The world of financial planning and wealth management is a constantly moving target, with new clients, new priorities and new ways of doing business. Modern clients demand a higher level of service than their parents and grandparents, and they expect 24/7 access to their portfolios and their trading and research goals. This new generation of clients was raised on Netflix and Amazon, and they expect instant service and timely responses to all their inquiries.
The needs of the modern client base has led the owners of financial planning and wealth management firms to implement new products and services, further changing the way they do business and how they serve their customers. The use of FinTech tools has taken off in recent years, with products like WealthBox, which streamlines client communication; services like eMoneyAdvisor, which makes portfolio management easier; and analysis like Truelytics, which helps owners optimize the value of their practices across key metrics.
While all this has been going on, the wider world has been changing and evolving as well. The Office of Supervisory Jurisdiction (OSJ) business model is a case in point, and practice owners can use its evolution as a guideline for their businesses.
As a financial industry professional and the owner of a financial planning or wealth management firm, you are no doubt familiar with the OSJ model. Understanding how it impacts brokers, wealth managers and other financial professionals is essential. The results of recent study of OSJs by AssetMark are quite revealing.
The study found that OSJs, the entities responsible for providing compliance supervision to financial industry professionals, have had to change and evolve in response to major changes in the industry. If you have been in the financial industry for awhile, you have probably noticed the enormous changes that have taken place. These changes seem to be coming faster and faster, requiring industry professionals, regulatory agencies and others to evolve and change with them.
Among the challenges facing OSJs in this new world are increased levels of competition, new forms of competition, including the rise in passive investing and robo-investors, enhancements in technology, online security and the protection of client data, technological changes and innovations, industry consolidation, and recent and upcoming regulations.
The study also found that the business models OSJs are using have been changing in response to these challenges. As practice owners seek to enhance client service and respond to client needs, they are changing the way they do business, and the OSJ business model is changing right along with them.
Three main business models have emerged among the OSJs charged with ensuring compliance.
The traditional OSJ is still a popular business model, mainly focused on the supervision and promotion of personal relationships, referral networks and the maintenance of a solid reputation to drive growth and value.
This growing business model focuses largely on the evolution of the traditional OSJ. Indeed, facilitators take the traditional OSJ business model one step further by including things like practice management and marketing support to build businesses and allow them to grow.
The business builder approach is the most aggressive of the OSJ business models. This approach to business growth is proactive in nature - instead of business as usual, those who embrace the Business Builder OSJ model are constantly engaged in providing additional services to their clients. Whether these services are customized for the practice or provided on a turnkey basis, the Business Builder model is focused on proactive growth.
In outlining the three main types of OSJ business models and the results of each approach, the study found some surprising findings. In recent years, there has been a growing belief that small financial planning and wealth management firms are at a distinct disadvantage compared to their larger and more well-capitalized counterparts. Indeed, the belief that bigger is better contributes to driving the current wave of financial industry consolidations.
But despite popular belief, the study found that small firms were just as well equipped and just as able to deliver a quality consulting model to financial advisors as their larger peers. That is good news for smaller business builders, and for the smaller financial planning and wealth management practices they serve.
The study also found that the current iteration of the OSJ business model must work within the established framework of the individual broker-dealer. The study further showed that OSJs that expanded their service offerings most aggressively tended to have the best financial performance.
At some level, it is easy to see why there is such a strong tie between the financial performance of an OSJ and the services it offers to individual practices. Regardless of their business model, all OSJs build a portfolio of advisors, creating both commission-based and fee-based revenue in the process.
On the other hand, the study found that the Business Builder OSJ model was different in a number of ways. Unlike its more traditional counterparts, the typical Business Builder OSJ generates the majority of its revenue through recurring fees - fees based on assets under management. These recurring AUM-based fees are part and parcel of the Business Builder OSJ, and one of the biggest reasons for the rapid growth of this sector.
This Business Builder OSJ model is in stark contrast to the traditional OSJs' way of doing business. While the majority of Business Builder revenue comes from recurring AUM-based fees, almost three quarters of the revenue of a traditional OSJ comes from commissions. By comparison, 60 percent the Business Builder OSJ model's revenue is fee-based.
The only thing certain in the financial industry is change, and that is more true now than ever before. The practice owner's world is constantly changing and evolving, and the OSJ business model is changing just as rapidly. Understanding the changes can help fine-tune practice operations and better serve clients.
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