The somewhat short-lived Occupy Wall Street movement sought to split the world into two camps: the 99%, and the 1%. Wall Streeters were generally lumped into the latter category, and this was not intended as a compliment.
Wall Street has long had a similar classification system. ou might be surprised where you fall in it.
Wall Street's View of the World
The traditional wealth management industry divides everyone into one of three categories – you either don’t exist (category A), you are a do-it-yourselfer (category B), or you are a delegator (category C).
Category A is composed of people with less than about $250,000 in assets. There is really nothing more to say about this group from the Wall Street establishment perspective, because if you are unfortunate enough to fall into it then you basically don’t exist.
Category B is composed of financial do-it-yourselfers. These are people with more than $250,000 in assets who like to manage their money themselves. They are the people that populate discount brokerages like ETrade or Ameritrade, or buy Vanguard index funds directly. Do-it-yourselfers exist to the traditional Wall Street establishment, but the establishment’s main concern with them is convincing them to give up their do-it-yourselfer ways and become delegators.
Category C is composed of delegators. This is the group that Wall Street really gets excited about. These are the people that are happy to turn over the financial part of their lives to the care of a qualified investment professional and that have enough money to pay for it. They are the people that (at least in Wall Street’s view) are not qualified to manage their finances and need the professional handholding of an advisor.
A Broken Model
To put it mildly, we think the Wall Street establishment’s classification scheme is missing out on a few things.
First, it is a mistake to completely ignore category A. With the dismantling of company pension plans (known as defined-benefit plans), people with more than $250,000 are more in control of their retirement than ever before, and have serious financial needs that they should be able to get help with addressing. Moreover, the appropriate application of technology should make it very possible to come up with a win-win business model to serve the mainstream customer. In addition, many of the people currently in category A will not remain there forever, but will instead go on to get promotions, raises, or bonuses and turn into members of category B or C at some point. We don't think it makes sense that Wall Street isn’t interested in talking to them until that point.
Second, the B-C split is less of a binary thing and more of a continuum which many people are constantly shifting across. One dimension of this continuum is peoples’ desire to make financial decisions themselves versus outsourcing them. At different stages in their lives, many people will want to take a different degree of involvement in their investments. For instance, early in their life many people have the time and inclination to choose their own investments. When kids start coming along and work pressures increase, many of these “do-it yourselfers” decide they lack the time and energy to manage money on their own and become something much closer to “delegators.” Later in their life after the kids our off to college and careers are winding down, these same people might flip back towards the self-directed end of the spectrum and become interested in managing their own money again. This is all natural and good, but is ignored by a wealth management establishment that is really only interested in grabbing on to and keeping assets, so that it can extract its fees on a monthly basis forever into the future.
The second dimension of the category B -> category C continuum is the kind of advice that people need. Again, in the Wall Street view of the world you are either a delegator who knows nothing about finance and needs to have everything managed for you by an impersonal black-box algorithm, or you are a do-it-yourselfer who is given no help and thrown to the financial wolves. But many on the do-it-yourselfer side of the spectrum also need advice – just of a different kind. They need a good coach - someone that can show them investment strategies that work, that can explain how to use time-tested investment principles to earn more returns while taking less risk, and that can serve as a sounding board to evaluate new ideas or “talk them off a cliff” when things get bad. Similarly, many people classified as delegators would like to have their money managed for them while still playing a more active role in the process by having a say into the kinds of strategies and funds they are invested in.
At different stages in your life, the degree and type of financial advice that you need will be different. It would be nice if you could have a relationship with a firm that would understand that. [Illustration – lifecycle model of classification ]
A Vision for a 2020 wealth management firm
The 2020 wealth management firm, should have a model that serves mainstream as well as high-net worth customers, and that supports multiple levels and types of relationships. At a minimum, we think this includes:
- Content and education that is free, or sold at very minimal cost to allow do-it-yourselfers to get better educated, and all customer types to evaluate the firm’s philosophy and qualifications before engaging in any kind of relationship
- A model that ensures that splits apart advice from taking custody of assets, ensuring that those that wish to manage their own accounts can continue to do so while getting advice and guidance on this through a flat-fee subscription service
- A flexible approach to investment management that lets clients take as active or passive a role in developing their investment strategy as they want, helping them but leaving the ultimate decision up to them.
In short, it's time for Wall Street to adapt its traditionally paternalistic approach to wealth management to a modern era in which technology and the internet create empowered consumers who will demand better service for a lower price than ever before.
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