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Practice Management > Building Your Business > Leadership

The Wealth Management Trend Advisors Can’t Ignore

By John Manganaro

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What You Need to Know

  • The traditional approach of giving a risk tolerance questionnaire and running some Monte Carlo simulations is no longer cutting it, portfolio tech pros argue.
  • Tech makes holistic planning easier.
  • Wealth management professionals must evolve with the times or watch their firms decline in relevance and revenue.

Financial advisors who continue to base their planning and investment processes on simple risk-tolerance questionnaires and closed-architecture product platforms are likely to fall behind their more forward-thinking, tech-enabled peers in the years ahead.

In fact, according to SS&C Advent’s Kyle Fleming and Alex Hagmeyer, the most attractive wealth management clients in the marketplace today are already demanding much more. They want and expect their wealth advisors to deliver a highly personalized, holistic and responsive experience that cuts across investment management, tax mitigation, goals-based planning and wealth protection.

Fortunately for advisors, the pair suggests, ongoing technology development is making this lofty level of service delivery not only possible, but also scalable, for wealth managers. With the right blend of personal touch and technology tools, they argue, skilled advisors have never had as much opportunity for growth and success as they do today.

Fleming, a senior product manager, and Hagmeyer, senior director of quantitative research within SS&C ALPS Advisors, offered this suggestion during the morning showcase session at the BNY Mellon | Pershing Insite 2023 conference in Orlando, Florida.

According to the duo, wealth management professionals who want to grow and thrive in the future simply do not have a choice: They must evolve with the times or resign themselves to watching their firms decline in relevance — and revenue.

The Old Way Won’t Cut It

As Hagmeyer and Fleming spelled out, the “typical” wealth management process starts with a risk questionnaire that assigns a client a tolerance score of some sort. Whether it’s five or 50 questions in the survey, the pair explained, the goal of the exercise is to set a baseline for the amount of volatility that a given client could theoretically stomach before they start pounding down the advisor’s door looking to get out of the market.

In addition to defining risk tolerance, wealth managers then traditionally layer on an income goal that is often (but not exclusively) about achieving short-term financial stability while simultaneously pursuing a targeted lifestyle in retirement.

“From there, the old-school wealth manager runs a bunch of Monte Carlo simulations that show what levels of risk-taking are needed to make achieving those goals likely, and that’s really the end of the ‘planning’ process,” Hagmeyer said. “That approach is effective, as far as it goes, but today’s wealth management clients are quickly realizing they can go a lot further — and that they want to work with advisors who can facilitate that.”

More sophisticated (and desirable) clients, the pair said, are already asking tough questions about how their wealth advisors are integrating their various goals and preferences into a holistic plan that maximizes the likelihood of success while minimizing tax burdens and eliminating unnecessary risk-taking.

This requires wealth advisors to evolve in different ways across their businesses, Hagmeyer and Fleming said, from client onboarding to investment management to vendor selection. Across all these areas, the need for greater personalization cannot be overstated.

The Emerging Approach

These factors mean that, already today but especially in the near future, the successful wealth management firm will be “as much a technology business as it is a financial advisory business,” Hagmeyer said.

“Where the rubber hits the road is in matching a client’s interrelated, evolving goals with their need to take portfolio risk. This is how we address specific goals over time in the context of holistic financial life,” he said.

One specific way in which firms will have to evolve, Fleming and Hagmeyer said, is by embracing a framework that does not limit advisors to one set of products or solutions. Access to best-of-breed solutions across many different practice areas will be essential.

“Great wealth managers know that the present and future of client service is not about pitching products,” Hagmeyer said. “It’s about identifying, understanding and solving specific problems in a goals-based framework.”

Fleming and Hagmeyer said this kind of analysis may seem lofty to some advisors who have an old-school, ingrained approach to doing business — but that’s exactly the point.

“Cutting-edge wealth advisors are asking these questions and more,” Hagmeyer said. “They are asking, how can I get my entire client base onto model portfolios that I can service rapidly and responsively at scale? How do I enable customization at scale in such a way that I can build consistency and efficiency into the client service process? These are the questions the industry is tackling today.”

Tax Loss Harvesting and Direct Indexing

In closing the presentation, Hagmeyer dug into the linked topics of direct indexing and tax-loss harvesting, suggesting that these are two key areas where wealth advisors “simply cannot afford to fall behind the curve.”

As Hagmeyer spelled out, many clients come to direct indexed model portfolios from traditional portfolio-building approaches at their preferred brokerage or active management shop. Many want to improve the diversity of their holdings by getting away from cap-weighted indexes, or they want to pursue some other specific goal that they cannot achieve with mutual funds or ETFs, all while being thoughtful about the tax consequences of the transition.

In the past, Hagmeyer explained, getting this client’s position unwound and then reinvested in a tax-efficient way was a big logistical challenge. It was feasible on a client-by-client basis, but creating such transition plans at scale was next to impossible for advisory firms lacking access to powerful computing technology.

Today, service providers are filling that gap, and forward-thinking advisors are taking notice.

As Hagmeyer emphasized, current and emerging technology is able to automate custom transitions for investors and allow for an ongoing pursuit of tax-efficient wealth accumulation.

“We view this emerging approach as the ultimate form of customization for high-net-worth and ultra-high-net-worth clients,” Hagmeyer said. “Getting this right can spell a huge difference for the client and help to maximize the value of the advisor.”

(Image: Shutterstock)

John Manganaro

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