Unfortunately in today’s seismic financial markets, the vast majority of private wealth management offerings are product-based as clients are usually passive recipients of their investment strategies. As this piece quickly runs through, there are serious problems that arise from financial services being product-based. Like health and relationships, investment success is particular to each person’s needs and is part of a long-term issue which cannot be bought or relegated away; financial management firms are struggling to keep their clientele educated.
Advisory Products Today
The prevalence of products in the investment advisory industry is a result of what can be called “commoditization”. Commoditization involves breaking down services to their simplest, lowest denominator and selling them like commodities. Once again, in of itself, commoditization is healthy when it addresses specific needs in the market. Problems arise, however, when it involves taking a product or service which should never be commoditized, and making it so.
Historically, before the late 20th Century, the distinction between product and process in the investing industry was best exemplified by the difference between “brokers” and “advisors”. Over time, however, commercial banks started buying brokerage houses and the industry changed dramatically. There was arguably nothing more significant and beneficial for the Canadian banks’ shareholders in modern history than the acquisition of broker-dealers in the late 1980s. Previous regulations prevented such activity yet as financial markets liberalized, bank mergers across North America brought brokerage houses into financial advisory and, in the process, invited the foxes into the hen-house.
Before Mergers…
Before the mergers, a broker’s primary objective was to facilitate a transaction between two parties, making a profit (“spread”) from each party. Brokers were pure product-people, offering a valuable platform through which many different customers could execute the same transaction efficiently and cost-effectively. Much like a sophisticated grocery store or a mall, brokers offered a location for exchange between buyers and sellers.
Advisors, on the other hand, would work for only one party, typically on the “buy side” of the transaction, and, alongside their clients, select investments specific to their needs and wants. In doing so, advisors got paid only by their clients (rather than third parties) and helped them deal with sophisticated salespeople whose objectives were diametrically opposed to their own.
After financial deregulation brought commercial banks and brokerage houses under the same roof, the barrier between brokers and advisors became muddled in the wealth management industry. These developments had a terrible effect on the alignment of interests between wealth management professionals and their clients. Finding this information in an investing directory is rather simplistic.
Conclusion
Moreover, financial management professionals sometimes get a significant proportion of their income from commissions, trailers and revenue sharing agreements with third parties, creating incentives which directly conflict with client interests. Whether this creates commoditization within investment firms or not is conducive to fiduciary, managerial and board member attrition, or the lack thereof. As investors, your ulterior motive when heading into any deal is the final payout; whether this involves expensive domain names, digital property in general or financial instruments, the payoffs are the same: commoditization plays an important backseat role to your front seat investment priorities.
