FinTech Conversations: Three new wealth management trends to pay attention to in 2023

In this installment of FinTech Conversations, we explore how wealth managers are creating new revenue models. Patrick Noonan, Product Manager at Advisor360°, and Bill Winterberg of AdvicePay discuss the trends wealth managers are seeing in the transition from investment management fees to a fee-for-service model.

The concept of charging a separate fee for creating financial plans instead of bundling the fee with a standard asset management fee isn’t new. Notably, wealth managers are beginning to identify three industry trends regarding this revenue model transition:

1. Commoditization of investment management
2. Scaling businesses to handle more clients per advisor
3. Changing demographics and the difficulty of interpreting client needs

Trend #1: Commoditization of investment management

Patrick Noonan: The transition from investment management fees to a fee-for-service model across broker-dealers is causing financial advisors and certified financial planners to go into an advice-driven relationship and they are having to expand the areas that they talk about.

Bill Winterberg: The dynamics in the marketplace have changed so that investment management is experiencing commoditization pricing pressure.

We see advisors respond by moving up the value chain and offering more valued services to the right types of households. For an advisor, the challenge is being able to identify the services that they are competent in and that they can do on a scalable basis, and also target the correct types of households and investors. The dynamics of the industry require that the firm focuses more on niche services and targeted households.

Trend #2: Increase in clients

Patrick: With a change in revenue model type, advisors are seeing a change in the number of clients they have. We're seeing the typical targeted advisor having a lot more clients because the revenue per client is going down. But that doesn't necessarily mean the services they require are decreasing.

Bill: Advisors no longer spend as much time managing paper checks and tracking down payments for fee-for-service engagements. They're not worried about setting up complicated reminders or tasks to do the billing. Advisors are able to use technology solutions to add scale, systems, and automation in place.

Technology is playing an impressive role in allowing firms to handle more clients. We now see advisors adopting and leveraging the technology to add more efficiency and scale. It is true that advisors are working and have the capacity to work with probably 10% to 25% more relationships than they had in the past.

Trend #3: Generational differences

Patrick: In addition to seeing trends regarding commoditization of investment management and firms seeing an increase in clients, firms are also witnessing more generational differences between clients. For instance, nearly three-fourths (73%) of advisors say millennials and Gen Z require a different type of engagement than boomers and Gen X clients according to our 2022 Connected Wealth Report.

Bill: I think we can agree that the current generation of investors—Generation X and millennials—have been growing up in the early years of their careers with more subscription services.

The evolution of financial planning is responding to increased expectations and demands among a new generation of investors.—Bill Winterberg

These younger generations are challenging the status quo. They’re questioning, “Why is it that I have to move all my accounts and why is it that I pay this percentage of my assets when I need discrete services on student loan planning, college planning, and tax planning? I've got stock options that I really need to run a good, sophisticated model on. Why can't I just buy that? Those are my needs right now.” These questions are forcing the industry to respond by adding the fee-for-service model to their firms.

A new revenue model era

Patrick: Wealth managers need to adapt to the trends that are pushing the industry toward new business models. Between the commoditization of investment management, the increase in clients as a result of a fee-for-service model, and the generational preferences of younger clients, the industry is entering a new revenue model transition that is likely here to stay for the foreseeable future.

Rania Kalaaji is a Marketing Project Manager Associate at Advisor360°, responsible for educating enterprise executives and building our community through content marketing and social media.