Where will wealth managers focus in 2023? The industry is coming to a critical juncture. Heightened geopolitical tensions, the war in Ukraine, inflation, and a looming global recession will cause additional pressure on wealth management firms as lower assets under management (AUM) growth strains profitability. At the same time, competitive pressures are intensifying, and client demand continues to evolve rapidly toward new products and services such as private markets, personalized advice, and seamless omnichannel experiences. Wealth managers have two choices: recalibrate their business models and accelerate their structural reform efforts, or risk falling behind. Here are 10 themes that we expect to see high on wealth managers’ agendas.
Strong interest rate tailwinds will continue to drive net interest income growth for wealth managers as dormant deposit pools become more productive. However, following recent rate hikes — and similar to the developments during the last US rate cycle starting in 2004 — we expect a delayed pickup in deposit beta, the share of margin upside passed on to clients through pricing. Given the increased competition in the wealth management market as well as the increasing focus on upper high net worth (HNW) and quasi-institutional ultra high net worth (UHNW) clients who expect a greater passthrough of rate increases, we anticipate deposit betas to increase beyond even the peak levels of past rate-hike cycles. That will limit the upside to wealth managers from future rate hikes. Strengthening deposit-management capabilities, including the sophistication of pricing and modelling, will be paramount for wealth managers who want to win.
Significant discounting of rack rate pricing has been a curse for wealth managers globally for decades. Today, in extreme cases 40% to 50% of a wealth manager’s client relationships remain unprofitable due to misalignment of pricing with cost-to-serve. Often larger and more profitable client relationships are cross-subsidizing others, with decent profitability on an aggregate level masking the problem. Amid high inflation and a darkening economic outlook, pricing management is essential for wealth managers to protect general competitiveness and profitability. While aligning fees with market standards is the first step, scrutinizing discounting levels and processes is necessary for achieving sustainable revenue uplifts. Successful wealth managers will run projects to identify clients with high and outdated discounts, perform discount reviews, redefine discount governance and processes, and implement dedicated, regular reporting and impact analysis tools. The sustainable revenue uplifts can be captured in less than 12 months, will counter bottom-line pressure, and help finance growth investments.
Rapid AUM growth, coupled with tactical efforts to realize productivity increases, allowed large wealth managers to maintain cost-income levels at around 70% over the past decade. A slowdown in AUM growth will accelerate profitability headwinds. Wealth managers will need to act quickly with a systematic approach tailored to their stage in the cost management journey. Balancing quick wins with structural change will be crucial to build momentum and drive a sustainable step change in costs. We expect the largest efficiency opportunities in the front office as well as heavy technology and operations departments, with levers spanning from adviser productivity assessments to support-function activity redesign to comprehensive business footprint reviews.
After a decade-long bull market and ultra-low yields, the investment environment is fundamentally changing. The short-term market outlook is much more muted and uncertain. Mid- to longer-term, higher yields will lead to changed investment opportunities: Investors can get better returns across a broader set of opportunities again and potentially need to rely less on riskier investments. While markdowns of asset values are likely going to concern investors who were expecting private markets to do better, the long-term trend for private markets remains intact. For clients from select emerging markets such as China where interest rates have not increased, global allocations have become more attractive compared with local instruments. Chief investment officers and their teams need to continue navigating choppier waters while at the same time revisiting their longer-term asset allocations and product shelves. Wealth managers with superior advisory and CIO capabilities will be better placed to support their clients and benefit. The pure platforms might struggle more.
Private markets continue to be a key client need and structural growth opportunity for the wealth industry. With private markets becoming mainstream, wealth managers need to find areas for differentiation across product and advice offerings and processes. Winning wealth managers will offer their very wealthy clients access not only to top-branded funds, but also to direct co-investment opportunities and niche, thematic, or ESG impact-focused funds. For their affluent and high-net-worth-clients, wealth managers need to solve the concentration risk by curating Fund-of-Fund offerings across asset classes and vintages and offering greater liquidity, for example via secondary trading options. Winners will differentiate by providing access to better managers, avoiding potential downsides from overcrowding in the space. They also will be able to better scale their offerings and provide a seamless experience leveraging technology to overcome operational, regulatory, and efficiency challenges that simply cannot be solved by creating bigger teams with more resources.
Partnerships between Wealth-as-a-Service providers and wealth managers are proliferating across the globe. Wealth managers are working with technology firms to enhance distribution, product, and technology capabilities. These partnerships are breaking down previously siloed businesses and blending them in ways that improve the customer experience. Examples include partnering for direct digital brokerage platforms, Lombard lending, and private markets capabilities. The unbundling of the wealth stack into composable modules makes it easy for both wealth managers and non-wealth firms to adopt best practice components or offer solutions beyond their core businesses. Leaders in the industry will embrace these OpenTech ecosystems and WaaS infrastructures to further strengthen their positions.
The wealth industry has been preparing to move to the next evolution stage, “Wealth Management 3.0.” Technology has evolved to where it can deliver personalized digital products and services and not only serve lower wealth segments profitably but also provide a smooth digital (omnichannel) experience to all clients. Advisers are aging out, and investors want to transact differently. Digital-first and hybrid propositions will gain popularity across all client segments, and wealth managers who are not preparing for this change will fall behind. For the past years the success of new digital brokerage platforms in tapping first-time investors with low assets has been in the spotlight. While this segment is set for continued growth over the next decade, the affluent and low HNW client segments with between $300,000 and $5 million in wealth represent the largest revenue growth opportunity in the industry. This segment is set to create roughly $45 billion in new revenue and account for about 60% of the total wealth management revenue pool by 2026. In the past, this segment has been underserved by wealth managers and retail banks alike, either due to challenging economics or a lack of capabilities. Investors in the segment value human advice while at the same time demanding affordability and seamless, integrated experiences when investing in a self-directed manner. In the US, direct players, who dominate the mass and mass-affluent segments with recognized brands and digitized experiences, are investing in their advisory propositions to become the provider of choice for clients under $5 million, with initial traction given their large client base to upsell. To win across all client segments, wealth managers need to provide hybrid propositions that combine human-advice access with a top-shelf digital client experience.
For decades, men have dominated the wealth management industry. While there have been efforts to make the space more inclusive, limited progress has been achieved on client-facing practices. Today, women represent more than 40% of high-net-worth individuals globally, and the share is expected to grow strongly over the next decade. Changing demographics will be the largest driver as baby-boomer men die and pass on control of their household wealth to their spouses and daughters. This will be one of the biggest growth opportunities in the next decade. Research suggests that women are more risk-averse and focused on their life goals with regard to investments, as they are expected to live longer, usually outliving their partners. They also consider themselves less confident about their investment skills and demand more involvement and advice from their wealth managers. The winners will fundamentally review their strategy to serve women and embark on a transformation of their value propositions. Leaders who have already started this process have observed revenue boosts of around 10%.
The consolidation wave across the wealth management industry is set to accelerate. The number of private banks has been decreasing continuously across markets. In Switzerland, for example, that figure has dropped from more than 150 to about 90 since 2010. Private equity has driven significant consolidation in the US and the UK among independent wealth managers and financial advisers. In the US, for example, more than 50% of advisors in the Registered Investment Advisor (RIA) channel are affiliated to the largest 10% of RIAs, and the trend continues. Continental Europe had been lagging behind but things may be changing. Especially for medium-sized and smaller owner-led independent wealth managers, strong cost and regulatory headwinds combined with the need for succession management are presenting an attractive opportunity for consolidation.
The wealth industry has long struggled to acquire lower high-net-worth clients profitably. Meanwhile employers are taking a broader focus on their employees’ financial wellbeing. As a result of these conditions we are increasingly seeing a mutually beneficial relationship emerge: Wealth managers provide financial education and seminars to businesses, and in return are able to generate high-value leads — typically including the middle and upper management of such organizations — and acquire new clients at relatively low cost. In the US, large wealth managers have been making workplace wealth a growth engine, investing resources to better identify, qualify, and match individuals with the appropriate wealth solution within their ecosystems. Outside the US, we see the workplace channel as relatively underdeveloped, with significant room for expansion in 2023, as wealth managers search for new ways to attract business. While all models are expected to benefit from this growth, technology is paving the way for firms to expand digital and hybrid advice offerings more effectively.
