Evolution of the mass-affluent advice channel

The Transforming Financial Services Landscape

The financial services industry is undergoing rapid and profound change. External forces—regulation, shifting demographics, evolving client expectations, and disruptive technologies including AI and cybersecurity—are reshaping the way business is done. This shift, often described as a “new world order” and “the decade of the client,” is further amplified in the post-COVID world.

Recent research by Investor Economics (February 28, 2024) highlights the new breed of investor: empowered, informed, tech-savvy, diverse, and demanding exceptional customer experiences. Meeting the expectations of this untethered, mobile client base is a significant challenge. We are in an era where consumers have the power and what they want cannot be ignored because the access to information, complete mobility and growing do-it-yourself options. Transformation is being led by technology changes and shifting consumer expectations.

We know that those who do not keep up with technology and trends tend not to survive. For example: Kodak – the Film company. Kodak actually bought a digital business in 2002. You got storage of your slides but had to print a quota each month or the photos were deleted. Kodak understood the trend, and had the technology, but it was more than just a technology tweak to their business that was needed, it required a reinvention of how they did business and how they thought about their business. The consumer had moved on from slides.

Kodak thought of themselves as a company that produced film, not a “sharing moments” company. They had digital storage but tried to force consumers to download and print slides. They wanted consumers to use the technology in a way that fit into Kodaks business model and view of itself. If they had read the trend and understood that consumer preference had moved on, and looked at how technology could transform their business from film to sharing moments, they might still be around.

The right tech is necessary but not a sufficient condition. Attitude matters. Kodak wanted to force the tech to fit their business model. But consumers did not want that anymore. And you can’t stop consumers.

Our market of mass affluent consumers is moving on in expectations, access to information, what they expect in terms of advice, and the options available to them. Let’s come to terms with the fact that the existing advisor business model began 40 or more years ago and for the most part has not changed. That takes us back to rotary dial phones and the land line!

Think about picking funds as being a Kodak slide product. Consumers are not looking for that now. They want advice on a host of issues. Why not leverage technology into your business and excite your client base and follow the consumer trend and give them peace of mind and confidence they can hit family goals and dreams.

Another example: Blockbuster’s extinction. Technology was a disruptive innovation in the beginning. It was not even that good. But it evolved quickly. First was the DVD that was mailed to you. It kicked off no late fees as the hook, but it came with drawbacks, you had to wait days for the DVD. It was not a real threat to the industry-titan Blockbuster. Blockbuster was stubborn and confident and would not give up late fees. Consumers began to order DVD’s. Then a web platform sped things up. The DVD went digital, This meant no wait and no late fees. Then came streaming.

At the early stage, Blockbuster had the superior model and the market. But the board and franchisees did not want to spend $100m to invest in the new technology model nor get rid of late fees – a significant contributor to their revenue. But their consumers had moved on to something better without them.

Disrupting the movie rental business was first, then came the streaming revolution. Netflix did not invent the DVD or online streaming. They embraced what the market wanted. Blockbuster, who had all the advantage and market share opted to stick with the status quo and died.

The real cost comes from not recognizing what the market wants and refusing to embrace disruption. We ignore it because we are comfortable – as though our comfort is the litmus test for future success. I am doing well so everything must be good, right?

Many advisors in the mass affluent space are resistant to change. They make a good living and are comfortable. But so were Kodak and Blockbuster. To keep and maintain that good living and the value of your business it is critical to follow what clients want, adapt to change, and harness disruption. We have been largely free of change in our industry for decades. That has now changed. And change is only going to continue to accelerate. Your clients are already there. Chat GPT had 100 million users in 60 days. This is likely the slowest pace of change you will experience for the rest of your life. Back to the decades old business model: in the face of the combination of evolving consumer expectations and emerging industry trends, we are facing real issues.

Emerging Industry Trends

As identified by Deloitte, Investor Economics, and Ernst & Young, several trends are driving this seismic shift:

1. Fee Compression: Downward pressure on fees is transforming wealth management, manufacturing, and distribution.
2. Technology as a Core Driver: From personalization and scalability to enhanced security and cost reduction, technology is central to meeting client needs and advisor efficiency.
3. The Trusted Advisor: Automation frees advisors from repetitive tasks, enabling a focus on high-value activities, deeper insights, and hyper-personalized service.
4. Scalability Challenges: Addressing the sub-mass-affluent market requires innovative operating models to unlock cost efficiencies.
5. Product Evolution: Unified Managed Accounts (UMAs), portfolio management outsourcing (OCIO), and advisor-preferred solutions are revolutionizing product offerings.

The Shift in Power Dynamics

The opportunity to seize the moment is here. The financial industry is seeing a realignment: power is accruing to those closest to the investor. Independent advisors, built on a foundation of trust, are poised to lead. To do so, advisors must remain relevant in the eyes of their clients. Advisors must pivot from what they are comfortable and familiar with – fund selection – to what clients want – holistic, goal-based financial planning, wealth empowerment and confidence that they can achieve their financial goals. This requires not only a mindset shift (Kodak’s failure) but also a fundamental adjustment to the business model (Blockbuster’s failure).

The Rise of the Independent Advisor

This could well be the decade of the independent advisor and dealer. Over the past 20 years, the number of mutual fund dealers in Canada has decreased from 260 to 93, even as the advisor population continues to grow. This is an attitude adjustment. Openness to shifting the value proposition to advice and away from product sales, new platforms that streamline old manual processes, tools, and opportunities enable advisors to “break away” from legacy systems and embrace independence.

Technology plays a pivotal role in this transformation, enabling:

• Efficiency: Automating low-value, repetitive tasks.
• Client Connection: Delivering tailored advice and trust-building interactions.
• Scalability: Providing mass-affluent clients with personalized solutions at a reduced cost.

Time for a Business Model Redesign

Research shows that advisors spend 50% of their time on operations, administration, and investment monitoring—low-value activities from a client perspective, all of which can be automated. By outsourcing fund selection and using technology for repetitive tasks, advisors can focus on high-value, client-facing interactions. Clients increasingly seek holistic planning over fund performance. This is where advisors must pivot to remain relevant. This is more than attitude change. It is fundamental business model change. How are you paid. What are you paid for? What is your value proposition?

The Role of Innovation

Innovation is no longer optional. The industry faces a “Netflix vs. Blockbuster” moment. Amidst all the change, the single greatest challenge for independent advisors who serve mass affluent clients is maintaining relevance. If the solution recommended by dealers is to move these accounts to a call center or “corporate channel,” why pay advisors? Is that trusted advice in today’s world? Where is your relevance to clients? This tells me that large institutions have not yet figured out the right model or platform for these clients. Let’s not do it that way. With a willingness to embrace change, there is an amazing opportunity.

Advisors must embrace digitization, AI, and redefined workflows to:

• Enhance client engagement.
• Improve operational efficiency.
• Deliver hyper-personalized experiences to mass-affluent clients.

Advisors who fail to innovate risk being relegated to irrelevance, as clients turn to do it yourself options, robo options and AI-powered tools for cost-effective solutions.

Democratizing Wealth Management

Current industry trends lean toward call centers and one-size-fits-all solutions for the mass-affluent market. However, democratization—scaling personalized advice—remains an achievable goal. It requires:

1. Audacious Thinking: Redefining cost structures for accounts and products.
2. Technology Adoption: Leveraging platforms and AI to scale advice without compromising personalization.
3. Mindset Shift: Discarding outdated practices to focus on delivering genuine client value.

The Path Forward

Advisors must reassess their value propositions. Activities such as fund selection, once central to the advisor’s role, are now commoditized. Instead, clients value personalized financial planning, meaningful interactions, and tailored solutions.

By embracing technology and shifting their business models, advisors can reclaim their relevance in this dynamic landscape. As the financial services industry continues to evolve, those who innovate will emerge as leaders in the decade of the client.

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