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Wealth-Transfer Torch is (Not) Passed


In the decades ahead, a new generation will inherit an estimated $20 trillion. Yet big disappointments lie ahead for financial firms that believe they will benefit from this multigenerational business. The transferred wealth will move into the hands of heirs who are technologically adept and who actively participate in the management of their wealth. Because of this shift in expectations, most financial services relationships won't successfully make the transition to the next generation.

Members of the so-called Generation X and Generation Y are the first to be born during the computer age, and most simply don't remember a time when computers weren't central to their lives. They also do not always have an appreciation for the incremental value of an advised relationship.

Because of this upbringing, the next generation of mass-affluent customers expect their accounts to be seamlessly linked. They expect a full range of actionable investment options-both traditional and nontraditional. They expect sophisticated, tailored, real-time Web-based services that are at their fingertips 24/7, via both stationary and mobile devices. And they expect their financial providers to be accessible, innovative and fully attuned to their changing needs.

Bold Steps

Gen X and Gen Y will discover that their parents' financial services providers are still using the processes and technologies of the previous century. This, coupled with the relatively low value placed on the advisory relationship, will hasten the severing of old ties in favor of more tech-savvy providers and advisers who are more specifically in tune with the needs of the next generations.

For those firms willing to take bold steps, the coming generational shift presents an opportunity to tackle both the impending wealth transfer to Gen X-Gen Y in developed nations and the underserved wealth segment within emerging economies. These firms will change the face of advisory services by addressing the needs and intentions that bridge health and wealth.

For example, the Baby Boom Gen X and Gen Y cohorts seek trusted advice through multiple channels, including their doctors, pharmacists, accountants, insurance agents and financial advisers. From these sources, they aggregate a picture of their own, unique health and wealth equations. They also spend time in social networking venues, drawing on advice generated via data analytics to put their decisions in a context that is relevant to their buyer values (e.g., web retailers' guidance that X percent of people who viewed this item also purchased that item).

Therefore, a key success factor for advisory firms will be to recognize the power of individual knowledge and experiences as a subset of all available information. In other words, those who want to take the lead position in advisory services will need to blend advice from the wisdom of experts and the wisdom of crowds to deliver a sophisticated, tailored and branded experience that clearly defines value.

In tandem with this more sophisticated, multi-channel experience, firms that offer health and wealth advice will be pushed for greater pricing transparency. The existing pricing models surrounding health and financial advisory services (such as compensation arrangements between big pharmaceutical companies and health care practitioners, or mutual fund companies and financial advisers) will give way to an auction model.

The health-wealth advisory market needs to take a page from the retail products handbook in order to continue to capture wealth transfers and position itself for success in emerging markets. This retail model, perhaps best exemplified by Amazon.com, has already knocked down geographic, economic, cultural and social barriers on a global scale. The number of Gen X and Gen Y consumers who have visited Amazon.com, used TripAdvisor or purchased music from iTunes is significant. This type of retail product model (where transparent pricing, bundled advice and a pleasant experience are the norm) also more easily translates into emerging economies, which is where the majority of wealth will be created over the next 20 years.

The Amazon model has clear advantages over the complex set of pricing and compensation structures currently prevalent in healthcare and financial services. Some variant of that model is likely to win out in the years ahead. For example, financial firms may harness the wisdom-of-crowds knowledge made possible by data analytics. This knowledge helps customers see that people who bought book X also bought book Y. In a wealth management application, it could show that people who own 529 plans also own fixed-income and long-term-care products.

Handful of Innovators

The advisory firm of the future is already taking shape at a handful of innovative firms that embrace multi-channel sales and servicing models and are, in the process, adapting innovations from other industries. Unlike their more traditional counterparts, these firms are taking bold steps to lock in their roles in the new marketplace.

The combination of the demographics of aging, regulatory change breaking down the barriers between financial organizations, the increasing speed and access to information, and technological sophistication have made wealth management one of the fastest growing and most fiercely competitive segments in the financial services industry.

The challenge is to build personal relationships on a mass scale. Central to these relationships is trust. Trust alone requires cost and price transparency. As investment managers strive to establish a trusted financial advisory relationship with clients, the most successful will focus on offering advice across a customer's entire balance sheet by establishing a 360-degree view inclusive of risk-based products, investments and liabilities. Doing so cost-effectively demands a high-performance approach to core platforms, operational infrastructure and all ancillary technology.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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