The key aspect of change in the wealth management industry is that change, in itself, is not new. However, the transition to a new paradigm is now fundamentally different in two key aspects: pace and scope. Just what is changing and what will happen to anyone who cannot keep the pace?

1. Changing business models
Why business re-modelling is
essential in wealth management
Changingbusinessmodels

2. Why business re-modelling is essential in wealth management | February 2010 01Changing business models
Q. We are all aware that our industry is undergoing enormous change but what
exactly is changing? Have we seen it all before?
SH: Our collective ability to achieve cost-effective scale in delivery of wealth
management services has changed. And, with that, so too has the wealth
management business model as we know it. It is shifting from aVersion 1.0 (that
driven by product), if you will, to aVersion 2.0 (sustained by technology to produce
scale). This new model of wealth management has provided the investment
management and advice function with infinite scalability, at a considerably lower
delivery cost than is currently the case.
Q. What has driven the evolution to Wealth Management 2.0?
SH: If you look at the early days of wealth management in the context of the old
model, it was essentially retail (or relationship) stockbroking.The reason why next
generation wealth management has evolved is because the retail stockbroking
industry approach couldn’t scale effectively. Therefore, it was not really viable to
operate with anything except the big end of town.
Q. So the lack of scalability was the critical factor in determining the rise of the
unit trust in Wealth Management 1.0?
SH: Yes, to address the issue of scale (or lack thereof), the mutual fund or unit trust
was developed in order to provide affordable investment options for the mass
affluent market as we refer to it today.The other main catalyst for the development
of the unit trust structure was the growth of pension funds and retirement savings
which gave trustees the opportunity to divest their risk as investment managers
to professional investment providers.The retail product sales environment was
a natural outcome of the unit trust, and a vehicle well-suited to the incumbent
insurance type sales force. This drove the next generation of widely available
investment products for the mass affluent market. Specifically, the increased
offering was targeted toward diversified investment products and services.This
contributed to the rise of the master trust, essentially a vehicle which allowed a
choice of investments but within a single legal structure.
This is the first in a series of provocative, and perhaps contentious, discussions with
Stuart Holdsworth (Managing Director, Financial Simplicity) concentrating on trends
driving the key changes in the financial services industry. In this first exchange, we look
at the pace and scope of change itself in the wealth management industry; in particular,
just what is changing and what may happen to those who are slow to keep with the pace.
Change is always resisted,
always because people are
afraid to venture into
the unknown.
Carly Fiorina(2007)

3. Why business re-modelling is essential in wealth management | February 2010 02Changing business models
Q. So product delivery was facilitated by the unit trust structure but, ultimately,
remained capacity constrained?
SH: Yes, in pursuit of wider channels of delivery and in the context of margin
pressures, change continued in the transition not only to master trusts in the sense
of pooled trusts but also with respect to wraps and the Investor Directed Portfolio
Service. These vehicles essentially provided the same sort of access to investors
– a choice of asset managers without the concept of a pooled trust. The resulting
wrap era grew not only because of the consolidated reporting it provided but also
because of the platforms became a natural system (or infrastructure) for adviser
practice management. That included fee management, consolidated reporting and
elements of compliance management as well. It was really the combination of that
as well as the adjustment to Australian Financial Services Reform that enhanced
the relationship between the dealer groups and the platforms and cemented their
position as it’s been over the past 10 or 15 years.
Q: Are we facing a bigger change than we’ve seen previously?
SH:The key thing about change in the wealth management industry is that change
itself is not new. The wealth management business model has been evolving
for hundreds of years. However, the transition toWealth Management 2.0 is a
fundamentally different change which has two key aspects: pace and profile. As
in every industry, change is getting incrementally and exponentially faster. The
outcome of this is a service for all investors that looks and feels different. We have
a fundamentally different building block in the evolutionary process.The building
block of all that change was the unit trust structure being the scalable component
and accessible route for mass affluent investors (but not High NetWorth per se) to
professionally managed investment products. It’s not necessarily so much a bigger
change than it is an entirely different animal to what we’ve seen before.
Q. Why is a new building block necessary?
SH:The reason why a new building block is important now is because the old unit
trust building block is being increasingly viewed with scepticism. The unit trust
method of adviser remuneration is via product commissions. This practice is the
subject of increasingly stringent global review. As we’re seeing, a range of real
issues with the pooled treatment of taxation in a unit trust poses problems for
the unit trust structure. Also, unit trusts themselves have become the subject of
considerable consumer backlash.
Most fund managers
are realising that their
channels are becoming their
competitors. Similarly, most
advisers are realising that
their downstream providers
are becoming more of a
liability than an asset.

4. Why business re-modelling is essential in wealth management | February 2010 03Changing business models
Q. Is the Internet compressing the traditional supply chain?
SH: Yes, I refer to this as “supply chain pirating”. A key implication of the current
technology is that everyone can reach everyone else on the Internet.The traditional
industry supply chain is that you have products on platforms sold to clients through
advisers licensed to dealers groups supported by platforms which hosted the
product. It is a very sequential supply chain with, frankly, a lot of snouts in the
trough. However with the Internet, we have the opportunity for fewer sequences in
the chain because the Internet allows everyone to interact with each other. No longer
is product manufacturing the holy grail of fund managers, nor is advice the holy grail
of advisers, the fund managers can access the clients and the advisers with the right
software, can access the manufacturing capability. In an Internet world, you can cut
out the middleman. For this reason, most fund managers are starting to realise now
that their channels are becoming their competitors.Therefore, they need faster
delivery of their services at a lower cost. Similarly, most advisers are beginning
to realise that their downstream providers are becoming more of a liability than
an asset, and perhaps even posing a competitive threat. And this is because
brands that were held in high esteem have become less attractive, if not actually
detrimental. Many advisers say to us that reliance on a major brand is a liability in
delivering client-focussed wealth management services.
Q: Is the unit trust dead then?
SH: It’s more accurate to say that, to a large extent, the unit trust ‘limb’ of innovation
has reached the end of its innovative life. Its growth has been in decline for some
time and its conclusion has been accelerated by the global financial crisis.There is
no more innovation to be gleaned from the unit trust given that its whole basis of
commercialisation is under real threat.
Q: This is a crucial point, isn’t it? Some might just say that this is just the flavour of
the moment but what you’re saying is that we are in a fundamentally different era.
SH: Yes, we’ve reached the end of that particular evolutionary road – that being
Wealth Management 1.0. There is now a new road to achieve full scalability of
integrated advice and investment management at a lower cost.
Everybody is afraid
of something… What
distinguishes people who are
successful in their life from
those who are not, is what you
do with your fear.
Carly Fiorina(2007)

5. Why business re-modelling is essential in wealth management | February 2010 04Changing business models
Q. So how does the technology facilitate this?
SH:Technology facilitates processing power which is at the heart of our collective
capability to achieve scale in the provision of mass tailored portfolio management.
More specifically, Financial Simplicity leverages the increased processing power
now available and is an innovation based on a fundamentally different building
block basis for scalable investment management. The original solution for that old
problem of scalability was originally thought to be best solved by unit trusts. Indeed,
at the time, this was the best available answer given that processing power was not
sufficiently robust to support the issue of scale. Therefore, no one had developed
scalable mass tailored portfolio management in the old model. So, whilst the
problem of scalability itself is not new, the technology to solve the problem is. Using
enhanced processing power only fairly recently available, Financial Simplicity is
bringing the weight of current technology to bear and can offer a superior answer to
the scale problem to which unit trusts provided a first generation answer.
Q. What do you mean exactly when you refer to ‘significant processing power’?
SH: Significant processing power means speed and the ability to perform a number
of interdependent linear functions (such as model portfolio adjustment, trade
allocation and portfolio rebalancing, to name a few) simultaneously. Such processing
power enables a business to manage 1000s of portfolios individually in a compliant,
‘exception-less’ manner without an army of staff.Without such processing power,
you just couldn’t take on that number of clients. Processing power combined with
‘exception-less’ processing operation is the key to achieving scale. We’ve got
remarkable quant processing machines combined with smart algorithms that allow
us now to perform complex rebalancing tasks in 10 milliseconds.Without such
techniques and processing power, this would not be achievable.
Q. It sounds like we have a confluence of two change processes.
SH: Yes, that’s exactly what has occurred. There have been two streams of
innovation that have finally reached a confluence.The two streams, technology
development and new approaches in investment service delivery, have each been
supported by the development of the Internet. Significant processing power gave
Financial Simplicity the means to offer a solution to cost effective scalability. At the
same time, technology has finally reached the point where it can do what the unit
trust structure never could: deliver individually tailored portfolio management in a
completely scalable, and more cost effective, manner. This is part of the exponential
change that is occurring around the world with the demand for bespoke services
not products.We have been the developing the idea for 15 years but, without the
processing power and the Internet, were not able to provide a commercially viable
solution to the issue of scale and reach.
The key thing about change in
wealth management is that it
is not new. What is new is the
pace and profile of the change.

6. Why business re-modelling is essential in wealth management | February 2010 05Changing business models
Q. So you’re saying that we have two somewhat counterintuitive ideas – individual
tailoring vs mass application – within portfolio management and that each can
work effectively in unison?
SH: Yes, that’s the beauty of the technology. Given the processing power and the
mathematical underpinnings, we can now genuinely help wealth managers deliver a
mass affluent solution to all investors in a highly customised manner. An analogous
example would be Google which wouldn’t have been a feasible business model 15
or 20 years ago because they needed processing power and the Internet. In our
turn, we needed processing power and a portion of the Internet. At the same time,
there’s been a decline in attractiveness of the mainstream wealth management
model (egWealth Management 1.0) because clients want more transparency, more
individual management and the products are increasingly available to them through
the Internet anyway. In effect, we have helped create a new branch in the wealth
management evolutionary process to which an increasing number of groups are
subscribing.
Q. So what does this all mean for the changed wealth management model you
referred to at the beginning of the discussion?
SH:What this means from a wealth management business viewpoint is that there
is a new era in which advisers are in a position to ‘manufacture’ their own products
essentially. It also means that we are now in an era in which fund managers which, in
the past decade or so, have been largely disintermediated by the rise of platforms,
are now in a position to get clients back directly at the retail and the wholesale level.
So, as someone said to me very recently, “the race is on”.
Q: Is there room for everyone within the new model or is someone going to be
sacrificed?
SH: Everyone will have to reconsider their positions and decide with whom they want
to interact within the industry. In essence, they need to rethink their relevance in the
newWealth Management 2.0 business model. And they need to think quickly now
because change is here.
You’re either a leader or
follower. And, if you’re a
follower, who are you following
and what do you stand for?

7. Why business re-modelling is essential in wealth management | February 2010 06Changing business models
Q: So will the new model uncover a new generation of leaders?
SH:The new model will do a lot more than that although, of course, leaders will
emerge to take the place of those who choose not to evolve. In an era where brand
value is declining substantially, people are asking what you stand for, not whom do
you represent. We are looking for passion and principle not brand and distribution.
The risk is that if you wait till the technology and approach is mature, the whole field
will have been carved up by other people who will already be working with changed
consumer mindsets. You don’t actually have the control you think you have.The
biggest output from this global financial crisis is that there will only be ‘A graders’
left.They have to be competent, passionate, skilled and viable. You’re either a leader
or follower. Are you going to lead your clients or are you going to follow someone
else? Do you want them to follow you or someone else?
Q: Returning to the new wealth management model 2.0, how do we ensure we can
benefit from these changes?
SH:The first part of any change has to be a will. The biggest challenge is the
motivation to change. The motivation will come from something better or the
realisation that you may die without the change. Then you come to the second part
of the changing which is having a vision as to what you are change. The vision has to
meet the needs of the business and the stakeholders within the business. In making
the change to mass tailored portfolio management, the solution from Financial
Simplicity is now there to be implemented. However, it has taken 10 years to develop
and, for this reason, it would be a difficult decision for businesses (large or small) to
journey down the path of building their own solution when one is readily available.
It becomes a question of maintaining a focus on the core competency of one’s
business.
The only way you can help
people get over their fear is
to give them a vision that is
worth striving for.
Carly Fiorina(2007)

8. Why business re-modelling is essential in wealth management | February 2010 07Changing business models
Q: What would you say to those who are concerned with the associated challenges
of business models?
SH:The degree of perceived difficulty is not really relevant.The real question is what
will happen if you DON’Tchange. You’ll be left out on the dying tree limb that has
stopped growing and evolving.The longer you wait, the harder it’s going to be.This
is why early adopters will win in this race. Not just because they are there earlier
but because early adopters have a level of passion and passion is selling today, not
brand.
Q. So what will happen if wealth management businesses defer or delay their re-
modelling process?
SH: As emphasised at the beginning of this discussion, change is not new. As we
have seen before, those who fail to adapt to change become either irrelevant or
obsolete.There is no longer a sustainable choice.The only immediate choice relates
to the timing of when businesses actually decide to act on the change that has come
upon all of us. If you consider that consumers can, and obviously do, use the Internet
for a host of purposes, it follows logically that they will also be using the Internet
to access wealth management products in a very cost competitive manner.The
technology developed by Financial Simplicity provides a new solution for an old
problem. Businesses that act early can take advantage of the confluence between
the technology and new service requirements.
It is not the strongest of the species that survives, nor the most
intelligent, but the one most responsive to change.
Charles Darwin (attributed)