Dad’s Financial Advisor Just Isn’t Cutting It
By: Travis Skelly, Partner at PruVen Capital & Rohit Ramkumar, Investor at PruVen Capital
These days, financial advisors are as popular as “Mom Jeans” and are best described as “loosely fitting”. This is largely due to the following secular trends:
- Graying out of the traditional advisor force: there are more than 260,000 financial advisors in the US and nearly 50% of these advisors are over the age of 55 [U.S. BLS].
- Rise of Fintech services and their ability to give consumers choice and raise their service level expectations.
- Democratization and unbundling of financial services giving consumers easy access to financial products such as no fee stock trading, robo-advisors, alternative assets and more.
The economic environment is changing rapidly in 2022, and we are being forced to navigate a market that much of the younger generation has never experienced. During the 10+ year bull market that preceded this, everyone was an investment expert with simple DIY strategies like “invest in tech” and “buy the dip”. However, given the disarray in both public and private markets, it is now more evident than ever that advisors can play a vital role to help navigate financial uncertainty.
Innovation to the Rescue
From our POV as investors in startups, we’ve observed two broad categories of innovation to leverage the above trends:
New Construction: Startups in this segment are building next generation, tech enabled RIA firms from the ground up and fall into the following three buckets based on their distribution channels:
- Advisor Marketplaces: Finding a great advisor is a highly personal and emotional decision that is primarily the result of offline referrals via trusted relationships. Customers want to work with advisors that are best suited to handle their interests, needs and financial situations. Marketplace platforms are developing tools and data driven matching algorithms to help pair consumers with financial advisers who have the right experience in dealing with their unique financial objectives. These startups often charge a one-time fee per signed client or an ongoing AUM fee over several years.
- Full-Stack Advisors: The existing product suite doesn’t enable advisors to fully serve their customers’ needs. New full stack wealth management firms that are building proprietary tech stacks to recruit and equip advisors with advanced tools and services to enhance their product and efficiency of their advisors. This category of companies is winning customers by leading with differentiated high value services such as employee stock option lending and estate planning.
- Advice-as-a-Benefit: Employers are rapidly evaluating and changing their employee benefits to include mental wellness, virtual fitness coaches, and telehealth. Over 60% of employees identify their finances as the number one source of stress in the workplace [2022 PwC Employee Financial Wellness Survey]. And while 98% of HR leaders feel it’s their responsibility to help employees improve their financial picture, just 49% of employees feel they’ve learned about finances from the benefits employers provide [SoFi at Work and HR Workplace Intelligence, 2022.]. This has shifted focus to providing premium human driven financial planning as an employee-sponsored benefit.
Remodeling: Startups in this segment provide software solutions that increase the efficiency and enhance the offerings of traditional RIAs to help them serve the evolving needs of their customers and markets:
- Access to Alternative Investments: As investors demand new types of assets, such as cryptocurrencies, collectibles and venture funds, financial advisors will need to change asset allocation strategies and align themselves with platforms that provide access to these new investment types.
- Portfolio Personalization: Technology has significantly reduced the costs of offering personalized advice and custom portfolios — it is now possible for wealth managers to offer personalized services such as tax-loss harvesting, and custom indexing at a reasonable cost, enabling them to compete with firms that offer lower fees or higher returns on investments.
- Life Insurance Advice: The line between investing and insurance has blurred, startups are building software to assist agents, brokers and customers with the selling and buying of life insurance. They aggregate key product information like policy illustrations, performance figures, and pre-approved marketing materials and deliver these digitally.
- Estate Planning: Often advisors refrain from helping their clients with estate planning because they don’t understand it or are unwilling because it falls out of their purview. Certain platforms use software to centralize historically paper-based information that is siloed and can help advisors provide a holistic visualization that illustrates the alignment of an estate plan with a client’s financial goals.
Early Signs that Innovation is taking hold
We are still early in this new wave of tech-enabled wealth management — but customer demand for change is accelerating and the industry is beginning to react. In 2021, 74% of wealth and asset managers increased their technology investments beyond their initial budgets and 71% brought forward planned tech projects. Edward Jones recently announced it was investing $1 billion in technology, in line with its goal of delivering “human centered complete wealth management services” to its more than 7 million clients [Tech & Ops Trends in Wealth Management: Wealth Briefing and SS&C Advent, 2021]. Moreover, new construction startups are clearly coming for incumbent financial advisors while deploying unique go-to-market strategies — more than 90% of the startups we’ve highlighted in the full-stack and “advice -as-a-benefit” sections have been founded within the last five years and have attracted investment from top-tier venture investors.
We believe that advisors should not and will not be fully replaced or disintermediated. However, revamping their tech stack will be key in winning the hearts & minds then trust and finally the assets of their clients. If you are building something innovative and exciting in the wealth management space, specifically solutions that improve the efficiency and distribution channels of traditional advisors enabling them to service clients with complex profiles, we would love to chat — please reach out to rohit@pruvencap.com or travis@pruvencap.com.
