Within the wide range of financial services offered, wealth management happens to be one of the most attractive sectors. This is due to the fact that wealth management has higher growth prospects, requires lower capital and has a higher return on equity as compared to other retail banking businesses. Secondly, wealth management businesses attract and retain profitable retail customers. The Founding Partner of the independent wealth management firm Avestar Capital, Xerxes Mullan states, “The ultra-high-net-worth clientele expect a close working relationship with their wealth management service providers and regard this as one of the most important financial relationships”.
Furthermore, Xerxes Mullan also believes that the industry is seeing significant changes. There is a new generation of investors who are shaped by emerging technologies which impact their expectations and preferences. In a publication titled ‘US Disruptors in Wealth Management’ by Deloitte, it is stated that these new investors have been through the last financial crisis and are bringing new standards to the industry with respect to advice and investment products. They will continue to control an ever increasing share of US retail assets over the next 10 years. However, high levels of uncertainty and increasing costs of risks to investors as well as wealth management firms make for a rather challenging environment.
While advisors are aging, there is a transfer of wealth from baby boomers to their children in the near future. The consumers are changing in the sense that women control more assets, millennials and Gen Z prefer digital tools which impacts the other age groups and those in the gig economy require new ways of protection & retirement planning. This provides new opportunities but there are always regulatory burdens, new business models and new competition that disrupts the wealth management industry.
In the aforementioned report, Deloitte has identified 10 key sources of disruptions that the wealth management industry could potentially face.
- The new generation (X & Y) expects to interact with advisors differently and wants to be seen as unique individuals rather than as a part of a segment. They prefer advice tailored to fit their unique needs, to be able to understand this advice, they prefer to stay in control of their finances and make important decisions themselves. Since they are skeptical of authority they prefer conducting their own research and trust their peers. They expect a digital-first and personal experience and view risk as a downside.
- While a number of “robo advisors” have emerged in the past few years, they cannot fully displace human-based advice. Advisories should differentiate themselves by harnessing the power of science-based advice and combine the 2 elements to work out a hybrid model.
- Wealth management firms need to invest in building more advanced analytics and data management capabilities. Firms are expected to provide insightful reports which include more descriptive and predictive analytics with internal & external, structured & unstructured data. This will help the firms to predict clients’ likelihood of purchasing products, services, their lifetime value, risk tolerance, etc.
- As investors try to fulfill numerous goals, funds must advise them on how to fund these goals. Avestar Capital is one such firm that provides holistic solutions and uses the full strength of the client’s balance sheet to have the right mix of assets & liabilities. Firms should measure performance based on achieving these goals within a stipulated time as opposed to trying to beat market benchmarks.
- Retail investors & a number of startups are also vying for access to the best-in class investment solutions. Clients want access to the same strategies & opportunities as UHNWI and expect more democratization of investment solutions.
- With longer life expectancies and rising healthcare costs, wealth management firms should meet the clients’ retirement needs with new products, tools & services apart from just traditional retirement products.
- The aging of advisors and the new generation investors implies that some challenges could result in weakened client- advisor relationships. As baby boomers transfer wealth to the younger generations, new tools will need to be adopted and firms should focus on a team-based approach. This will promote the relationship even as lead advisors retire and will cover the shortage of advisors.
- Low interest rates, inflation rates and slow rates of economic growth have forced investors to rethink their strategies. The confusion is further compounded by high volatility and high levels of financial leverage.
- Wealth management firms are facing an increased regulatory burden which keeps getting more complex.
- New emerging key competitive trends can impact the margins of wealth management firms.
Additionally, a report by McKinsey & Company emphasizes that industries outside of financial services (Google, Amazon, Facebook) have caused client expectations to change in terms of virtual engagement, omnichannel support, instant payments, etc. They refer to the emergence of what is called the “Netflix” style model which is hyper-personalized, and data-driven. The report also predicts that big tech infrastructure providing cloud service offerings and analytics will continue to grow over time.
While these are some expected changes on the client front, advisors will also have to keep up. McKinsey & Company forecasts that by 2030, half the advisors will be women, 40% minorities and 50% mid-career in tenure. The approach toward recruiting & talent sources will have to be fundamentally changed to be more diverse.
The wealth management industry is due to undergo some seismic shifts in the next decade. This shift is heavily influenced by dynamic customer segments, rules of engagement, technological advances and competitive trends. These changes have a profound impact on the nature of advice, on advisors as well as wealth management firms’ operating / working models. However, those firms that are able to broaden their horizons and accommodate these changes will be able to thrive.
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