A dose of “disruptive innovation” could be just what the wealth management industry needs, according to a new report by Deloitte.

The recent financial market turmoil appears to have deeply affected the mentality of wealthy investors, with many now skeptical of the advice offered by wealth managers. However, a fresh burst of “disruptive innovation” could be just what the industry needs, according to a new report by Deloitte.

Although 42 per cent of the 1,027 respondents to Deloitte’s survey have worked with an advisor in the past, over a third currently do not. The firm believes that there are ways to convert this segment into profitable wealth management clients.

The survey - The out-of-sync advisor: Applying disruptive innovation to serve non-consumers of wealth management advice - involved participants that were at least 25 years of age, with at least $250,000 in investable assets. A total of 79 per cent of the respondents had investable assets between $250,000 and $1 million, while 16 per cent had between $1 million and $2 million.

Deloitte found that, over the financially turbulent years, investors have become more conservative in their investment philosophies, with 41 per cent of respondents describing themselves in this way in October 2012, up from 20 per cent in September 2008.

This shift in values resulted in some investors pulling out from professional advice, while others followed their advisors - especially those migrating to an independent channel, the firm said. The main reason cited by those who decided to leave their advisors was because they felt that the cost of financial advice was “no longer worth it,” while the same proportion (27 per cent) of investors said they felt that their advisor was “putting their own interests ahead of mine,” the survey found. 

How can traditional wealth managers rebuild their asset share?

Deloitte said its findings are “not encouraging for an industry struggling to recover from the financial markets turmoil,” but added that part of the answer might lie in tapping the non-consumers of advice segment.  

As part of this, the firm suggests that “disruptive innovation” could provide a viable path to capture more growth for wealth managers. This is a basic concept that has helped shape the creation of some of the biggest markets across many industries, it said.

Interestingly, however: “Disruptive innovations begin as seemingly inferior point solutions to very specific problems that, on their own, may not amount to much.”

But foothold business models which start out as “seemingly inferior” to the more established offerings tend to have a “much better chance of survival,” the firm said. When achieved, disruptive innovation has a “systematically higher success rate than sustaining innovation,” it added.  

In light of its findings, Deloitte has outlined some possible areas for disruptive innovation, such as extending open architecture and de-emphasizing proprietary products, as well as offering non-investment related services.

“Likewise, innovations in fee structures and pricing that challenge the current models in the industry would very likely be welcomed by many mass affluent customers, particularly non-consumers of advice,” the firm said.

It added that, according to the survey, many investors consider other methods of fee-based compensation - like fees on income earned and flat fees for services - to be “more fair” than fees related to asset size.

The firm also cited “immense opportunity” in the operations area, where it said greater efficiencies could be extracted through new technologies and increased trading volumes.

It emphasized that the above-mentioned suggestions are not exhaustive, saying: “There are possibly other aspects of the wealth management industry that are ripe for disruptive innovation in the future.”

The family office model

Even though multi-family offices generally serve clients with around $500 million in investable assets, some aspects of the model can be adapted to cater to the mass affluent, Deloitte said.

For example, MFOs offer an array of services which “may be more in tune” with investors’ current priorities, especially non-consumers of advice, it said. One reason for this is that MFOs are often modeled around services and products purchased as opposed to percentage of assets purchased, the report said.

Similarly, they function as “neutral purchasers” whose advice is not tied to products. “This may lead to clients generally perceiving the advice to be better, the products to be more diverse, and the trust factor to be higher,” the firm said.

On this, it concluded: “Traditional firms may have to sacrifice their margins to compete with the MFO model, as clients who feel like they are overpaying 'vote with their feet' in favor of flat pricing and conflict-free advice.”

The survey was conducted online by Harris Interactive in October 2012.