Wealth management used to be reserved for the elite, and to an extent it still is, except that definition has broadened slightly. Wealth management firms once set the bar out of the reach of many investors, with one of the prerequisites for entering into the market being an abundance of accumulated wealth – needing a lot of money to make money – but times have changed.
The rise of innovative exchange-traded funds to mitigate rising costs, as a result of increased regulation, along with more and more investors opting to manage their own portfolios, has led a number of wealth management firms to widen their nets. Many still recommend a minimum investment fund of around $100,000, but that figure has opened up the market to small-business owners and even families looking to better manage their asset portfolios.
Finding steady footing
Since the 2008 financial crisis, the stock market has managed to find more solid ground, with a noticeable rise in overall volatility and volumes. Similarly, a level of stability has steadily returned to a number of national economies, as GDP growth figures begin to see a slow but steady recovery out of the global recession.
Wealth and asset managers have faced their fair share of difficulties at the hands of the financial crash too. Asset prices fell considerably as a result of the economic downturn, which also made a considerable dent in investment funds’ overall revenues, with some of the biggest wealth management firms in the industry coming close to collapse. But the sector has shown considerable resilience, especially when it has been hit by a string of stringent global regulations in the form of Dodd-Frank in the US and MiFID II in Europe – with more likely to follow. Regulation is responsible for raising costs, as well as altering the lay of the wealth management landscape, changing the habits of investors and, therefore, altering the manner in which wealth managers must interact with their clients.
Digitisation is pervasive in all industry sectors and one that can be a difficult to keep ahead of, but if used properly it can help firms offer alternative service models and better cater to the needs of their clients. Wealth management, an industry that takes pride in cultivating strong, personal relationships, is facing both challenges and new opportunities, as technology shapes the sector and, more specifically, how clients want to interact with their wealth managers.
There will always be demand for face-to-face interaction between clients and those tasked with looking after their investment portfolios. But the growth and success of mobile applications, video, and social media platforms, due to their increased speed and accessibility, means they are becoming the preferred method for high net worth individuals (HNWIs) to stay informed, as well as in executing certain transactions.
The digital movement has taken a little longer to reach the wealth management sector, which is not that surprising considering the age of many HNWI, who may lack the technological literacy or interest of their younger counterparts. But the digital trend is likely to continue, as a younger set of investors begin joining the ranks of the world’s financial elite. Therefore, the application of digital technologies is essential if firms want to survive. They must be willing to adopt, evolve and grow their use of these platforms and incorporate these systems into the very heart of how they do business if they hope to cater to their new, technologically savvy client base.
“Technology plays a critical role in the industry’s future,” says Ian Smith, financial services strategy partner at KPMG in the UK. “The clients of the future will be fundamentally different in terms of their needs and expectations. They will demand more personalised information, education and advice that will require asset managers to radically address their technology capabilities to really understand their clients and support this level of service.”
Increased regulation
The Governor of the Bank of England, Mark Carney, announced regulators’ intentions to clamp down further on investment funds, and that watchdogs around the world will be keeping a close eye on the sector, in a bid to prevent a repeat of the financial crisis. He told attendees at the IMF and World Bank annual meetings, held in Washington DC, that, while he is happy to see the sector grow, with assets managed by investment funds equating to nearly 90 percent of the global economy, the need for stricter regulation is essential.
“[There must be] a focus, as there has been with banks, on the systemic risk it could create,” said Carney. “In the current environment, those types of activities need careful monitoring, and possibly a deliberate policy response.” In all sectors of the financial industry there is a drive by regulators, as a consequence of heightened social and political pressure, as well as for the sake of market stability, to apply stricter rules in areas of capital, liquidity, derivatives, corporate governance, compliance and transparency. The cost of updating internal systems and practices in order to comply with these new regulations costs the industry, and in this case wealth management firms, a lot of money to implement. European firms have felt the pang of increased red tape the most, with the region seeing overall costs of doing business inflated between five to 10 percent since the financial crisis.
The overall wealth management market, however, continues to grow. According the World Wealth Report 2014, HNWI growth continues to accelerate. Improved economic and equity market performance has added 1.76 million people to the global HNWI population, with the investable wealth of HNWIs growing by nearly 14 percent to reach a record high of $56.62trn.
The report also forecasts global HNWIs’ overall financial wealth will continue its upward trend, predicting growth figures of 6.9 percent annually through to 2016, which translates as a record high of $64.3trn. It expects every region, except for Latin America, to grow strongly, but that the Asia-Pacific region is likely to emerge as a clear leader, with a 9.8 percent annual growth rate.
Large retail banks have had to look closely at their wealth management divisions, weighing up whether it is still a viable option for them to be involved in particular markets. Some banks think it wise to downsize and decrease their exposure, preferring to narrow their focus and simplify their overall strategy. But, as is the case in financial markets, where there is space, there is always someone else eager to fill it.
Some large US banks have chosen to pull out of the European wealth management market altogether in order to escape cost-escalating EU regulation, favouring to focus solely on their domestic market. This has opened the doors for smaller, independent firms to swoop in and gobble up good talent and with it new clients. This will allow them to increase their market share, while the bigger players rethink their positions in the marketplace.
Wealth managers are in a state of flux; a combination of regulatory pressure on one side, and short-term margin pressure on the other is causing firms big and small to start looking at the core aspects of their business models. Though global wealth has managed to pick itself up to something like pre-crisis levels, there is still a lot of work to be done if wealth managers are going to see larger revenues.
There will also need to be an overhaul of their methods. Wealth managers need to continually provide clients with high-quality advice, and they will also need greater technological solutions to enhance their business offerings. Success in these areas will give firms – particularly, in this instance, small, independent firms – a means of differentiating themselves from the competition.
