The age of advice manufacturing is here
Despite fear of new technologies and political turbulence giving way to uncertainty about the Department of Labor’s fiduciary rule, the wealth management industry is moving quickly into a new era of “advice manufacturing,” which emphasizes personalized financial advice for all investors, large or small.
Rapid change has happened before in the asset management industry. The creation of the mutual fund, arguably the greatest innovation in the history of the investment management industry, was ushered in by the 1960’s processing power of Big Blue and the main frame computer.
An original disruptor, mutual funds catalyzed how the industry worked and democratized institutional investing for the masses. The mutual fund industry became so successful, in fact, that the industry has manufactured nearly 13,000 mutual funds. Today, per the Investment Company Institute, $15.7 trillion is invested in mutual funds as of the end of 2015.
After the meteoric rise of mutual funds, the investment management industry aligned around building and distributing financial products. We are, of course, also seeing accelerated adoption of ETFs by investors and advisers. Somewhere along the way, however, the needs of the individual client decoupled from the interests of the financial services industry. This decoupling, in many ways, occurred when we were all focused on building and selling product — I should know, my first job out of college in 1991 was as mutual fund product manager.
FIDUCIARY RULE'S ROLE
The new DoL fiduciary rule is about fully aligning the interests of the individual investor and the investment management industry. While the original lobbying efforts against the new fiduciary rule argued that it would drive up costs and reduce access to investment advice for regular Americans — we are witnessing the exact opposite in the marketplace.
The rule is already directionally operating as advertised. More specifically, the industry is witnessing unprecedented flows into low-cost index ETFs and funds, and many of the largest investment management firms are rapidly rolling out personalized digital retirement advice solutions to all client segments, including the very small investor.
The current administration has moved to delay the rule’s applicability and could repeal the new rule entirely. However, the financial services industry has already moved to comply with the rule and smaller investors who did not have access to financial advice previously will benefit from a best interest standard as well as digital advice technology.
The fiduciary rule, at minimum, is forcing the investment management business model to be re-evaluated. In many cases, it poses long-term sustainability and existential threat questions for both marginal product manufacturing and product-only distribution-based companies.
However, even without the fiduciary rule in place, technology is the other disruptive force, which will move us towards new standards. Personalized digital advice solutions are helping advisers take into account more than just financial products. As a result, investors have more awareness of their entire financial picture. Advisers would be smart to embrace change, whether from regulations or technology, because the industry is quickly moving in a new direction.
ADVICE MANUFACTURING RISES
The new DoL rule, coupled with the rise of technology-driven TAMPs, managed account platforms, and now more holistic digital advice platforms, is fundamentally shifting the entire industry from product manufacturing to “advice manufacturing." The investment management business, while perhaps not yet a fully formed concept yet in the minds of all industry executives, is now in a race to manufacture scalable personal advice solutions. Digital advice platforms will be utilized to fulfill both the near term regulatory requirements of the fiduciary rule, but perhaps more importantly, to ensure long-term offensive competitiveness.
So what do I mean by advice manufacturing? Broadly speaking the coming age of advice manufacturing is about the shift from selling an impersonal financial product to delivering personalized, outcome-based, solutions at scale. The enthusiasm from many financial executives regarding the rise of digital advice is the promise of delivering scalable personal risk/liability-driven or goal-based investment solutions, such as retirement income, to more Americans than ever before. Regulatory change along with quantum changes in technological capacity are converging to make this a reality — perhaps even more rapidly than many proponents anticipated.
The simple analogy is bricks versus a brick house. Brick is a material manufactured and used to build a house. Brick can be used to build a house, but ultimately, what the individual investor is seeking from the building professional is a house to withstand the elements of mother nature — the house is the solution the customer is ultimately seeking.
The investment management industry needs to be in the house-manufacturing business, not the brick manufacturing business.