By- Robert Norris Partner at Capco & Partner Michael Daly, Senior Consultant at Capco
Wealth managers have embraced shifting client demands during
the pandemic, prioritizing digital engagement and hyper-personalization
preferences to provide comprehensive advice and capture asset growth across the
wealth spectrum.
In 2022, firms will compete on the next wave of growth
within products, including digital assets, ESG, and custom indexing; client
segments involving emerging High-Net-Worth investors and women; and service
models comprising holistic advice, digital engagement, and fee modernization.
Against the backdrop of a changing regulatory environment and looming
disruption from ‘big-tech,’ incumbents must balance retaining existing assets
with growth opportunities as firms build and deepen relationships with next-gen
investors.
TRENDS-
Digital Assets Become Mainstream The slow pace of crypto
adoption by wealth managers has provided an opportunity for new entrants to
engage wealthy investors. As firms continue grappling with regulation
uncertainty and volatility while advisors remain skeptical of the asset class,
clients have invested their assets outside of their primary money manager
relationships. With crypto market capitalization exceeding $2 billion, the
institutionalization of crypto has created a sizeable revenue opportunity for
asset and wealth managers.
While leading wealth managers, including J.P. Morgan and
Fidelity, provided availability to Bitcoin funds in 2021, competitors should
re-evaluate the products currently offered and incorporate digital assets as
part of their portfolio. We expect to see more strategic partnerships and
potential acquisitions between vendors within the digital asset ecosystem and
institutional investors.
ESG – The New Normal Investors are increasingly
looking to align their assets with environmental and social goals. A survey
conducted by Broadridge suggests 49% of millennials and 27% of baby boomers
expect to make socially responsible investments over the next five years.
Beyond the social aspects, there are material performance implications for
firms that embrace the initiatives.
MSCI reviewed companies in their ACWI index by ESG rating
over a seven-year period finding the top third outperforming peers through
higher earnings growth and higher reinvestment returns. There has also been
pressure from regulators, asset managers, and governments to provide better ESG
disclosure. S&P Global noted many large managers have urged management to
reveal their ESG strategies and “stewardship priorities” while some governments
have moved to divest “non-complying” companies from sovereign investment funds.
Given the lack of criteria for measuring the effects of
achieving social goals, U.S. wealth managers should look to prioritize efforts
around ESG data.
Custom Indexing – The Next Battleground Direct Indexing, a $400 billion
market as of Q2 2021, is set to outpace the growth of ETFs, Mutual Funds, and
SMAs over the next five years as investors seek customized investment solutions
that align with their ESG objectives while optimizing tax management. With
growth expected to rise to approximately $1.5 trillion by 2025, there is a
significant revenue opportunity linked to these actively managed products.
Attracting Next-Gen Clients Millennials and Gen-X are set
to inherit an estimated $72.6 trillion over the next two decades via a
multigenerational wealth transfer, yet only 13% of this cohort is expected to
retain their parent’s financial advisor. To capture the pending money in
motion, incumbents are moving down the market while FinTechs move up the market
to meet clients where they are in their financial journey.
Women in Wealth Despite accounting for more
than half of the U.S. population and having longer life expectancies than men,
women are often regarded as a niche client segment within wealth management.
Women are positioned to be one of the largest beneficiaries of the
multigenerational wealth transfer and are increasingly becoming the primary
financial decision maker within households as evidenced by the younger cohort
of Gen X and millennial women.
Digitizing for Growth Wealth managers have embraced
digital transformation to meet the growing hyper-personalization demands of
clients. According to a Capco survey, 64% of executives believe nonface-to-face
interactions will be permanent.8 As 50% of millennials anticipate using digital
channels to access a wide range of investment services and connect with their
advisors, firms must continue to enhance a hybrid approach where personal
interaction intersects with digital offerings. Further, more personalized
investment solutions and access to advice will be critical to retain clients
and increasing wallet share.
Modernizing Fees Given the transition to lower
costs and more transparency, wealth managers are reevaluating their pricing and
service models. The traditional method of asset-based fees currently makes up
70% of an advisor’s compensation on average and is anticipated to reach 74% in
2022.
Industry Consolidation Set to Continue With
M&A activity at a record high, the lines between wealth managers and other
financial institutions continue to blur. 66% of investors under the age of 30
want a “one-stop-shop” option for their finances, according to a recent Capco
survey.10 In response, wirehouses and FinTechs have launched integrated
offerings that break down silos between banking, wealth management, and
insurance.
As 92% of survey respondents in the industry expect players
like Amazon, Apple, Meta, and Alphabet to enter the market, incumbents can
capitalize on existing client relationships and data to drive new client acquisition
between banking and wealth. underscores the need for a comprehensive financial
plan, which can serve as an opportunity to introduce new pricing strategies.
Financial Advisor Succession Plan After years of slowing
growth, advisor headcount is set to decline beginning in 2022 with up to 40% of
advisors expected to retire in the next decade. 62% of industry survey
respondents have expressed a higher level of concern for employee retention
since the pandemic began. Succession and continuity planning for retiring
professionals has become a strategic imperative for leading firms, resulting in
the launch of new programs to retain and attract talent. Firms must devise a
clear strategy to engage with next-gen investors while navigating the
transition of baby-boomer advisors and limiting the churn of assets.
SEC Regulatory Agenda – Now or Never As digital assets became
mainstream in 2021, cryptocurrency is now a high-priority initiative for SEC
Chairman Gary Gensler about increased requirements around transactions,
reporting, advisory services, and custody services. Similarly, conflicts of
interest and better protecting investors related to self-directed digital
engagement will be addressed in the near term along with broader market
structure items including shortening the trade settlement cycle (T+1) and short
selling. However, with November’s midterm elections looming, 2022 will be a
critical year for the SEC Chair to implement his agenda.
CONCLUSION-
A changing of the guard is underway within wealth management
whereby a younger cohort of millennial and Gen-X investors are forcing firms to
rethink their product offerings and client service, models. Driven by evolving
client demographics, demand for customized investment solutions, enhanced
technology, and industry consolidation, firms that meet clients where they are
and effectively serve the younger generation will be well-positioned to capture
asset growth.
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