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How to Master the Changing Advisor-Client Relationship

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The World Wealth Report (WWR), published annually by Capgemini with RBC Wealth Management, provides an excellent overview of the global high net worth investor (HNWI) market for advisory services.

The 2015 report covers four main areas:

  1. Growth of the global HNWIs market;
  2. Insight into investment strategies employed by HNWIs;
  3. Growing desire of HNWIs to consider social impacts; and
  4. Factors that are transforming the advisor-client relationship.

See more: Download the full 2015 World Wealth Report.

This summary focuses on key takeaways related to the key factors disrupting and transforming the advisor-client relationship in wealth management.

The backdrop for disruptive change

According to the WWR 2015, HNWIs are growing globally (though at slower rates than previous years) and are generally satisfied with their advice relationships.

wwr15-hnwi-wealth-distribtion

Younger HNWIs are an increasingly important demographic given the heavy influence they will have in coming years (an estimated $59 trillion of wealth will be transferred from 2007 through 2061).

And women are also playing an increasingly important role as a rising group of HNWIs, though the WWR 2015 doesn’t offer as many substantive insights into how women investors are changing the industry.

A generation gap is growing between younger HNWIs and older wealth managers

A distinct generational gap (some might even say, a gulf) is becoming apparent in the demographics of the wealth management industry.

Younger HNWIs have considerably different financial needs than wealth managers realize about affording retirement, managing education costs and transferring their wealth. Yet, wealth managers with less than 20 years experience are more in touch with HNWIs when it comes to these advice and service related needs (p.29).

Younger HNWIs are also more mobile than previous generations when it comes to advisory firms. They have a greater propensity to work with multiple firms (p.31) and they are more willing to leave those firms if their wealth needs are not being met (p. 32).

Finally, younger HNWIs also place a higher value on word-of-mouth referrals with respect to how they are introduced to wealth managers, yet they are technologically savvy enough to do their online research. Therefore, firms need to have solid presence both online and offline to convert these referrals into clients. (p. 32)

Emerging technology represents both threats and opportunities for wealth managers and firms

The WWR 2015 identifies three main technology developments as having the potential to impact the relationship between wealth managers and HNWIs:

  • Automated advisory services (a.k.a. robo-advisors)
  • Open investment communities (crowd-sourced investment advice)
  • Third-party technology tools (digital enhancements for wealth managers)
     

Automated advisory and portfolio management services represent potentially greatest threat to wealth managers because they empower investors through self-service and reduced cost.

On this issue, wealth managers and firms seem to have their collective heads in the sand. Twice as many HNWIs (and as much as four or five times as many in some regions) demonstrate a propensity for using automated investment management services, as compared to wealth managers who think HNWIs will consider using them.

wwr15-hnwi-propensity-to-use-robos

According to the authors of the WWR 2015, the threat of automated advisory services can become an opportunity if wealth firms adjust their value proposition:

“As basic asset allocation, investment advisory, and risk profiling services become commoditized, the value proposition of wealth managers is transitioning. It is moving away from stock selection and investment management, toward more holistic financial planning.” (p. 36)

At the same time, technology tools are emerging that can help wealth managers not only level the playing field, but tilt it in their advantage. The report’s authors point to a growing number of third-party technology solutions that can increase client engagement through enriched online reporting, more effective use of client data and more professional practice management.

“Wealth managers can overcome the fear of disintermediation in investment management by implementing an IT-enabled approach for client investments that complements the more tailored financial planning services, so they can respond to specific client demands and compete with the disruptive players more effectively.” (p. 38)

As the old adage goes, the best defense is a good offense.

The hybrid way forward

Moving forward, the report’s authors suggest, most wealth managers and firms will adopt a hybrid model that combines automated, self-serve tools with full-service human advice. After all, that is what their clients say they want – and most business don’t thrive by ignoring their clients’ needs.

But there are a number of other areas on which wealth management firms need to focus their improvement and differentiation efforts, including:

  • Broadening their service offering;
  • Embracing a holistic approach to financial planning;
  • Recruiting more younger wealth managers;
  • Leveraging technology more effectively; and
  • Training and supporting all wealth managers in the fine art of online social networking and personal branding.
     

“Wealth managers can utilize next-generation digital tools (including social media networks) for functions such as prospecting and risk management, as well as wealth planning and aggregation tools to enhance overall service delivery.” (p. 38)

The wealth management industry faces the same dilemma of virtually every business in the digital age: adapt to technological change or stick to the traditional ways.

The latter path is littered with the remains of old, failed business models. Adaptation, on the other hand, seems to be baked into our evolutionary history as a species.

You can be sure that if the current wealth management firms can’t or won’t adapt, someone else come along that most certainly will.

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