Will the future of wealth management really be “virtual”?


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I’ve been chatting with a few friends over the past couple of days about which model will prevail for wealth management in years to come.

2 sides to the argument

Essentially, there are 2 sides to the argument:

  1. virtualists: The virutalists are banking on a future where investment advisors will prospect, deliver advice, and service clients over virtual channels (Internet, phone, chat, video conference). This is a boundary-less marketing environment and doesn’t put a premium on marketing to a local clientele.  That’s a world where there’s no tennis, no kids’ bar mitzvas, and certainly, no shoulder-crying on your advisor when markets go bad.
  2. ol’ skoolers: This camp doesn’t envision a world where the delivery of financial services changes very much from what it’s been traditionally. Advisors have adopted email and websites and yes, are beginning to use social networks but ultimately, it’s a face-to-face business. You may buy diapers online but you’ll never really buy financial services online.

It might be easy to dismiss the ol’ skoolers as just that — financial dinosaurs who just can’t face the digital future of the business. We’ve got plenty of analysis like this from kasina pointing to the future and it appears to be digital:

the physical relationship with an investment professional is less important when you grow up in the digital age. Imagine video conferencing and e-communication as the norm in the advisor/investor relationship (2025: Wealth Management in the Internet Age)

The facts don’t match

Yeah, but the thing is, this isn’t really happening on the ground. Sure, we read about this financial startup raising millions of millions of dollars of growth capital (think, Personal Capital and Motif Investing )  to capture the multi-trillion dollar opportunity that’s to be had transitioning investors away from their brokers and mutual funds into an online advisory world.

But the data don’t support it. None of these services have any real assets under them yet.  Millions of dollars spent, engineers hired, marketing budgets approved — but the truth of the matter is that if you combine all the assets under management of all these services, they still don’t even come close to approaching the book of a mid-size stockbroker who’s been in the business for 10 years, doing all the marketing himself.

Of course, it’s early for many of these firms and to put in into perspective, they have to outmarket and outspend (frankly) the incumbent asset managers who have spent billions building credibility and brand. Many of these firms, like Betterment and Covestor, have spent wisely to boost their service offerings over the phone, email. So that there’s a real live caring person on the other end of the communications chasm.

But, beyond outmarketing the incumbents, these new startups have to essentially find the market and develop it.

Growing, slowly and surely

These firms are growing but is it enough? Betterment — for example — has over 10,000 open accounts, yet manages a very humble amount of assets (for more on Betterment, listen to my interview with founder, Jon Stein).

At this rate, there will need to be massive money spent on all these new startups to capture the market. Are the VCs along for this expensive ride? Will the payoff really be that great after 5 years?

How scalable are information businesses

The MarketRiders and FutureAdvisors of this space don’t care the size of your accounts. They provide advice in return for a fixed fee. And these types of firms are growing and can build nice, profitable businesses. But how scalable are they — how big can they get?

These firms hit a subsection of the market — the DIY crowd — but there will always be people will need customized, personalized advice and either don’t have the time or don’t want to spend it managing their money.

A 3rd camp: the virtual local asset manager

Maybe the future isn’t solely a world in which we have 2 poles: virtual and full-service.

Maybe the future of asset management is a hybrid — where services can be delivered online but where the local presence of a firm still matters.

There’s still a real person who can take you to lunch…Who will suck it up long enough to play tennis with you…Who will attend your kids’ bar mitzvas.

In fact, Wealthfront has taken that approach. It’s pivoted (well, multiple times) to an online investment advisor targeting a specific geography and persona (newly-minted rich techies in Silicon Valley).

MyGDP, Scott Bell’s (of I heart Wall Street fame) new firm, looks poised to take this same local/virtual approach. Keep an eye on what he’s rolling out.

Will the virualists win or are the ol’ skoolers going to triumph with a big fat “I told you so”?

What do you think? Where’s the winning model?

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