I’m always astounded by the number of exceptionally bright and capable financial and legal professionals who develop inventive, ingenious strategies and products and expect them to result in a tsunami of new clients.
I don’t doubt many of them are offering something innovative and superior to what is already available. But it’s delusional to think that this innate superiority will magically translate into a flood of opportunities, tremendous professional success and considerable personal wealth.
These strategies and products are varied. Some examples include a turnkey platform providing alternatives to individual qualified purchasers; a charitable trust that leverages robo-advisor technology to deliver top-quality, inexpensive investment advice, and an offshore legal structure using tax-deductible monies feeding into a portfolio that grows tax deferred. For the right client, each of these innovations is very advantageous.
But many of these endeavors fail, for a couple of very good reasons. First and foremost, the professional lacks access to clients who would appreciate the new product and be in a position to acquire and use it.
Specifically, “If you build it, they probably will not come.” There is even a pretty good chance they will never even become aware of the innovation until it goes mainstream, where there are more than a few versions being offered by an array of different professionals.
Distribution tends to be the most pronounced obstacle to any financial services innovation. Just being able to focus the appropriate messaging to the appropriate audiences can be quite problematic. This is especially the case when the audience in question is the wealthy.
Sadly, many financial entrepreneurs are under the delusion that mass-market approaches such as advertising will get them their flood of clients. They think that once the wealthy see the “magnificence” of their strategy or product, they will of course drop everything else until they get access to it. (This is only a slight exaggeration.)
The second cause of failure is that the business model behind many of these innovations is not fully formed and not very profitable—if it’s profitable at all. This seems to happen with a number of technology companies. This is a problem because, unless the financial innovation has deep-pocketed backers, there is a strong need to be profitable fairly quickly.
In the near future, however, we will see a plethora of financial innovations. The financial entrepreneurs who understand the critical roles of distribution and profit-oriented business models will be the ones who will help transform the industry. As good capitalists, they will become seriously wealthy in the process.
