Wealth Management As Disruption

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Wealth Management As Disruption

We saw two items last week that got us thinking about the historical arc of wealth management services over the last 100 years or so:

  • Gloria Vanderbilt’s passing at the age of 95 sent us looking for a famous anecdote about the family. In 1973, some 80 descendants of Cornelius Vanderbilt attended a reunion at Vanderbilt University, which “the Commodore” had seeded with a $1 million endowment in 1873. 

    Urban legend has it that none of the Vanderbilts in attendance were millionaires; the familial wealth hurt by the Depression and hundreds of heirs each getting their slice of the pie. Even Gloria Vanderbilt’s own trust fund in 1924 was the equivalent of just $70 million today and in the 1980s she had to sell her Southampton house to pay back taxes.
  • Watching the Antiques Roadshow we saw a lovely 1920s desk with an unusual sticker on the back reading “Hearst”. It turns out that while William Randolph Hearst was a talented publisher, he was not so good with personal finances. The Great Depression took its toll and by 1940 he had to sell much of his furniture collection at Gimbel’s department store in New York to pay back taxes. The item on the Roadshow was one of his pieces.

Many years ago we did an analysis that fits with the Vanderbilt/Hearst rags-to-riches-to-not-really-rich generational storyline. Looking at Hamptons social registers from 1927 and 1940, we found only half the families that appeared in the first “who’s who” of the New York elite were still there 13 years later in the second. In terms of those who didn’t make it through the Great Depression with their wealth and status intact, there was one common theme: they owned banks. Mystery solved…

All this made us wonder: will the Bezos family follow the example set by the Vanderbilts and be back to middle class in the next 50 years? Will the Zuckerbergs have to sell their furniture after the 99% of Facebook shares they have pledged to donate to charity is fully disbursed?

All that seems very unlikely, and the difference between wealth in 1919 and 2019 is broad access to competent, holistic financial planning. Informed by the lessons of prior American affluence gone wrong, wealthy individuals have smartened up in terms of how to maintain their financial security. They set up family offices, which diversify investments and actively manage the expectations – and spending patterns – of the next generation. They look for new asset classes like venture capital and crypto currencies. Making money is one goal, yes. But not losing it all is far more important.

What does all this have to do with technological disruption? A lot:

  • You can draw a straight line from financial products available only to the wealthy in the 1950s – 1970s to those available to anyone with $100 today. 

    Stock trading is virtually free, where one trade would have cost hundreds of dollars in the 1950s. Ditto for exchange traded funds, with fee structures counted in the basis points. In the 1950s, getting access to every stock in the S&P 500 would have been limited to a fraction of society’s 1% at the time. Now, anyone with $100 to open a robo-advisor account can have that exposure instantly and at virtually no cost.
  • But – and this is a big “but” – simply making wealth management cheaper and better only matters for those who have discretionary income to invest. For those who do – about 44% of the American population at last count – access to low cost investment products and services is clearly a boon. But what about the 56% who do not?
  • That means the next wave of financial industry disruption will not look like the last because technology has already done what it can for affluent users. If you have $1,000 you can invest more sensibly than the Vanderbilts. But if all you have is credit card debt and are scraping by on an hourly income, things are no different for you than 50 years ago.
  • To our thinking that is why Amazon is experimenting with credit cards for low-FICO score customers and Facebook is so set on launching its own global currency. The former directly addresses the unbanked in the US, and the latter is highly relevant for the large swaths of the world’s population that do not have access to a stable currency or affordable payment systems.

Bottom line: over the next decade the real disruption in financial services will come from addressing users that have been passed over in the first rounds.