Telewealth Reshapes Advisor Priorities

This podcast is brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.

Hi everyone. I'm Sterling Shea from Barron's, and thanks for joining us for another episode of The Way Forward. Since the beginning of this series, we've been saying that the effect of COVID on the wealth management business is really an accelerator of trends that were already well underway before the pandemic started. The business is transforming and has been for years. And I think it's incumbent upon all of us to put a lot of thought into how do we refine our business and our practice strategy to add deeper value for clients and and build momentum? Well, we have a guest who can share a lot of insights into that question here with us today. Mike Durbin is Head of Fidelity Institutional at Fidelity Investments. Mike, thanks so much for joining us.

Thank you, Sterling. Thanks for having me and congrats on the series. I've really enjoyed it.

Oh, thank you. Mike, let's dive right in. You know, there are seismic shifts happening in our industry right now that have been underway for a while. Cutting right to the chase, how do you think advisors, how can advisors deliver value in new ways and transform that client experience in order to adapt to the evolving client needs and all the things that are changing out there?

Yeah, it's a good question right off the bat, Sterling. And as you reference, I think we all know that customers and their needs are changing. In fact, they've been been changing already, as you alluded to, and I think that's something we've all become even more acutely aware of this year. But much like during the 2008 financial crisis, investors with an advisor and with a plan typically feel better and importantly have fared better during a crisis. So again, those advisors who are going beyond really just managing the money and instead are helping their clients with planning, creating peace of mind, are delivering a higher higher level of value. And we think this will lead more firms to adopt a planning-led practice, which we're encouraging, versus purely an investment management model alone. And we think it's really important because our own research confirms that the more elements of value a firm can deliver, the more relevant they will be to the changing client, that changing set of client needs, as you referenced. And even more important, we're quite focused on this, younger investors value the higher-level elements that advisors can help them with, things like achieving goals, giving them incremental peace of mind, and ultimately, you know, giving them a sense of fulfillment, you know, that they've sort of accomplished their life's purpose. So a lot packed in there, but that's how we see it, Sterling.

Well, no, I think it's, it's good to say that, uh, if I understand you, the more the advisor can, you know, broaden their value proposition to meet the client on numerous financial needs, the, the better. Am I hearing that right?

For sure. And even to sort of broaden, but also elevate even beyond sort of traditional financial needs into more human needs, you know, quite honestly.

You, you brought up, uh, younger generations, uh, of wealth holders as well. And I think that's a, a really important dynamic in the industry. The client of the future, uh, is gonna want something a little different than their, their parents might have, uh, in terms of their their expectations for a wealth management relationship. Uh, how should advisors who are thinking about wealth transfer in the families they're working with and, and to create authentic appeal for younger generational clients anyway, uh, how should they prepare for the emergence and empowerment of, of Gen Z?

Uh, it's first and foremost to recognize that, you know, Gen Z is here, uh, in many regards. So Gen Z, believe it or not, already accounts for 40% of the US consumer base. So they're very much here. And as you know, Sterling, they consume information very differently than their predecessor generations, you know, more time online, far less time watching broadcast TV. They have different social views than previous generations. And unfortunately, they just have acutely less trust in any and all institutions. So as you ask, you know, what, what can you do? What can advisors do? I mean, a couple of ideas to flag. One is to make sure that as an advisor, you're leveraging all this great technology at your disposal. So by example, in another industry early in the pandemic, telehealth or virtual learning were examples of the dramatic shift in everyone moving online and interacting via video. And that happened virtually overnight, really almost immediately. And I'd say here we are in this industry, Now we're with telewealth. We need to take advantage of these vastly accelerating technologies around artificial intelligence and augmented or virtual reality, all the, of course, persistent chat and video and voice that's out there to create more meaningful remote-first experiences. Because let's face it, as mobile natives, Gen Z is going to not only want to engage this way, but they're going to increasingly demand it. And then Second area I'd say is, you know, really make sure you have a plan around ESG. And I know that gets a lot of attention these days and it should, but it's particularly important for millennials and Gen Z because again, research shows they're increasingly focused on it. So if we don't embrace it, you know, we really run the risk of missing a pretty critical opportunity. In fact, again, our research suggests 86% of millennials want to invest sustainably. And over the coming 2 to 3 decades, that is the generation that could place between $15 and $20 trillion into ESG investments just in the US. And that's effectively double the size of today's US equity market. So we think it's a force that's here to stay.

Well, you're packing a lot into these answers, Mike, and I think we need to dig into some of these points a little bit, but that's a hugely important one around ESG. It's something that our team has had high conviction on for a while, but that's pretty stunning. 86% of, uh, of— or did you say millennials, or does that help us? Millennials want to indicate they want to invest sustainably. So you better be well-versed as an advisor to have that conversation. But you also talked about leveraging technology to merge that digital and analog human experience. It can be daunting for advisors, particularly ones who have relied for so long on direct face-to-face, over the table, so to speak, conversations. Where do they get started? What are some of the dos and some of the don'ts when you realize you've got to upgrade your digital engagement with clients?

One way to think about a way to start, Sterling, because you're right to say a lot of advisors sort of hear this kind of plea or appeal and sort of struggle with where do I start? Because there is a, mountain of opportunity or optionality that's out there. Our view is that advisor advisory firm should really start on what is their respective center of gravity for their client value proposition and really make sure that what you're trying to do with clients and through your business model stays true to who you are and that the technology is an enabler as opposed to turn your tried and true value proposition upside down because you've chosen a bunch of technology first. And so, again, if I could dovetail into something, Sterling, as a potential essential organizing set of principles for how to think about, you know, the mountain of optionality that exists for technology solutions out there. We're spending a lot of time with clients and prospects right now talking about the potential to focus on the 4 Ps in a wealth management practice. And I'll go through them. I'll try to go through them quickly. The 4 Ps being personalization, private markets, purpose, which is really ESG, and then portfolios. And again, not because I'm here to advertise for the 4 Ps, but as indicative possible set of principles against which an advisor or advisory firm can go source capabilities, either technology capabilities or products. So if we do them each quickly in turn, personalization, it's really, let's face it, I think this industry has already arrived at an era of personalization and it's driven by this increasingly pervasive availability of good data and technology to apply to portfolio construction, investment strategies, goals. And again, this is where two particular technology elements that are fast-moving are coming of age right before our eyes. Things like direct indexing and fractional share trading. I mean, these are really key enablers to personalization. So advisors can bring products like a purely bespoke separately managed account way down market because of this great facilitating technology. But like all good tech tools, you know, advisors are going to have to adopt them. And, uh, you know, sometimes adoption is tough because, you know, particularly in this kind of example, it may change the way advisors measure performance and report on performance. You know, we may have to come up with new paradigms for performance, like outcome-based performance or plan-based performance, as opposed to the traditional benchmark-based performance. But we think that's a real potential upside of really embracing personalization. The second is purpose. Again, as we talked about it, that really is putting a P to ESG. Yeah. Um, you know, and, and again, According to a good recent study by Fidelity of high net worth investors, they appreciate the environmental and social impact that ESG investments have, but they also view them as having inherent financial value. So there's also alpha beyond just, you know, the social impact that they seek, and they do seek both simultaneously. But again, advisors have to adopt. Only about a third of advisors today offer ESG investment options. Uh, so our industry is going to have to really look for ways to, again, measure ESG-aligned products and portfolios. Like, again, like impact-based performance, as I was talking about some other potential ways to track performance. By the way, purpose is another great way to express personalization. You know, you can, you can personalize portfolios. Third is private markets. A lot being written and talked about, you know, the estimates, the still lofty estimated growth of private market investments over the next several years. We like the backdrop of the confluence of the number of listed companies, as you know well, has decreased by over a third over the last 25 years. But market cap of that shrunken list of publicly traded securities is up almost 500%. So that means that sort of alpha is concentrated in listed securities. And so advisors and investors are seeking alpha increasingly in private market form or in these sort of private investments. So we see it as a another way for advisors and firms to potentially differentiate the way in which they can build portfolios and express investments through this exploding set of private market investments that are out there. And the fourth is portfolio construction. Sorry to be long-winded. We think this is the P that wraps it all together. The quick history of portfolio construction, many, many years ago, the industry did a good job building portfolios based on risk budgeting. And then later came advisors that were really focused on effectively fee budgeting, which brought to age some of the cheaper ways to do underlying building block investment selection. But we think these other newer, faster-moving portfolio construction elements exist today are things like ESG screens. You can call that values budgeting. And then with private markets, how's the industry get ready for liquidity budgeting? Because not all these private investments have the same kind of liquidity as more traditional democratized investments. So lots to be done around portfolio construction. And we think it's, again, a great way to evidence personalization, a great way to drive engagement between advisor and client and take advantage of some of these other trends that we think are quite productive.

Okay, Mike, I have questions about all 4 of your 4 Ps. Do I have them right? It's personalization, purpose, private markets, and portfolio construction. That's right. Let's start with private markets first. Democratization of access to private markets, both on the equity and debt side, is that inevitable at this point? Are we at that point? What's that going to look like when this is a main street rather than select opportunity for the few?

Yeah, I think that democratization is well underway, Sterling. Democratization is one of those terms where it's all in the eyes of the beholder of just how democratized is democratized, but it's already underway. We've, we've had a regulatory environment which has been incrementally helpful towards further democratization, whether that's from the DOL or from the SEC. So, so we think the regulatory frameworks made it a bit easier to democratize. Some of the structures that have come in, come out have also made it more accessible. But ultimately it comes down to are they the right investments in the right portfolio construct against the plan that the advisor and customer has put in place for his or her household or for his or her sort of individual life. So, so whether it's inevitable or not, I do think that that democratization is underway. How far it goes is going to be a function of, you know, how the regulatory environment, the product origination or the product innovation environment, and then that critical surround sound portfolio construction and education ecosystem emerges. And there's still a lot, still a lot that's not known there yet.

Another question on portfolio construction. I think that's a super important area for advisors to refine their thinking and, you know, go back to reshape its relevance and then for a new era. Do you think the greater adoption of model portfolios and kind of guided portfolio construction is a good thing for the industry? And how might it change the wealth management business moving forward?

I think it's excellent for the wealth management industry because I think it's seizing on two things, which, you know, we think are pretty important. I've alluded to each of them already. One is it's helping to get that advisor, we say, sort of up the stack. So beyond singularly focusing just on quote money management and sort of getting up these sort of higher value levels of engagement between advisor and that household. On what are they trying to accomplish, uh, and embrace and sort of embracing a portfolio approach as opposed to I'm picking and choosing individual investments is a step in that direction northwards, sort of up that advice value stack as we like to refer to it. Um, the second is if, if an advisor is going to take advantage of these other fast-moving trends and innovation, direct indexing, private market proliferation, you know, product proliferation, uh, ESG, as we've been talking about. We really think it has staying power if those fast-moving trends are engineered into an appropriate overall portfolio. And again, maybe I'm beating a dead horse here, Sterling. Stay on private markets for a while. For one more go-around, there are still, in my view, still far too many advisors who allocate client assets to alternatives almost as if alternatives are an asset class. Well, I've got an allocation of 60/20/10/10 and 10% to alts. But really, rather than say it's 10% to alts as an asset class, it's really what attributes of the alternative investment or of the private investments are you trying to stitch into the overall portfolio? How do you want your end investor paid for relative illiquidity in an investment? How are you thinking about correlations in the overall portfolio? And we think this capability set is finally coming of age. The tools and expertise is coming to help advisors build better portfolios and be able to engineer in some of these newer expressions, but in this context of an overall portfolio strategy.

And the point of which, to your very important point, is not just the creation of alpha for alpha's sake, but rather to enable the advisor to move from access to capital markets and access to product up that ladder to more behavioral coach and trusted family counselor.

That's exactly right. And again, let's stick with ESG as our foil there, Sterling. I mean, no better way for an advisor to have that broader and deeper relationship with clients than to explore ESG aspirations. Like, talk to me about your values. What's important to you? You know, is it important to you that your money be invested in X, Y, and Z or not be invested in A, B, and C? And so yes, that has that has an impact on the portfolio and the solutions we choose, but it also just really deepens the knowledge that the advisor has about that client or about that household and what's really important to them. I can assure anyone that that will make you a better advisor through time to have that level of sort of intimacy with what really motivates the end client.

Mike, if you're thinking about as an advisor engaging and acting on some of these trends, I would bet that scalability is really vital because if you don't have an efficient practice and you try and evolve to change and engage some of these things that are happening, it's going to be a lot of work.

It's, it's going to be a lot of work for sure. And that's why, you know, we think a lot of efficiency, good practice management does come through embracing some of these trends or themes, but also really properly adopting the technology capabilities that are there. Uh, there is a lot of innovation available to an advisor or professional intermediary. So we spend a lot of time on, you know, the practice management components of tech adoption. It's not tech sales. It's to your point, how can I really adopt these sets of capabilities against these trends to come up with a scalable solution for my advisory practice? Because I haven't met an advisor yet that isn't trying to grow. And if you're trying to grow, you probably need to do it across generations, which means your value prop has to adjust, you know, the way we've been scratching the surface here around the sort of generational differences for what they're looking for and, and, and Tech adoption's a big deal.

Well, let's talk about growth. I think it's a really important issue. I know that's something that you and your team are, are very focused on. Uh, we study, uh, advisor growth very closely as well. One thing that always surprises me, uh, is that when you look across channels across the industry, uh, the same truth tends to repeat itself, that a smaller group of forward-thinking advisors are growing at a much faster rate than industry averages. And, uh, that growth tends to be concentrated. It's not a tiny amount, but, but there are advisors who are growing at a rapid clip and many who have kind of stagnated. In your mind, how are the best advisors driving growth and what can they do to continue to further their ability to attract, win, and retain new client assets?

We clearly see that the consistent growers are firms that are really quite deliberate against a small list of things. One is really deliberate about the segment or segments that they're going to specifically target. One. Two, they're open to flexing, you know, a value proposition or an approach dependent upon that underlying segment that they choose to pursue. Three, they have the— this sounds silly, but the resources in the most generic sense in order to go get the growth. And these days, the resources is a healthy dose of financial resources, human capital resources. You need the skill sets, you know, that are going to be responsive or necessary to go after the segment that you're targeting. And you need the, the raw, you know, sort of digital capabilities, whether that's the set of technology tools or sort of a digital mindset for how to go out and actually serve large, you know, numbers of client households with some modicum of marginal efficiency. You know, you can't add a fully, you can't add a full pay advisor for each 50 families. What is it in your practice that allows you to bring on the next 10 families, you know, without adding an additional head? So, you know, we see those as sort of the common denominators for those firms that you rightly flag or, you know, seem to consistently get the outsized growth.

Is there a specific formula for how many households per how many team members there are? I think the and digital enablement of delivering service at scale that we first saw emerge with some of these robo-advisors, so to speak, is now becoming more widely available for all advisors. But is that in and of itself a good thing? Should they be segmenting further and further and further to provide a real niche-specific service? Or is there the possibility to have a broader base and manage manage that base efficiently for growth?

Both. It tends to be a throwaway answer. I think it works against your good question, Sterling. So, look, as you rightly point out, the evolution of the, call it, robo 1.0 wave that came out, quite honestly, that has nicely evolved to and settled into— there's really great automated money management available for intermediaries today that you can build portfolios and set your modeling rebalancing parameters and set your fee billing site and off you go. It's not a set it and forget it, but to your question, it offers a lot of efficiency beyond having to do a lot of that in a spreadsheet or on your custodial desktop trade by trade or account by account. So that clearly has come. Your first question though of, is there sort of a rule of thumb, putting words in your mouth around how many households? The short answer is there really isn't because it's a function of Some advisors say a core part of their value prop is trust and estate planning or deep tax planning, right? Or just really complex financial planning that is going to impact the sort of load factor that you can have in terms of number of households per, you know, per advisor, as opposed to another firm or model that might be a little lighter on planning and then really heavy users of, you know, model management, let's say through one of the many really great TAMs that are out there today. So it's really a function of what's your model drives the ultimate load factor. And the good news is there's a wide range there. And I say it's good news because there's lots of different models thriving right now that there is not a one-size-fits-all. It's really a function of how do you want to compete in the marketplace.

But it's going to get tougher to compete without a team. You keep bringing up teams and firms. We certainly have our own opinion on the question, but do you think the era of the sole practitioner is gone?

Well, I don't know about gone. It's a good question. I mean, I think that for a long time that we, we used, sometimes used the expression, a lifestyle practice, Sterling, I think, as you know. So I think there's still a long runway for those that want to do good business and do great work for client households as a sole proprietor, as more of a lifestyle business. But clearly, we think if, if you're focused on building sustainable enterprise value in a practice, then yeah, we think you need to be be more team-based because you need to be bringing much more of this higher value-added stuff to these households because they're seeing it, they're hearing about it, they're getting access to it. But again, the good news is you don't have to employ every member of the team. You can partner with others, you know, outside of your, your own four walls of your practice in order to, you know, we call it sort of professionally outsource, um, some of these functions. Um, because again, there are so many the different practices and, um, you know, client solutions that are out there and the way the industry and technology is evolving, it's not that difficult anymore to integrate back in, you know, to your— let's call it house brand or house value proposition— some capabilities that you go to the outside market, you know, to partner for. Um, let's face it, there's some really successful advisors that don't run money anymore. Yeah, they've outsourced it, you know, to a money manager. And we think that counts as a team because to the end investor it looks like a single proposition, 'cause it's delivered relatively seamlessly.

Well said and agree, Mike. A couple of questions here while we have some more time, 'cause I think your perspective's really interesting. The time will come, whether it is sooner or later, that COVID is a memory, we'll have a vaccine, or we'll just have moved on from the disease. And in either case, when you think about the future, what legacy of the last 9 months will be with us forever? What hallmarks of the way we've done business as advisors in the COVID time will permanently change the business?

Yeah, I mean, it's a good question, and I know we all long for that time when we can put this behind us. You know, I think the biggest impact, Sterling, is that so many more people will recognize the importance of having a plan. For their future. And I say generically more people, whether that's investors, advisors, home office executives, et cetera. I mean, that immediate hit on the markets and our broader economy from the pandemic, how it devastated so many people in so many painful ways. I mean, who could have predicted that we would be in a time where in-person sports, concerts, movie theaters, dining would just stop for months on end. So there were there were so many people impacted for such a long period of time, I think it made everyone really stop and think, do we know what we would do if this, God forbid, were ever to happen again? Do we have what we would need? So I think it's put a clear premium on planning, and I do not think that that will fade. I mean, as humans, we've got a great defense mechanism, which is that memories do fade, but I think this is one that may stick with us, the need to plan. The other thing, You know, maybe I'm going to lay it on a little thick here, Sterling, but I feel pretty passionately about it. I think you do too. We don't know what the future is going to bring, but I'm convinced that our industry can play an integral role in helping Americans get back on their feet, whether that's directly serving clients in a book of business or just finding ways to contribute in our communities. I mean, our industry has a lot of value to bring, and all things being equal, We've fared pretty well through this. So, it's time to look forward and think about the range of positive outcomes that can come from this and how we can help our clients navigate and grow in the future, but also just help the broader communities. And so many advisors already do, but I think it's a real moment for the industry to shine here.

Well, yeah, I totally agree. And you struck a nerve there. It's part of one of our team's mottos is good advice can save the world.

There you go.

So, what is our role in propagating it? And I think we did that today, Mike. This has been really, really helpful and certainly for me to hear some of the ideas that are a high priority for you. To close it out in the tradition of our content here at Barron's, I'm wondering if you can offer for the advisors listening in one final actionable idea that they can consider for their business.

Yeah, sure. So, you know, as I mentioned earlier, one silver lining of the pandemic, it's hard to find a silver lining in a pandemic, but it's in there. And I think it's the fact that, you know, advisors have been given permission to go a little deeper, go a little further in conversations with their clients. So I guess my actionable idea is two simple ways to do precisely that, go further, go deeper. One is, and I know advisors hear this, but be vulnerable rather than joking about the stress of the times we're in or acting like everything is fine. Share some of your reality. When people share vulnerabilities, when they share emotions, they connect more deeply. And the second is similarly use curiosity. Ask questions like, what things have changed for you? What's been hard for you? How has this changed your long-term plans? I mean, obviously we can help advisors pull together a really good list that we've seen a lot of advisors use, a list of questions that can really help go beyond typical financial conversation with clients to get into this deeper, further, sort of richer set of conversations with clients. So, that'd be the one actionable idea. And I think ultimately, it builds trust in the relationship between an advisor and client. And trust is trading at a discount these days. So, we think it's a great long-term investment for an advisor to make.

Wow. Great idea. Well, Mike, I want to thank you so much for, for your insights today. We really appreciate it.

Thank you, Sterling. All the best to you.

And I want to thank everyone for listening in. We'll be back next week with another newsletter and another episode of The Way Forward.

This podcast was brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.