Wealth management firms have fared well in recent years on the back of rising markets, but the underlying drivers suggest an industry in flux; global investible assets are at all time highs, intergenerational wealth transfer is accelerating, and FinTech products are poised to disrupt. Yet, many analysts are skeptical about the industry’s prospects. Rising global wealth means that there are more assets for wealth managers to manage, and intergenerational wealth transfer means that there are also more opportunities to gain (and lose) clients. FinTech products threaten competition, but also offer efficiencies for agile firms. Depending on your point of view, the industry is either poised to grow or on the verge of massive disruption.
The Next Generation
One thing is clear: the wealth management industry has benefited from the fact that global wealth (and demand for wealth management services) has reached all-time highs. According to Capgemini’s 2018 World Wealth Report, global wealth held by high net worth (HNW) individuals grew 10.6% to more than $70 trillion in 2017. More wealth means, well, more wealth to manage, and revenue at wealth management firms has generally increased with the market. However, for wealth managers, business is also a function of who holds that wealth – and that is changing. As baby boomers continue to retire over the next decade, trillions of dollars of wealth will be transferred to a younger generation. This massive wealth churn is an opportunity for wealth management firms to attract a new, younger client base, but wealth managers face several challenges in appealing to that new demographic.
One such challenge is the industry’s aging advisor base. According to data from EY, the average advisor is now 50 years old, and only 5% of advisors are under 30. As assets move from one generation to the next, a weak pipeline of new advisors is a looming threat for the industry. The age gap between clients and their advisors is poised to create real difficulties in attracting and retaining an evolving client demographic, particularly given the increasing prominence of FinTech-based competition. A lack of succession planning at many wealth management firms will only exacerbate these problems.
With a changing client demographic, also comes changing expectations. As a result, wealth management firms face pressure to adapt their service and product offerings, most notably through changing the way that they utilize technology. On its face, FinTech-based wealth management products appear to be a threat to traditional human advisors, less agile firms will likely find this to be true. For other firms, FinTech-based solutions offer an opportunity to increase advisor efficiency and meet regulatory requirements by utilizing hybrid advice models. By utilizing FinTech solutions, wealth management firms can free up advisors from routine tasks and allow advisors to offer a greater breadth of client services and improve client relationships.
Despite its potential benefits, technology is also partly responsible for the continued fee-pressure wealth managers face. According to data from McKinsey & Company, pricing on fee-based accounts dropped by five basis points to 1.08% in 2017. Establishing a personal connection with clients is one way wealth management firms can differentiate themselves to help maintain pricing power. According to a 2018 study by Capgemini, only 56% of HNW individuals said they connected strongly with their advisor. Despite the strong market returns over the last two years, this low satisfaction suggests that performance is not the only concern of wealth management clients.
The current fee-conscious environment favors advisors that offer a value proposition that software cannot replicate at lower cost. Ultimately, such a value proposition will likely need to be based on establishing real relationships with clients. Growing revenue on the back of strong markets may have masked the changes in the business for many wealth management firms, and the party may end if equity markets normalize going forward. One thing the industry has going for it is that the demand for wealth management services is clearly there, and increasingly so. The performance of wealth management firms will depend in large part on how well individual firms are able to adapt to an evolving landscape to capture growing demand.
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