COVID accelerates race to re-invent wealth management

Wealth management is hot property and getting hotter

Industry estimates see wealth management AuM doubling in a decade to reach $145 trillion by end 2025 and, while there is some evidence for growth rates slowing, the wealth manager value proposition remains attractive on an absolute and relative basis.

Global bank-owned Wealth Managers have increasingly become the central underpin to global bank group valuations, now representing around 38% of total group valuations in 2020, as COVID puts pressure on corporate lending, consumer lending and investment banking.

Wealth managers also stack up well versus asset managers, in particular active ones:

  • Revenue margins have been around 20 basis points higher at wealth managers, albeit facing increasing downward pressure, notably from greater competition and rising costs around servicing, operational complexity and regulation.
  • Client longevity at wealth managers averages at around 12 years, almost 3 times asset management levels.

Client longevity is one of the key attractions to a range of players, both inside and outside financial services. Simply put, wealth management gets you closer to underlying clients for longer with something that is central to their health, opportunities and ultimately their lives, even if it is not often perceived or engaged with in those terms. Provided you deliver on the core offering, this opens up all sorts additional servicing adjacencies and the opportunity to harvest the rich data which arises from being central to an individual’s long term P&L.

Structural demand for good, competitively-priced advice and joined-up management

With so much uncertainty in other sectors, the case for wealth management is supported by strong structural demand drivers, a point not lost on private equity and other investors, increasingly looking to do deals in the space, notwithstanding the heavy regulation and attendant risks and liabilities around this industry. The common theme here is that there has never been a greater need for good, competitively-priced advice and joined-up asset management.

  • The shift from defined benefit schemes to defined contribution schemes, which will not reverse, has put retirement planning back in the hands of individuals who do not want or are ill-equipped to shoulder that burden
  • Pensions and taxation around personal assets are getting ever more complex
  • Ageing population demographics are giving rise to the need for more planning to meet the increased costs of healthcare over a longer period of time
  • We are on the cusp of the “Great Wealth Transfer” as the Boomer generation reaches older age. How and when to manage this transfer is very much in play, in particular with increasing taxes on wealth to pay for COVID and possibly climate change coming into focus
  • The removal of commission-based structures for intermediaries in many jurisdictions, while addressing evident conflicts, has led many private investors with insufficient individual assets to meet traditional wealth management minimum asset thresholds (also being raised) into DIY investing. Some are comfortable with this. Many are not. There is a significant opportunity to aggregate these assets and provide a more cost-efficient and user-friendly advisory and management service.

Ripe for tech-enabled re-invention

Tech innovation has a habit of asking the question – “why does it need to work like that?” And then answering it. “We can use these tools to make it look like this and work a whole lot better.”

For all its potential, wealth managers have many of the basic “plumbing” problems which tech loves to solve. Left to build up over years, wealth managers have struggled to innovate to address them. Just taking apps as one indicator, mobile apps by Wealth Managers are updated half as frequently as retail banking apps, and only one fifth as frequently as digital-only challengers, underscoring their lack of focus on digital investment.

The issues run deeper than apps. These include multiple, legacy client ledgers (often imperfectly consolidated following mergers and acquisitions), different asset types (non-public,  non-traded alongside listed) on different systems, planning processes which can be highly manual, labour intensive and disconnected from wider client data, and Excel as the most pervasive financial technology.

The byzantine complexity that dogs the sector is both a challenge and an opportunity. To take one example, US wealth platform Addepar, set up by former engineers from security firm Palantir Technologies, has made a business out of applying the same tools used to reconcile large disparate data sets in security scenarios (for example, in piecing together fragments of information to crack terrorist sleeper cells) to deliver a single, consolidated portfolio view to family offices and registered advisers. It has taken the application of those technologies to solve for the underlying complexity and deliver on a seemingly straight-forward mantra “Everyone should be able to understand the assets they own, where they are invested and how they are performing at any given moment.”

In practice, there is no silver bullet and the re-engineering challenges across the prospecting, onboarding, client management and client reporting lifecycle of wealth management are legion. Some of the bigger bang changes, such as open source banking and federated identity looking to give wealth managers controlled access to banking financials, feel some way off and begin to get into fairly complex data access territory and ethics. Even more broadly, the rise of digital assets prompts questions around how we might assign value and to what and ultimately what we may to understand as wealth over the next decade, the platforms for which may not even yet have been invented.

Nearer to hand – and arguably more “front-of-house” than “in the kitchen” – digital engagement is estimated to have increased 7-10x across leading wealth managers post COVID, with changed expectations from clients around UX and interaction more broadly. Short term we can expect more effort going into increasing the effectiveness of individual relationship managers and self-serve by putting better tools at the front end.

Still very human at its core, with all the communication challenges that implies

And this underscores the important COVID reminder of the primacy of human interaction in much of the wealth management business.

In a recent, pre-COVID survey, Oliver Wyman found that 85% of polled HNW investors valued the ability to talk with an advisor, versus less than one third rating robo-advisor interaction. As they noted, “the surge in complexity, diversity and urgency of client requests during Covid-19” will only have heightened the value of having access to human advisors.

There is undoubtedly something about the trust and intimacy of the advisor relationship, linked as it often is to a qualitative understanding of personal histories and extended family dynamics, which is tough to replicate synthetically. Ultimately it remains a business largely centred on relationships where there is a very human need for a conversation, rather than a process, however well-choreographed.

But this is also a two-way street. Historically, wealth managers have not been (and arguably have not needed to be) very pro-active about segmenting their existing and potential target audiences and understanding the communication drivers for each. The brand emphasis has tended to be a slightly monolithic take on discretion, stability and tradition.

While the average wealth management client profile (in the UK) remains around 60 and male, improving data analytics, imminent large-scale wealth transfers, and the penny dropping on the ability to open up new markets with more competitive offerings to the “non-advised” are leading wealth managers to more actively build out a range of client personas and tailor their channel strategies accordingly.

Alongside improving performance, a fair proportion of the second wind around ESG has been driven by wealth managers finding investment content that speaks in a more compelling and authentic way to a younger, very different demographic set to inherit significant wealth from Boomer parents.

This is part of an intensifying shift away from talking in technical industry terms about specific strategies to talking about themes which relate to developments that clients see in the world around them and to which they can relate – disruption, energy transition, healthcare innovation and so on.

This, in turn, is part of a wider language challenge with wealth management.

Very few clients understand (or indeed want to understand) how and where their money is invested and why those choices are good for them. More than ever markets seem volatile and opaque, wrong-footing even professional investors. Regulatory attempts to improve disclosure have sometimes had unintended consequences, mandating additional disclosure which has created more heat than light.

Does it need to be like this?  Just as there is a chance to remake the operational plumbing, is there an opportunity to remake the way in which looking after your assets is talked about and understood?

The answer is this a work in progress and not easy. But we are seeing better, more user-friendly visualisations of how the components fit together, clearer lines of sight being drawn between the personal journeys we are all on and our financial needs and a more relatable narrative around the part that wealth plays in our lives.

And getting these narratives right is pretty central to the wealth management value proposition. Because if you can demystify the relationship between individuals and their assets and become embedded as the go-to platform for managing their interactions around that, you are quickly into a relationship with them which is durable, data-rich and multi-faceted and which importantly gives you a seat at the table on all sorts of adjacencies such as insurance which might form part of a more holistic wealth picture.

No-one holding all the cards, but wealth management most definitely “in play”

It’s a reasonable assumption that the winners here, potentially with some PE backing, will be the existing wealth managers, because they hold the current relationships and these are sticky and built over many years of personal interaction often through crisis, that this gives them an unassailable head-start.

There is some substance to this, but it ignores the profound technology and operational weakness of many current wealth managers, whether as independents, or part of banking or asset management groups. It also ignores the changing of the guard which the great wealth transfer implies.

Challenger wealth management start-ups, starting with relatively clean-sheet operational set-ups and a better feel for what the latest tech can do, are well positioned to do things better in niches and grab corresponding share. They may also partner with wealth managers in the same way that banks have effectively developed “App-world” style eco-systems to foster innovation.

Whilst in the wings, are the Tech giants.  For now they seem content to work relatively below the radar, partnering with financial institutions to improve the underlying infrastructure that supports the flow of money rather than taking centre stage. With the power of Big Tech currently so much under the microscope, as many defend their licence to operate publicly in front of regulators, making a bold move into this highly regulated space looks less probable for now. Longer term, Big Tech’s data analytics and distribution muscle and their capacity to not just fix the plumbing, but re-engineer the model, may be an opportunity they do not want to pass up. If/when they dive in, it will be a game changer.

What seems clear is that, despite the pressures, there is substantial unrealised value potential in wealth management for all these players to unpack and go after.

And the race to re-invent, accelerated by COVID, is on.

By Andy Knox Strategy and Technology Consultant with Meridian West.