February 22, 2024

Investment in digital solutions is an insurance policy
David Reeve
Tech can help protect firms and advisors against two key risks
Every business carefully monitors its insurance coverage and cost, which can be significant. Premiums vary based on insurance product, coverage and risk. I recently reviewed a couple of our insurance policies — for cyber-risk and life insurance — and the premiums were about 0.5% of policy coverage.
Imagine if you could buy insurance that would not only protect you against risk but also effectively eliminate that risk. Digital compliance presents such an opportunity.
In the wealth business, firms and advisors face two significant risks. The first is regulatory risk: if you’re found to be non-compliant, you expose yourself to regulatory scrutiny, audit costs, fines and reputational damage. The second is client attrition: if clients take their assets elsewhere, you must rebuild your book. Let’s look at the costs of these two major risks.
In the 2022 KPMG report “A Triple Threat Across the Americas,” compliance was considered one of the top issues facing firms, including financial services and insurance firms. More than half of survey respondents (55%) said their firms suffered losses last year due to regulatory fines or compliance breaches, with the largest firms paying on average 0.8% of net profits as fines for non-compliance. Six in 10 executives expected these fines to increase.
Regulators in North America are stepping up their examinations following recent “best interest” regulations — client-focused reforms in Canada and Regulation Best Interest in the U.S. The business case for investing in strong digital compliance solutions and avoiding these increasing regulatory fines is compelling.
The other major cost to the advisor is client attrition. In a 2022 Salesforce survey of 2,250 wealth clients, a whopping 33% switched providers in the last 12 months. This trend of client attrition is expected to accelerate as baby boomers transfer their wealth to the next generation. The cost of replacing a departing client is significant. A Kitces Research survey of more than 800 U.S. financial advisors reported the average total cost to acquire a new client (or replace a departing client) is US$3,119. One of the rules of client management in any industry is that the cost of attracting new clients can be five to 25 times more than client retention costs.
So, how does digital compliance provide insurance against these major costs?
It’s helpful to take a deeper look at why this money is in motion. The Salesforce study highlights three primary factors driving client attrition: ease of use of digital wealth offerings, transparency of fees and open disclosure, and bad experience with previous advisors. To stem the tide of client attrition, advisors and firms will need to focus on creating great digital experiences, embracing client-friendly regulatory disclosure and acting in the best interests of their clients.
I asked one of our client leaders whether they see a correlation between compliance, advisor success and client attrition. His answer: “It’s the simple fact that this industry operates almost entirely on trust … The most successful advisors at our firm are also the most compliant, simply because they play by all the rules and have a loyal customer base as a result.”
As our industry evolves over the next few years, the winners will be those that retain and build profitable assets. Avoiding regulatory costs and reversing the trend of client attrition are tremendous opportunities to lead. Investing in digital wealth solutions will not only insure your practice and firm against these risks but also potentially eliminate them.
David Reeve is CEO of InvestorCOM Inc., a compliance technology provider to the wealth management industry.
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