The recent launch of Merrill Lynch’s robo-advisor platform is confirmation that the genie is out of the bottle when it comes to the Department of Labor's (DOL) contentious fiduciary ruling. More investors are justifiably insisting that financial advisors act in their best interest and broker-dealers are responding irrespective of our Commander in Tweet. The DOL ruling is, therefore, a distraction at this point.

The Old Guard of Investment Managers

Instead, something of greater magnitude and worth considering is the aging of the investment management industry. As recently as 2014, research from Cerulli Associates found that 43% of advisors are over the age of 55. Let us presume that many of these folks had admirable careers, but their days of innovation have gone the way of Quotron machines.

Freewheel Marketing believes that the winners and losers in investment management over the next 3-5 years will purely be a function of innovation through digital technology. Our recent study identifies those RIAs and asset managers taking the necessary steps to flourish in an evolving industry.

The critical issue here is best described in The Innovator’s Dilemma by Clayton Christensen, which details how new technologies can cause great firms to fail. Though it was published in 1997, the prophetic nature of the book is still applicable, as fintech firms have found shelter, due to the fact that their domain expertise is often so foreign to the decision makers at investment management firms.

Shelter is often veiled with arrogance from the old-guard, however. This is not without precedent, or reason, to be fair. The following is a lucid explanation from Christensen that details this dynamic and is easily applied to the proliferation of technology-based solutions within wealth management:

Disruptive technologies bring to a market a very different value proposition than had been available previously. Generally, disruptive technologies underperform established products in mainstream markets. But they have other features that a few fringe (and generally new) customers value. Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use.”

Disruptive Financial Technology

Disruptive technology is certainly an overused term these days, but the concept of convenience must not be ignored. This is because digital marketing technology will be the catalyst for registered investment advisors (RIAs) to foster better environments for prospects and clients, and otherwise compete with the robos and other fintech upstarts.

But this isn’t a Millennial story. In fact, it is lazy and unimaginative for this type of narrative to continue. What of the 50 year old that has lived through the horrors of securing a mortgage, for example? Refinancing online with automation driving the process, not paperwork and paper pushers, is likely preferable. If you are unconvinced, consider that Personal Capital’s average client is 45 years old.

RIAs must also leverage technology or they will fall behind those doing so in client acquisition and assets under management. In other words, great firms will falter if their management relies on the old bag of tricks. Christensen points to “planning better, working harder, becoming more customer-driven, and taking a longer-term perspective” as tone-deaf responses to disruptive technology. Relying on referrals is perhaps the only thing missing here.

The Freewheel Score

With this line of thinking, Freewheel Marketing evaluated over 250 RIAs and asset managers to compare their use of marketing software and technology. A scoring model was then applied, permitting the universe of firms to be ranked top to bottom. Each firm’s total score - or Freewheel Score - indicates the extent of their adoption of marketing technology. We believe that those firms with higher scores will grow AUM faster than those with lower scores, all else equal.

To test this, we applied the scoring methodology to FA Magazine’s list of the 50 fastest-growing RIAs and found that their scores were 28% higher than the broader universe of firms. This subset of firms is important because it spotlights investment managers across the size spectrum. It was particularly intriguing to therefore discover that so many of the rapidly growing firms are leveraging technology to do so. (For more, see: How Advisors Can Use Blogs to Boost Their AUM.)

Alexandria Capital

An example is Tarrytown, NY-based Alexandria Capital. The firm manages about $630 million, with asset growth over the last two years of about 50%. Additionally, their Freewheel Score ranked eighth when compared to the largest RIAs in the country. With this as a guide, we would assert that Alexandria Capital’s leadership team is not suffering from the innovator’s dilemma. Rather, they are dealing with it head on.

To better understand the firm’s appetite for innovation and their strategic vision, I sat down with their CEO, Augustine “Gus” Hong. By his account, the reason Alexandria is driven towards innovation is his experience previously founding fast-growing start-ups, including a fixed-income shop that grew to $7 billion AUM, and a media company. The latter of the two has helped him to avoid having an insular view of the world. Additionally, he reports to a highly engaged board of directors that shares his predisposition to constantly evolve. This has meant not getting too comfortable, making tough decisions and remaining focused on growing faster than his competitors.

In describing how technology supports their initiatives, Hong said,

“[Technology] centralizes the selling process, so advisors can better act as fiduciaries, and allows the firm to be laser-focused on getting in front of the right audience. This is a paradigm shift that has driven the firm’s cost of client acquisition downward. More broadly, I believe that technology is an indication of our firm’s commitment to excellence throughout all facets of the business; it has helped us to attract top talent, acquire more savvy clients, support best-in-class client service, and improve the firm’s valuation for potential outside investors.”

This is a stark contrast from the pitfalls described by Christensen of solving new problems with old solutions. Just as important, Hong is quick to point out that people drive success in the use of technology, particularly within investment management where relationships are so important. Therefore, with technology eliminating routine tasks, advisors can provide more intimate levels of client service. With this, Alexandria is relying upon digital technology to utilize a forensic approach to segmentation, with targeting, messaging, and client service now systematic and hyper-personalized.

Freewheel Marketing believes this is the future of wealth management. More established firms like UBS and Wells Fargo are launching their own robo-investing platforms, but there will always be a place for high-touch client service. Tech tools can help support this goal. For this reason, Freewheel Marketing is delighted to announce that Alexandria Capital is the recipient of its 2017 Award for Digital Excellence in Wealth Management.

To learn more, you can download the full report from Freewheel Marketing here.


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