Wealth Management Trend
Five key trends affecting the wealth management industry include increased investments in emerging technology and digital platforms; growth of independent financial advisors and third-party partnerships; the use of superior customer experience as a unique differentiator; offering hybrid advice solutions; and integrating other services with wealth management services/products.
Increased Investment in Emerging Technology and Digital Platforms
- Sixty-four percent of wealth management executives surveyed reckon that the future of asset/wealth management future is with the mass-affluent consumer segment/investors. This is a remarkable change from three years ago when only 32% signified the same.
- To further attract the mass affluent segment, wealth managers who serve this segment continue to invest in emerging technology such as artificial intelligence and data analytics to "provide personalized services and scale up quickly."
- In part, the key driver of this trend is the "democratization of the financial services industry by technology," which is forcing wealth managers to adopt financial technology platforms as well as emerging technologies.
- Wealth managers such as Openbank are latching on to this trend by setting up its own internal technologies and digital platforms. For example, it has invested in a robo-advisor for its customers to maximize its Investment Committee and another platform that's targeted at investors who like to manage their investments themselves.
- Similarly, Goldman Sachs is also developing a digital investment platform "that will be offered via its digital offshoot Marcus and target US' mass affluent segment, consisting of individuals with liquid assets between $100,000 and $1 million."
- To better put this into perspective, a 2015 report by McKinsey notes that 40% to 45% of affluent consumers that changed wealth managers in the last two years preceding the report did so to move to a firm that was digitally led.
- Over the next three years, it is expected that more mass affluent clients will adopt fintech solutions, growing from 28% today to 38% expecting to use such solutions.
Growth of Independent Financial Advisors and Third-Party Partnerships
- The percentage of investment clients who use independent advisors or wealth managers is set to increase by 18% over the next three years.
- On the other hand, the percentage of clients who use independent advisory or wealth management firms is set to increase by 14% over the same period.
- While the wealthiest clients have always engaged the services of independents, the expected growth over the next three years is driven by growth in the mass affluent segment; 34% currently, which is expected to reach 42% over the next three years.
- One of the factors driving this trend is the low rates offered by independents, as well as other newcomers and fintech startups in this space, which is forcing wealth management companies to partner with third-party firms to attract new clients.
- Additionally, independents offer more flexibility to clients as they can alter their offerings based on the client's valuation and needs, which can alter how much they also charge for their services, instead of the constraints large brokers face over set terms and agreements.
- To avoid some of their advisors going independent, wealth managers are also setting up independent channels or considering the same.
Use of Superior Customer Experience as a Unique Differentiator
- The business models in the wealth management industry continues to evolve, leading market players to find and develop offerings that are competitive and tailored to the needs of the various segments of consumers they serve or aspire to serve. For example, many are "leading with a high-touch human advice model focused on the higher end" of the market, including the affluent segment.
- The ever-evolving business models require businesses to become customer-centric and develop a convincing and riveting value proposition that attracts investors.
- A 2018 survey by McKinsey notes that firms that prioritize and score high on consumer satisfaction "enjoy materially higher wallet share and consumer loyalty." McKinsey further notes that this manifests in these firms making investments that can improve the customer experience.
- In particular, they leverage artificial intelligence and data analytics to understand the customer's journey, through which they identify key touchpoints that they can enhance to improve engagement and drive loyalty.
Integrating Other Services with Wealth Management
- Many top-tier wealth management firms are having to add other services to their portfolio that are not primarily wealth products per se, especially for high-net-worth consumers.
- This is especially true for the boomer generation whose wealth needs continue to evolve with their age.
- For example, it is becoming critical for services such as estate planning services to be bundled with other wealth products as "many prosperous households will need help with estate planning, traditionally a niche service offered to high-net-worth customers."
- Asides the boomer generation, other affluent and high-net-worth clients across other generations will also need product offerings that combine different services to amass wealth and meet other mid-life issues and retirement targets.
The Advent of Hybrid Advice Solutions
- New wealth management providers such as Betterment and Wealthfront have disrupted the wealth management industry, which hitherto had always depended on human advisors or managers to dispense advice.
- However, these services lack the human element that fosters trust and confidence that traditional well-recognized wealth managers have.
- Despite the trust and confidence deficit of these digital-only services, existing data point to greater adoption of digital services down the line. For this reason, wealth management firms, are beginning to adopt the hybrid advice services model, that is, wealth management service that combines robo-advice with the human element.
- According to the 2017 World Wealth Report, "53.7% of wealth management firms have hybrid advice programs underway."
- Some of the drivers of this trend for wealth management firms include reduced error, low cost to income ratio, increased conversions, and leveraging technology to improve productivity.
- The other resultant effect of this trend is that affluent consumers will have fewer direct interactions with advisors, as advisors prioritize their interactions with high-net-worth customers over others.
To identify and build the current trend in the wealth management industry especially as it pertains to what managers are offering to affluent consumers, we leveraged reports by leading consulting firms such as EY, Deloitte, McKinsey, as well as articles from reputable financial media. We have chosen trends that have been repeated across these sources. In some instances, we have taken information from reports focused on the global wealth management industry with the knowledge that what affects the global market affects the United States market as well. Also, we have had to read in between the lines to identify certain trends that were not explicitly stated.