The wealth management industry is undoubtedly about to enter one of the strongest transformation phases in its history. For a long time, the profession was first and foremost reserved for the large network banks that dominated both production and much of the distribution.

Even if the principle was that a distributor had to offer other products than his own, allowing a model called “open architecture” to develop progressively  alongside the traditional integrated model, a very significant part of the activity still was in line with a captive model, maintaining confusion over the role of the advisor and added value to customers.

The context is dramatically changing, under the combined effect of regulation and disruptive technologies. There is considerable concern that MiFID2 will significantly change the situation of independent distributors by requiring them to become affiliates of large producers, or to charge consulting fees (which the industry today hardly imagines). Yet what is under way is likely to impact much more than independent distributors; and is the first step towards thorough restructuring of the wealth management market, right into the heart of network banking activities.

The traditional sharing of remuneration between the distributor and the producer was based on the premise that the management represented only a part of the value added to the customer throughout the life of investment. The role of the distributor was to guide the customer in a wide range of investment solutions and to provide added value in addition to just create connection between customer and asset manager.

The ability of the distributor to perform due diligence on clients at the time of investment to ensure the adequacy of the products to their profile justified charging high entry fees and receiving a substantial portion of the management fees retroceded by the producer. However, this step, which is a regulatory obligation at purchase, was only rarely being monitored by the distributor in the management phase, in spite of sometimes abrupt changes in capital market law. It is this long-term support, intended to protect investors from products that become irrelevant as financial markets evolve, that is required by MiFID2.

The complication is that the new regulations no longer allow distributors’ remuneration as it used to be in the form of retrocession of commissions, and then modify the charging scheme with which customers were familiar. This creates paradoxical situations where MiFID2 requires from distributors to do work they had not been doing previously and abolishes the indirect remuneration they received until then, while requiring customer to pay for financial advice, the cost of which was “hidden”. Basically, after MiFID2, asset managers will work more to earn less, within a framework of transparency that will drastically reduce the ways to charge customers.

But monitoring the risks to which a customer is exposed transforms the role of the distributor and increases the service to be rendered. The key question is what the cost of investment management services should be. If it is obvious that the management of an investment mandate requires real work and expertise whose cost will not be disputed, what about just selling simple savings products? Is it appropriate that advice provided before sale by the banking networks is free, even though this advice is often essential to the investor to make decisions? Then the investor, having benefited from the skills of one or more advisors, according to his ability to take advantage of the services that the banks offer for free, pays high fees to have the right to entrust an asset manager with his money even though the service now rendered is minimal or non-existent. if he purchased index products?

If we refer to institutional activities where power relations are much more equitable between asset managers and investors, three issues stand out clearly. Firstly, the client pays for a consulting service, often provided by a specialist (consultant) who has become in many cases an intermediary between investors and asset managers. Secondly, the management itself is often based on a remuneration model with a small fixed component and a variable component related to the product performance. Lastly, the support services (reporting, fund administration, etc.), which can be substantial for institutional investors, are paid according to the services rendered: the more the investor performs these functions himself, the less he will accept paying the asset manager.

So how much does an individual have to pay? If we transpose the model applied for institutional investors, he will pay a little amount for the consulting service in line with the complexity of the service received. He will pay for the management service if he chooses products with high added, but very little if he chooses products with a level of performance close to index products. Lastly, he will mainly pay for reporting and monitoring services imposed by regulatory authorities, but the cost will tend to decrease as asset managers organize to industrialize the provision of such services, as they have. already done for institutional investors.

How can an industry with such inconsistent pricing model withstand disruption? First of all alarmists should be reminded that the wealth management industry is still experiencing strong volume growth in a favorable context of changes in demography and attitudes to savings. The winners will therefore be those who will succeed in investing to adjust their product offering and cost model to take advantage of this growth, notably by exploiting the solutions offered by robo-advisor technologies. The challenge is not so much to offer fully automated services as to respond effectively to customers’ demand for advice by reinforcing the level of service provided while meeting regulatory requirements. These transformations are now enabled by technology but require significant investments in information systems, the use of technical partners capable of maintaining a level of service that will change significantly, and a total rethink of working methods focused on creating value. Digital processes and technology use are no longer an option but a prerequisite. Traditional suppliers know that if they fail to evolve, new entrants offering services based on robo-advisor technology or online banking will take the lead. And as everyone knows, in big industrial revolutions, longstanding activity may not be a source of strength…