Since autumn 2008, the money management industry has contended with one of the most uncertain business environments it's ever faced. Important U.S. investment banks have literally disappeared, credit markets are hardly functioning and the government has begun nationalizing financial systems. This is no simple correction for the market. This is a fundamental reorganization.
It's been unpleasant (to say the least) for folks up and down the wealth management business -- from the smallest investor to the largest investment firm. But it has not been unnecessary. Out of this mess will emerge nothing short of a new way of doing business. And, dare we say, a much better one.
Already, investors, many of whom are looking at a near halving of their net worth, are looking for a better form of investment advice and a better class of investment product. Gone is the unexamined reliance on big Wall Street houses for product guidance, especially now that all the former investment banks are commercial banks. Lost, too, in the post-Lehman reality is the notion that multi-layered wealth managers add a commensurate level of value. We know now they only add complexity.
As more traditional concepts like prudence, risk management and excellence emerge out of the fog, it's reasonable to expect high-touch, high-quality advisory firms to come to the fore. And, given the mind-numbing number of products in the marketplace today, including mutual funds, alternative investment options, fixed and variable annuities, and life insurance products, that the competition for investor assets will be won, not by reputation, sheer size, or brand, but the quality of product, advice and service offered.
At the same time there's a palpable and growing dissatisfaction among advisors with their tarnished brands and constrained approaches to doing business. According to the fourth annual National Financial Broker and Advisor Sentiment Index, two-thirds of brokers who say they're likely to switch firms this year would prefer to move to another type of firm. It's likely that the most productive are noiselessly looking for the kind of broker/dealer that's built around personal relationships, flexibility in service and advisor ownership. The kind of B/D, in other words, that caters to highly successful advisors and their demanding clients.
Among all their competition, boutique broker/dealers have the best opportunity to secure advisor -- and ultimately investor -- trust, especially those built around open architecture. With tumbling values placing investors under mounting pressure to generate solid, risk-managed returns, a greater number will seek providers that have access to products and services unavailable to all but the largest institutional investors.
Indeed, the migration speed from proprietary products to open architecture investment platforms is likely to increase exponentially in this environment. In-house offerings and programs, already less viable, will wither as investors seek transparency, objectivity, quality and broad diversification. True open architecture supported by a robust state-of-the-art technology platform will align with both client goals and regulatory scrutiny. B/Ds structured with these ideals as key ingredients will have a distinct advantage in the new world.
In the long term, we could well end up with a judiciously regulated environment where capital formation has found traction and the U.S. economy is motoring full-speed ahead. In the short term -- say the next year or two -- we will certainly end up with new wealth management leaders as re-ordering dynamics take shape. Those firms and those financial advisors who seize the extraordinary opportunities that arise during this time could very well prosper. More importantly, so will their clients.
Ryan Diachok is vice president of marketing and business development at Denver, Colo.-based broker/dealer Geneos Wealth Management.
