybrid advice services, which have now gathered $25 billion in assets collectively.

“We often think of this industry as being protected because we have this regulatory barrier and we have human advisors,” Hathi said. “But if you look at the industry in another way, this is an industry that’s considered opaque. It’s an industry that people don’t really understand. It’s an industry where everyone has pretty good profit margins.

“If you pull all that together, it’s an industry where we may see disruption, and we want to be able to prepare our clients and our advisors for that.”

Obuchowski acknowledged competition’s role in accelerating that change, not just from fintech disruptors but also from other custodians and asset managers increasingly seeking a footing in the advisor technology market space.

“Each of the major custodians are obviously spending a tremendous amount of their investments to offer the right technologies,” he said. “Our approach is, we’re in an open architecture world. [Advisors] are slightly unique in one way or another. You realize as much as you would love to, you may not be able to meet every single need.”

But financial service competition doesn’t worry Clark, he explained after the panel.

“I personally worry about the disruptors, which could be the Googles, the Amazons,” Clark told Financial Planning. “[Wirehouses] will say they’re fee-only — that’s wonderful — but they’ll have the encumbrances of the architecture and the products they’ll continue to have to move.”

The legal and government hurdles preventing fintech giants from entering wealth management won’t last forever, he said.

“At some point, the Justice Department is going to regulate those firms. And at that point, regulation is no longer going to be a barrier. They then just have to make the decision that [wealth management] is something they value in the future… But when they do; it’s going to be dominoes.”

'At some point, the Justice Department is going to regulate [Google and Amazon]. And at that point, regulation is no longer going to be a barrier.'

“Yes, they are going to come with great technologies, but our whole model is predicated on the great experience of our people,” Clark added. “AI can replace some [advice], but it can’t replace it all.”

Clark noted a proliferation of business models in the fintech space trying to innovate on traditional wealth management offerings, but expressed doubts about their motives.

“They are developing technology, but to what end?” Clark asked. “Some of these models are being developed for the needs of the companies.”

Clark added the RIA model “has learned over the past decade where they thought they had value-added services, that’s [not the case] anymore. To think, 25 years ago if you told someone portfolio management is only going to be 25% of your value proposition, they’d probably have thrown you out of their office.”

But in that same period, Clark said, such technology has enabled advisor freedom unlike ever before.

“Technology has made that transition to independence easy. I can remember a decade ago, you had to make some serious choices. It was hard. There was work done still manually within the office, and maybe you had to leave behind some capability if you went out on your own.

“That doesn’t happen anymore. You can do everything, plus you can choose your own technologies if you want. You can align yourself with like firms and your technologies can be similar. You can bring greater scale to what you’re doing. The teams we’re seeing now exceed $1 billion in assets, sometimes greater than $10 billion. They’ve recognized the power that’s been unleashed.”

That’s the innovation challenge to wealth management’s business model that is already causing disruption in the wirehouse industry, Clark added, noting the teetering state of the Broker Protocol.

“People don’t want captive product, they want open architecture,” he said. “I’m not saying it's evil; I’m just saying it's reality. Those models are going to be forced to change.”

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