Wealth managers, press the pause button. In the stillness, what you will feel is change. Or, to borrow a phrase from Bob Dylan, ‘The times they are a changin’. Wealth management is on the precipice of a changing marketplace being transformed by various disruptors requiring advisors to rethink their game plans.
Disruptors in the Spotlight
Some of these disruptors have already received wide coverage. We’re reading a lot about the new generation of investors and how their expectations of wealth managers differ from those of their parents and grandparents. They expect advice tailored to their individual needs. They expect communications to be seamless, digital and accessible anywhere, anytime. Regarding their investments, they view risk from a downside perspective requiring advisors to focus on capital markets and hedging strategies that offer more downside protection.
The rise of the Robo advisors is also grabbing headlines with hearty discussions centered on the combination of science and human-based advisors and new advisory models. Wealth management firms with deep pockets are developing in-house solutions or aligning with established Robo advisors to gain greater access to larger pools of investors.
From Artificial Intelligence and Big Data to Blockchain and Increasing Regulations
Then, of course there is Artificial Intelligence (AI), Big Data, Blockchain and crypto currencies and how they are affecting wealth management and new ways of engaging clients; meeting their investment goals and managing their risks. Many leading wealth management firms are investing heavily to build their Big Data repositories and shore up their analytics. Also on most wealth managers’ radar are the increasing regulations relating to heightened consumer protections (e.g., increased transparency and avoiding conflicts of interest), improved cyber security, and compliance regarding outsourcing activities. The new regulations have introduced greater administrative burdens and costs which wealth management firms must factor into their business operations.
Disruptors Lurking in the Background
Not all of the disruptors are front and center. Those receiving less focus, but equally deserving of our attention include:
- Today’s challenging macro environment requiring advisors to carefully consider the best return/risk combinations for their clients;
- Retiring aging advisors with fewer new advisors entering the field; and
- Longer life spans which require different planning strategies beyond traditional retirement plans.
Macro Environment, Aging Advisors and Longer Life Spans
Today’s macro environment is marked by low interest and inflation rates, along with high market volatility and investors’ high levels of financial leverage – all occurring in economies with low rates of growth. For advisors, this requires a holistic, 360⁰ view that reflects proactive portfolio management and investment strategies which factor in contracting economies and protect clients against downside risk.
For wealth management firms with an aging workforce, it is vital that they actively recruit and train the next generation of wealth managers to begin transitioning the firms’ clientele to new advisors who will succeed retiring wealth managers. Creating a corporate culture and compensation package that will attract younger Generation X & Y advisors is critical. Applying a team approach wherein the senior advisor and the younger advisor meet with their clients together is an effective transition strategy to help younger advisors gain the trust of clients who had longstanding relationships with their advisor.
Unquestionably, a major concern for many wealthy individuals is, “Will they have enough money to fund their future in the lifestyle to which they have become accustomed?” As life spans grow longer, their concern takes on a greater importance for wealth managers whose focus must evolve to consider life longevity. It is too late to start this discussion as clients approach the retirement window. It must begin early on in the client engagement with a discovery process that not only probes short- and long-term financial goals, but also covers the somewhat less comfortable matters of age-related living/housing arrangements, advanced directives pertaining to healthcare and related insurance, and associated portfolio strategies.
The Shift in Investor Base
According to a report from PricewaterhouseCooper (PwC) titled, “Asset Management 2020: A Brave New World,” the volume of investable assets is expected to increase from $64 trillion today to $102 trillion by 2020 (i.e., at a compound growth rate of almost 6%). South America, Asia, Africa and the Middle East will see their economies grow faster than the more developed regions. Asset growth will be driven by an increase in high net worth individuals within the emerging populations, the growth of sovereign wealth funds, and a shift to individual retirement plans incentivized by government. Wealth managers will be under heightened scrutiny to perform with the highest level of transparency. As for distribution, PwC projects that 2020 will see four regional fund blocks created for the sales of products on a “pan-regional” basis in North Asia, South Asia, Latin America and Europe. To succeed, these global managers will need to have clearly established brands and a competent, talented team capable of functioning in the changing asset management landscape.