Pareto’s Revenge
25 years ago in Indianapolis a simple question asked by a 21 year old sales assistant awakened an at-scale industry to the benefits of high touch - and set the stage for that scale opportunity to return in 2022.
Way way back in 1997, I met a terrific Merrill Lynch advisor and his young sales assistant who found that 88% of their practice’s revenues were created by just 12% of their clients. “Why do we do so much for people who don’t pay us?”, was her naïve query.
Sharing their discovery with supportive local management, the pair shrunk their book to just 35 households while increasing proactive engagement with each family. The results were staggering. Share of wallet soared as assets were consolidated, significantly boosted their revenues and driving a crazy level of referrals. I captured the story in a 2001 book with Evan Cooper, Attract and Retain the Affluent Investor. But the real traction occurred with the practice management concept of Supernova, followed by a new service model I was privileged to help build - Merrill Lynch Private Wealth.
High touch with fewer clients was not a new concept. Goldman Sachs and most private banks were already reaping the benefits, including high share of wallet, intergenerational wealth transfer and valuable referrals of similar clients. The nuance was acceptance at a “scale” player known at the time for bringing “Wall Street to Main Street”. At the time the average Series 7 registered representative had 500 accounts scattered across 125 households. Applying that 88/12 - or the more familiar 80/20 Pareto principle - meant that most of an advisor’s revenue was earned from just 25 of those households. Skeptics demanded more data - but the facts confirmed the harsh reality.
The march continued - wealth management was an exclusive offering and personal attention was available - to the wealthiest clients.
Fast forward to Fidelity in late 2009. Net outflows to competition spurred analysis that revealed to our new team that even longtime clients were looking for “planning” and “relationship” - and willing to pay more. SOW of high value clients had slid below 50%. A bold new strategy to turn the tide was ultimately successful, driving AUA from $850 billion to now well over $4 trillion and establishing Fidelity’s retail division as the largest Fidelity business unit.
But what about Pareto?
A closer look at the Fidelity retail engagement strategy shows the firm actually embraced Pareto by separating clients by service model. A new advice offering was provided to clients seeking high touch (and willing to pay), while enhanced DIY digital tools created the industry’s biggest robo. In the middle floated the ad hoc offering, the Private Client Group, with the on-call availability of human advisors. So there was respect for 80/20 - at both ends.
The key of course was client segmentation - with service models to match client preferences. Target client personas humanized efforts to better connect with clients. Having an Active Trader offering and a High Net Worth Bond Desk drove more self-directed client engagement and recaptured assets that had decamped for other firms. Buying a bond online became as easy as picking a stock. Many client households had accounts in multiple service models for different purposes and often for different family members.
Results tell the story. Net flows turned positive as Fidelity’s Private Client Group net promoter score soared from 8 to 63. Advice and guidance efforts expanded to include retirement plan participants.
Fast forward again to today. Bull market confidence has helped scatter client assets across the industry to an array of providers. We see wire house numbers averaging 50% SOW - with higher rates among top advisors but the same stubborn 80/20 rule across the board. The “moveable middle” advisor population tops 60% in many firms, according to one IBD CEO and confirmed by others. Typical HNW households are working with 4-6 providers.
Money is on the move - still seeking more “relationship” and “planning” - and the inevitable post-bull consolidation. Add in the march to retirement by the Boomer age wave and you have the makings of a serious battle for assets. Without a better strategy for segmenting and servicing clients, the lack of industry capacity to engage with human advisors will lead to serious losses among “scale” firms dependent on human advisors for coverage.
The biggest players are on it. Morgan Stanley and UBS acquired robo/DIY capabilities. Empower is angling in from the plan participant side, plus Personal Capital and Morgan bought Soliam and also offers Graystone advisors. Merrill is now a bank and touts Merrill Direct. All great additions with significant long-term promise. And therein lies Pareto’s revenge.
80% of financial industry consumers are unaware of these innovations because they don’t see the benefits. They are waiting and wondering - increasingly anxious about their retirement accounts. Annuity sales in the second quarter of 2022 were the highest ever. Securitized lending has soared. Peace of mind, wellness, protected income, certainty - all great objectives but hard to achieve if you don’t have a lot of dough. Add a historic level of advisor retirements and you have even fewer available trusted professionals.
The parts are there, the execution is not. Buying a capability is not the same business as integrating and connecting the capability, aligning it with the delivery mechanisms and then driving adoption among both advisors and consumers. Imagine your new big screen TV without a power cord…..
Meanwhile, Pareto’s Revenge awaits the firms that cannot reach the unengaged clients. FinTech entrepreneurs are salivating over the gaps they can fill with capabilities that work 24/7/365. Imagine the fate of the human advisory firm that misses a client’s window for selecting their Medicare plan, and the robot gets there on time.
Digital journeys, next best actions, client data mining and better segmentation are all in flight, but the number of impacted clients indicates we are still in the very early innings of a long game. At The Execution Project, this is our world. At-scale engagement using client segmentation, advisor coaching, scale plays with targeted offerings using both advisors and direct-to-consumer lead generation in support of advisors. The upside is extraordinary but the work of adoption is dullingly old school. Companies holding on to bull market profits hope the 20% can keep producing but Pareto is on the rise.
Steve Gresham is ceo of The Execution Project, LLC, a consulting firm driving adoption of wealth management innovations, and managing partner of Next Chapter, an industry effort to reimagine “retirement” across 60 affiliated companies. From 2009-2017, he was executive vice president and head of Fidelity’s Private Client Group.
