The Advisor Gap | Getting to 200:1
The ratio varies significantly by geography – and also by wealth bracket. Let’s focus on advisors serving mass affluent clients with between $200,000 and $2 million invested. Here the average is probably somewhere between 90 and 140 clients per advisor.
Sources in the US show that Registered Investment Advisors (RIAs) regularly serve around 150 clients each. Whereas in the UK advisors using wealth platforms have around 115 clients, and in Australia the number is closer to 90.
Each jurisdiction has different circumstances and challenges to deal with. In the US there is a higher degree of standardisation as there has been a shift to ETF-based model portfolios over recent years. Moreover, many of the portfolios managed by RIAs are under discretionary mandates. With discretionary mandates there is less needs to discuss with clients proposed changes to portfolios, as there would be otherwise.
In the rest of Europe and much of Asia it is difficult to get a clear picture of the ratio, as wealth management is frequently embedded in the normal banking relationship. In high-wealth centres such as Switzerland it is no surprise to find much lower ratios. My own straw poll shows the ratio to somewhere between 60:1 and 90:1.
Meanwhile, for years many of us have been expecting a big tech-driven jump in the ratio, as a decade’s worth of fintech investment and the emergence of AI come to fruition. So, what will be the ratio be in five years’ time?
Let’s start with some simple ‘finger in the air’ assumptions. Firstly, that a client advisor will need to be on a direct meeting or call with their client at least four times a year, for an hour at a time, plus another hour or so preparation and follow-up time. And then we strip out everything else, with the exception of training days, vacations, sickness and some corporate time: the maximum would be around 200 clients per annum per advisor.
Given a 200:1 ratio, what tech would you need to invest in to make this a reality? Here are a break-down of tech trends that are relevant to this question.
1. The 'Already Happening' Trends
Some things are already available, it is ‘just’ a matter of execution:
API-based apps and services simplify
integration and data transfer between apps.
Most modern applications are developed with such capabilities. Nevertheless,
most advisors still use legacy technology. Clearly, avoiding the need to rekey data saves
significant time. Particularly this is the case for advisor firms which are
independent from the custodians. But also, the links between client facing
apps, such as the financial planning tools, the CRM and the PMS. The
compatibility of data will be improved further as the ISO 20022 standard comes
into place, and by Open-API initiatives.
Fully digitized client life-cycle management. Most wealth managers have been implementing one of a range of the business process, or rules management software solutions over the years. On one side digitizing regulatory forms and workflows compliance (e.g., KYC, SOF, FATCA etc.), on the other managing the connectivity to compliance checking solutions (e.g. NiceActimize, Worldcheck etc.) and other administrative processes. These digitize forms and workflows between clients and the firms (e.g. Flowable, WealthDynamix, Atfinity etc.). Onboarding time has been greatly reduced, and administration time decreased. However, there is still a long way to go. The additional compliance and stricter sanctions environment, continues to increase the burden on wealth managers. Moreover, the high-net-well segment has the added complication of dealing with complex legal structures and trusts, which add a whole different dimension.
Digital client reporting has also been rolled-out by many wealth managers. Ensuring the need for paper reports is minimised, has been a focus for recent years (e.g. UnBlu, Smart Communications). Yet, there are still parts of the processes and communications that remain in the dark-ages. The back-end connectivity between the back-office, custodian, transfer agents, advisor and related client interactions can often be very cumbersome. Corporate actions and funds transfers in particular have a long way to go.
A shift to ETF-based model portfolios and DIM (discretionary investment management), on a mass basis. The era of relying on expensive Mutual Funds to consistently beat the market across the whole portfolio, is largely over. Many large-scale wealth managers are building client portfolios around a core market exposure using a range of low-cost Model Portfolios, typically risk-classified, or themed. With a discretionary mandate they can benefit from standardization and scale – and avoid some costly compliance issues.
2. The 'In the Pipeline' Trends
Given these items, which all exist today, why could an
advisor not be able to serve 150+ clients every year - and then get to 200+? To get to this next step, on an industry
average basis, requires some innovations to become wider adopted by the market.
For example:
Direct Indexing has taken off in the US as a way to provide custom, or personalized, portfolios of direct investments at scale in recent years. While the trend in the US is partly driven by tax harvesting, the fundamental driver is the provision of a low-cost method for deliver investment portfolios closely aligned to specific client values and their direct investment requirements (e.g. ESG factors). Direct Indexing solution providers, such as Invest Suite and AllIndex.com, automate the indexing, selection and rebalancing processes saving the advisors significant time and effort.
Recommendation and next action prioritisation tools are being implemented by larger wealth managers, typically using analytical-AI techniques, to ensure relationship managers and advisors are quickly able to reach relevant information and decisions when meeting with a client. These range from notifications and prompts on which priority action needs to be taken next, to reducing long investment lists down to a few select recommendations that closely match the clients investment profile.
AI-driven reporting tools produce custom reports, and more frequent snippets and updates to keep clients engaged. Current reporting tools and automations have reduced this effort, but it is far from sufficient. Companies such as Invest Suite and Digipal are involved in projects that go-beyond just digitizing and automating the reporting process. Their technology is creating custom reporting narratives using large-language models – but with investment guard-rails and review processes built in.
Social media communication and chats (e.g. WeCan, UnBlu). Going beyond the need to report and notify clients digitally is the need to advise on and collect approval from the client for investment decisions and related activity (e.g. investments or corporate action decisions). Highly secure and compliant means of using social media chat and messaging services are increasingly being adopted as regular communication channels.
The 'If-Then' Trends
Some areas of technical innovation still remain limited to early
adopters and innovators. Typically there are still technical hurdles to
overcome or more time for maturity to be reached.
Model Portfolio exchanges to make distribution more efficient and transparent do exist in the US, but it is hard to see major adoption across Europe. Nevertheless, as the trends towards model portfolio of low-cost ETFs continues, it is conceivable that the demand will grow for an open market mechanism for acquiring and selling model portfolios – in a similar way to the underlying fund market. The transparency and efficiency this will deliver, will reduce search, selection and acquisition time for advisors.
Self-Sovereign ID and KYC wallets based on proof-of-knowledge algothms have been discussed and tested for some years. But execution is highly dependent on local jurisdictional acceptance, regulatory frameworks, and culture. If such technology were to be adopted it would reduce onboarding and product access administration significantly by having all client ID and KYC documentation in one pre-validated package.
Augmented visualization (a metaverse). The worlds of online meeting apps (MS Teams,
Zoom etc.), video, bots and AI-collated client
presentations are merging into augmented reality capabilities where advisers
will be able to keep multiple clients informed and advised simultaneously. There
are of course fiduciary trust hurdles and potential compliance controversies to overcome, so it’s not
going to be an easy ride. But in the end, investors will gain from having highly
tailored content and advice delivered in their preferred media, at a time they want to consume it.
There are other innovations too: automation tools for Private Equity, Real-Estate, the whole area of crypto-compliance and so on. But investment in a combination of these technologies could in the end lead to a ratio of 200 investors per client advisor being achievable within a few years. There is of course plenty to debate around whether the ratio is desirable, relevant, and at which wealth levels. Indeed it is important to remember clients are not identical, they have differing expectations and needs for advisor attention – it is not a simple linear equation. Nevertheless, there will inevitably be intense competition between wealth management firms to serve more than the 200 before long.