The wealth management industry holds opportunities for practitioners and investors alike, but these are not without risk. However, in the experienced hands of the experts, and the patient focused drive of informed investors, these risks can be mitigated, the opportunities better realized, our clients better served, and their financial goals met.
To better manage these risks and opportunities it is helpful to be aware of global trends affecting the industry. This article identifies 7 Industry Trends in Wealth Management that impact wealth managers around the world. It examines implications and discusses industry responses.
1. Regulations
Regulations are generally tightened on an ex-post basis, usually following infractions by industry participants, and are designed to prevent recurrence. These regulations protect against bigger future costs, but do pose a current cost to current participants. Examples of such regulations are guidelines on Fair Dealing, restrictions on Cross-Border Sale of un-registered products, stiffer controls on Financial Crime, Common Reporting Standards, enhanced Sales Competency and Compensation requirements, to name but a few.
2. Moderating Economic Activity
Moderating economic growth takes the punch bowl away and makes it harder to find returns like in the heady days, past. The developed world is forecast to grow between 1.4 to 3.0%, while Asian growth is seen between 3.8 to 6.0%, over 2016-20.
3. Wealth pool growth
The global wealth pool is large at $168 trillion, and seen growing @6%, through to 2020, with Asia large at $37 trillion, and growing @10%. This Asia leadership is based on economic development, enterprise, and high savings. Only a fraction of this is within the formal wealth management industry, however.
4. Rising competition
Notwithstanding growth in the client wealth pool, fierce competitive headwinds have moderated industry growth- the top 20 Asia Private Banks have grown- @ 5% CAGR 2012-15. Total wealth in the hands of the Top 20 Private Banks, was c. $1.5 trillion, at end-2015. Within this group, full service Private Banks have outgrown the rest, backed by wider distribution and broader capabilities, while also drawing on portfolio gains of the existing assets.
5. Market Volatility
Increasing volatility in recent years across asset classes has rendered traditional business models obsolete, and in need of review. Volatility, when measured by the number of days every year with more than a 2% price change, has grown from a peak of 10 days in the 50s, to 70 days in recent times. This volatility places demands on client service and the sales model.
6. Demographic shifts
Globally, demographic shifts are seen with slowing birth rates, although a link between development and population growth is palpable as slowing population growth drives higher per capita incomes. Absent a shift in the retirement age, this slowing growth may lead to an eventual decline in the working age population globally.
7. Digitization
Digitization is disrupting traditional wealth management business, impacting it from end to end. The falling cost of technology, unprecedented access to computing power and storage, faster and wider connectivity, and simplification of interfaces, is creating new generations of the tech-savvy, leading to informed decision making, greater economic freedom, value for money, and unconventional competition. Increasingly, Digital technologies are driving paperless, instantaneous, unmanned and 24x7 engagements, and ushering in disruptive competition.
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What are the implications of these trends?
These trends are a combination of secular and cyclical drivers that have a medium to long-term bearing on the wealth management industry, globally. Factoring these trends into business plans will help wealth managers better prepare for the future and build more sustainable businesses.
a. Focus on both revenue and costs to drive efficiency
These trends not only place constraints on revenue but also drive up costs, thereby impinging on efficiency. Regulatory constraints, competitive pressures, and market volatility cap revenues, while regulatory compliance costs, and stepped up client servicing costs push the cost envelope. Digitization and the growing pool of technologically literate millennials, offers new revenue streams and an opportunity to trim costs, thereby boosting efficiency.
b. Prioritize transformation efforts
Of the many opportunities to change business models, digitization is a top priority, especially at the front end, where it aids client acquisition. It also helps institutionalize advisory processes, innovate service delivery and boost RM capabilities. Client acquisition also drives up scale and builds operating leverage. Overall, there is a growing industry-wide realization that efficiency matters more than scale, for sustainability.
c. Human Capital Matters
Raising RM capabilities and growing the pool of skilled wealth managers is a key success factor, in the road ahead to growth. This needs multiple approaches, including the induction of talent and the development of current staff. Further, the provision of tools and resources can boost productivity, while a review of the rewards program can help procure the alignment of interests between the various business stakeholders.
d. Institutionalize client relationships
The future calls for a step away from the classical RM-driven paradigm. This may feature simplified onboarding, mobile execution, customized platform access, personalized insights feeds, real-time alerts, and self-service options. While the RM may remain the orchestrator of the engagement, digitization and analytics offer to open new contact channels, and carry the potential of an omni-channel, digitally-enabled institutionalized client engagement model.
e. Cost-effective segmentation
Given the large wealth pool, these investments have potential, however, the market is not homogenous, and is made up of multiple segments of varied dynamics. A typical approach taken in the industry is to build a common platform of products and services, and package them to suit the revenue potential of each segment, such as affluent, HNW or VHNW. Segment-focused propositions help optimize the firm’s efficiency.
What should a wealth management firm do next?
Each firm should develop a vision for what it wants its the future to be. A realistic appraisal of where the business is today, i.e. the current state, could provide an effective baseline. Charting a path to the future would then entail harnessing the trends identified, herein. Such a course should consider all aspects of the business model, starting from the target client segments, their needs and the appropriate products and services, the desired engagement model, with associated transformation implications on people, platforms, processes, and channels. Ultimately, the right to win is earned by firms that have a sharp view of the future, a clear path to get to it, and a plan that is effectively executed, with agility.
The Wealth Management industry is a product of human endeavor, economic efficiency, and a primordial urge to thrive. Those of us who are privileged to be a part of it can realize the potential by embracing the changes that lie ahead, while not losing sight of the constant objective- of putting clients first, always.
Have your say: take part in the 2017 wealth management practitioner survey.
Vineet Vohra is the Director and Practice Leader at Arete Financial Partners and will be talking more about the 7 key trends that impact the wealth management industry at the upcoming FundForum Asia, taking place in Hong Kon 24-26 April. Click here to find out more about Asia's leading asset management event.