Executive Summary 2016 U.S. Full Service Investor ...€¦ · the rise of the Validator. Validators...

Executive Summary

© 2016 J.D. Power and Associates, McGraw Hill Financial. All Rights Reserved. CONFIDENTIAL AND PROPRIETARY—For Internal Use.

2016 U.S. Full Service Investor Satisfaction StudySM

Michael Foy Practice Lead, Financial Services

Wealth Management +1 646-703-3868

[email protected]

2 www.jdpower.com © 2016 J.D. Power and Associates, McGraw Hill Financial. All Rights Reserved. CONFIDENTIAL AND PROPRIETARY—For Internal Use.

Welcome

The wealth management industry is entering a period of significant disruption, driven by a confluence of demographic, technological, and regulatory changes that will significantly change what investors expect from their advisor and their wealth management firm.

The Millennial generation recently surpassed Boomers as the largest demographic group in the U.S. workforce, and they are looking for a very different kind of wealth management experience than their parents. They don’t fit neatly into either the traditional full-service or self-directed investor paradigms, but instead want to play an active role in managing their money and also have access to a trusted advisor whenever they need one.

Technology is in some way disrupting nearly every industry, and wealth management is no exception. The emergence of the robo-advisor phenomenon is not the only way technology is transforming the investor experience, but by enabling the delivery of portfolio management at a fraction of the cost of a human advisor, it does pose the most direct challenge to the traditional full-service value proposition.

Finally, the anticipated Department of Labor rule on the fiduciary standard is likely to have a significant impact; 62% of advisors recently surveyed by Fidelity expect to unload some of their smaller clients who will no longer be profitable to manage under the new constraints1.

Michael Foy Practice Lead, Financial Services Wealth Management +1 646-703-3868 [email protected]

Source: 1Fidelity Institutional, 2016 Financial Adviser Community, Expectations of Upcoming DOL Ruling Study


Welcome

What do these seemingly disparate trends have in common? They each reinforce the importance of a trend that’s been emerging over the past several years, what J.D. Power calls the rise of the Validator.

Validators are investors who want to make their own decisions but also want access to an advisor. Nearly two-thirds of Millennials are Validators, but so are about one-third of other full service investors, up from 24% just 2 years ago.

As a group, Validators are much more interested in robo-advisors than other investors, and, as these investors tend to skew younger, they will also likely be disproportionally among those who advisors and firms will increasingly struggle to service effectively or profitably under a more arduous regulatory burden.

Validators also have different needs, preferences, and priorities from their wealth management provider, they care more about value and are more willing to consider switching firms, including to non-traditional providers of investment advice, whether that means a robo-advisor or a retail bank. They also stand to inherit an enormous amount of wealth over the coming decades, so the firms that are best able to understand and meet their needs today are most likely to be the industry leaders of tomorrow. Firms like Charles Schwab—this year’s highest performer—are leading the way.

Michael Foy Practice Lead, Financial Services Wealth Management +1 646-703-3868 [email protected]

Michael Foy


Market Impact and Economic Outlook

Investor satisfaction flat despite decline in markets and outlook

S&P 500 Index and Overall Satisfaction Trends While market volatility is up sharply and the S&P is down year over year for the first time since 2009, overall investor satisfaction as measured by the J.D. Power 2016 U.S. Full Service Investor Satisfaction StudySM has essentially remained flat since 2014.

Investors also remain relatively sanguine about economic conditions and especially about their own financial circumstances. Just 12% of investors say they are “worse off” than a year ago, and 66% indicate they are more positive than negative about their personal financial outlook, while 48% indicate being more positive than negative about the broader economic outlook.

While the data suggests investors remain relatively confident, 2016 is the first year since 2010 that investors’ personal financial outlook and outlook for the economy had not improved year over year.

^GSPC S&P 500 Index Source: Standard & Poor’s; Index via Yahoo! Finance at http://finance.yahoo.com

686

714

758 762 776

731

769 772 775 789

807 807 804

680

880

400

2,400

'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Overall Satisfactio

n In

dex

S&P 500 Index Overall Satisfaction Index

S&P

50

0 I

nd

ex

Compared to a year ago, would you say you are financially…

38% 29%

54% 59%

8% 12%

2015 2016

Better off About the same Worse off

Note: 2016 study was in field January 5 through January 31, 2016


837

822

822

810

809

809

805

805

804

802

789

782

781

777

774

774

772

771

768

766

765

832

500 1,000

Charles Schwab & Co., Inc.

Edward Jones

Fidelity Investments

UBS Financial Services

Ameriprise Financial

Merrill Lynch Wealth Management

Raymond James

Wells Fargo Advisors

Industry Average

U.S. Bank

RBC Wealth Management

Stifel, Nicolaus & Company

Chase

AXA Advisors LLC.

Citigroup (CitiCorp)

Morgan Stanley Wealth Management

Northwestern Mutual

LPL Financial

PNC Wealth Management

Lincoln Financial Network

Voya Financial

USAA Wealth Management

Firm Rankings

Schwab performance underscores shift in both strategy and market needs

Overall Satisfaction Index (On a 1,000-point scale)

Over the past several years, Charles Schwab has focused on going beyond its legacy business as a discounter or self-directed platform to emerge as a leading full service wealth management provider.

By improving interactions with advisors as well as building on its strengths around fees, performance, product offerings, and account information, Charles Schwab has developed an overall client experience that is closely aligned with the evolving priorities of today’s full service investor.

Notes: Firm index scores are significantly higher ▲ / ▼ lower than 2015 at a 90% confidence interval; USAA Wealth Management is not rank eligible due to member exclusivity

Difference vs. 2015

(On a 1,000-point scale)

27 ▲

10

10

27 ▲

2

5

(4)

(5)

(3)

0

(11)

(21)

30 ▲

4

36 ▲

(8)

1

(11)

N/A

(12)

N/A

N/A


Investor Satisfaction Drives Revenue

Satisfaction drives loyalty, net new assets, and referrals

13%

50%

85%

29%

53%

70%

13%

22% 28%

Less Satisfied(Bottom 25%)

Median Satisfaction(Middle 50% of clients)

Highly Satisfied(Top 25%)

Percent definitely will recommend firm

Percent definitely will not switch firms

Percent increased investment in the past 12 months

Business Impacts of Investor Satisfaction In addition to improving retention and loyalty, investor satisfaction significantly impacts critical drivers of new business, both increasing share of wallet among existing clients and generating referrals, which remains by far the most important source of new clients.

Average satisfaction scores for firms are clustered within a fairly narrow range between 765 and 837, which masks a lack of consistency at the individual investor level: overall satisfaction among 21% of investors is below 700, while satisfaction among 28% is above 900.

High-ranking firms with business models as different as Charles Schwab and Edward Jones outperform peers largely by delivering a more consistent experience, with just 12% and 14% of their clients, respectively, falling below 700.

Note: 1Advocates are those who say they “definitely will” recommend the firm on a 4-point scale


Key Industry Themes

The 2016 study identifies and highlights key challenges facing the wealth management industry and how firms can best respond to meet evolving investor expectations.

1. Millennials and the Rise of the Validator

2. Goals-Based Advice and Investment Performance

3. Transparency on Fees

4. Robo-Advisor


The Rise of the Validator

Millennials lead the way, with older investors following

Millennial investors, even those who use a full service advisor, tend to be Validators, who want to play a much more active role in the management of their wealth than previous generations.

While some may speculate Millennials will change as their wealth grows and their needs become more complex, research suggests the opposite dynamic, i.e., more investors in all the older generations are embracing the Validator paradigm as technology empowers them to access more and better information, tools, and educational resources.

1J.D. Power defines generational groups as Pre-Boomers (born before 1946); Boomers (1946-1964); Gen X (1965-1976); and Gen Y (1977-1994). Millennials (1982-1994) are a subset of Gen Y.

1 Validators as a Share of Full Service Investors

Validator: Advisor acts as a sounding board for my ideas, but I make my own decisions

Collaborator: Collaborate with an advisor and depend on their guidance and advice

Delegator: An advisor makes all decisions on my behalf

47% 64%

25% 30%

43%

32%

60% 56%

10% 4% 16% 15%

2014 2016 2014 2016

Delegators

Collaborators

Validators

Millennials All Others


How Are Validators Different?

The advisor is still most critical, but performance and fees matter more

Relative Impact of Key Drivers of Satisfaction As Validators continue to increase in share of the overall investor market, firms need to prioritize enhancing aspects of the experience that align with their unique priorities.

Financial Advisor remains the most important factor in the overall relationship; however, Investment Performance and Commissions & Fees are relatively more important for Validators.

Also, the specific attributes Validators most value in their advisor are different; for example, Ease of contact becomes more important. Firms can adapt to this by supporting alternative channels such as text, chat, social media, and video conferencing.

1

2% 1% 2% 7% 8% 7%

12% 13% 10%

12% 15% 9%

16% 19%

14%

17% 15%

20%

35% 28% 37%

2016 IndexModel

Validators Collaborators

Financial Advisor

Account Information

Investment Performance

Commissions & Fees

Product Offerings

Website

Problem Resolution

Validators Collaborators

No. 1 Promptness in keeping you up to date

Promptness in keeping you up to date

No. 2 Ease of contacting Care for needs

No. 3 Courtesy Courtesy

Top Three Most Important Advisor Attributes


Goals-Based Advice and Investment Performance

Advisors are not consistently delivering on their promises

Stages of Goals-Based

Investing

Stage 1: Goal Setting

• Advisor helped set goals

• Advisor discussed risk

Stage 2: Implement Strategy

• Advisor provides advice based on goals

• Effectively incorporated risk into plan

Stage 3: Ongoing Tracking and Monitoring

• Reviewed the plan in the past year

• Discussed needs and how they may have changed

Firms have been promoting the concept of goals-based advice or investing for several years; however, few investors indicate their advisors are actually delivering on it.

Goals-based advice is important for several reasons: it improves investor satisfaction with Investment Performance and mitigates the impact of volatility by shifting the focus toward meeting long-term personal objectives as opposed to beating the market. It also elevates the role and value proposition of the advisor beyond asset allocation, both of which will likely face pricing pressure with the emergence of robo-advisors.

2

Stage 1: Goal setting

38% 62% 54% 42% 13%

28% 30% 41%

667

767 778 802

600

850

0%

100%

Did not meetStage 1

MetStage 1

Met Stage 1and Stage 2

Met All3 Stages

% of Investors Indicating Advisor Met Stage(s)

Net New Assets (as a percentage of portfolio)

Performance Satisfaction (1,000-point scale)


Transparency on Fees

Advisors need to explain fees and value to clients

54%

23%

8% 2%

37%

56% 63%

44%

9%

21%

29%

53%

557

637 648

734

400

800

0%

100%

Not explainedand not onstatements

Not explainedbut includedon statement

Explained butnot includedon statement

Explained andincluded

on statement

% Not at all understand fees

% Partially understand fees

% Completely understand fees

Percent Completely Understand Fee Structure The wealth management industry continues to struggle with Commissions & Fees satisfaction and transparency, a situation that may get even more challenging after the impending DOL rule is implemented.

While many advisors would prefer to talk to clients about anything but fees, it’s critical that they have these conversations so clients not only know what they pay, but also how that aligns with what they get from their advisor and firm.

Understanding and satisfaction are highest when investors are aware of receiving information about fees from their advisor and through regular account statements. Advisor discussions with clients on fees should include ensuring they understand how to read and interpret their statements, which are often difficult even for relatively sophisticated investors.

3


54% 62%

47%

18% 7%

% Clients interested if firm offered robo-advisor

Pre- Boomers

Boomers Gen X Millennials

Robo-Advisors Attractive to Millennials

Millennials have significant interest in automated solutions

Robo-Advisor Interest by Age Segment While automated advisory solutions, or robo-advisors, are still relatively new to the market—only 33% of full service investors are aware of them—when explained, 54% of investors indicate they would be interested in such services if offered by their firm.

The value proposition for automated advisory solutions resonates particularly well among Millennials, who are more likely than older generations to be comfortable with and trust a technology-based solution and appreciate the lower cost.

The top obstacles to adopting robo-advisors relate to a perceived lack of personalized advice and interaction and concerns about reliability and security of the technology. Firms planning to roll out robo-advisors should address these concerns directly.

4

Industry Average

61%

40%

31%

30%

27%

Impersonal/Prefer to talk to a person

Don’t trust/Not reliable

Online tool can’t understand my needs

Privacy concerns/Site not secure

Potential for biased recommendations

Top Reasons for Non-Interest


Affluent Millennials Are Most At Risk

Half of high-income young investors are considering switching firms

10% 8% 83%

Age <40, Income <$80K Age <40, Income $80K+ Age 40+

Young Higher Earners Are Most At Risk Though they represent just 8% of full service investors, high income younger investors1—including Millennials— control 67% of at-risk assets. About half (49%) of higher-income young investors say they either “probably will” or “definitely will” leave their current firm vs. just 8% of older investors.

This risk—or opportunity—underscores the importance of firms attracting and developing loyalty today within this market segment. Those that do not fully understand and do not meet their needs will likely be left behind as this generation of investors continue to amass wealth.

$176,965 $623,251 $798,406

Age <40, Income <$80K Age <40, Income $80K+ Age 40+

Percent of Clients

Percent of AT-RISK Clients (Definitely/Probably Will Switch)

Average Assets with Primary Firm

18% 67% 14%

Percent of AT-RISK Assets (Definitely/Probably Will Switch)

$83,173 $305,393 $63,872 Note: 1For the purposes of this analysis younger investors are under age 40 and older investors are ages 40 and above.


Key Questions

• Is your firm positioned to meet the needs of both emerging and established investor segments? Do you have a strategy to attract and retain affluent Millennials?

• Do your advisors consistently deliver goals-based advice to clients?

• Do your clients understand what they pay and how it relates to the value they receive from your firm?

• Do you view robo-advisors as a threat or an opportunity, and how does automated advice fit into your overall service platform?

How well is your firm positioned for the demographic, technological, regulatory, and competitive challenges ahead?

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