The global wealthy are continuing to increase their wealth at a phenomenal rate. Managing that wealth can be a profitable enterprise. Wealth managers are, according to a new report, keen to improve their revenues. The report highlights, however, that the rules of the game are changing and that providing a transparent service, offering a wide range of digital channels and an annual fee/commission based structure may help net some of the more than $200 billion in wealth revenues open to switching from their current wealth managers.
As the number of mass affluent, high-net-worth and ultra-high-net-worth continues to rise, demand for the management of the newly acquired wealth, too, is on the increase. The total assets of the wealthy fluctuates between reports, BCG put an estimate of total wealth of the wealthy at $164.3 trillion in 2014, Capgemini pegged the wealth of just the high-net-worth wealth segment in excess of $56.4 trillion in 2014.
According to a new report from EY, the value of wealth under management by global wealth managers is in the order of $120 trillion. Just as in a range of sectors, however, disruptions are affecting the wealth management market. The study, titled ‘Global Wealth Management Survey 2016 – The experience factor’, suggests that a large share of the wealth management pie may be open to firms offering propositions that more closely meet client expectations, with digital serving as the key enabler.
The study involved a survey by Oxford Economics of 2,000 wealth management clients across all segments and all global regions, as well as interviews 60 wealth management executives globally to better understand how wealth managers think about and invest in key growth initiatives. One area under consideration is the primary focus of the wealth manager’s strategic budget in the next three years; the global picture suggests that the primary focus is revenue growth (50%), followed by regulatory compliance (19%). In terms of a regional breakdown, the EMEA has the highest strategic focus on revenue advance, at 68% of respondents, followed by compliance, at 14%. The APAC region is the most concerned about compliance, at 42% of respondents, and the least concerned about growing revenues, at 14%. The North American market is generally focused on growing revenue, at 40%, followed by a mix of priorities, also at 40%.
While increasing revenue through operational efficiencies and cost-cutting measures remains one of the priorities for wealth managers, according to the analysis, a focus on increasing revenue by expanding propositions and acquiring and servicing more clients too forms a growing priority for managers. One way in which to improve revenues is through a streamlining of the client experience, thereby not only better meeting the needs of current clients, but also potentially attracting clients seeking to consolidate their sometimes fragmented portfolios. The report notes that up to $200 billion in wealth is looking to consolidate, in a bid to find a better customer experience.
Clients are also changing the way in which they seek to engage with wealth managers and their various propositions. Recent years have seen the rise of digital channels, creating a wide range of new ways in which financial institutions are able to connect with clients and deliver services. Competition is fierce, however, with FinTech players and cross-border competition – leveraging digital technologies – too seeking to enter the market. However, wealth management, according to a recent report, remains – for the time being – in the hands of incumbents.
Meeting client expectations, even for incumbents, increasingly requires a range of digital channels to at least be available. Especially for basic transactions with their wealth manager, clients are keen to have digital possibilities available, for viewing account info for instance, 73% said that it is their preference, followed by access research at 71%. Viewing portfolio performance, a key component of transparency, has a digital channel preference for 68% of respondents. The areas with the least current preference for digital channels includes finding an advisor, at 33%, followed by opening accounts, at 38%.
The survey finds that the demand for digital services is expected to increase, over the coming two to three years, across all categories considered. Around three quarters of respondents expect to be able to view account info and perform access research through digital channels. Viewing portfolio performance through digital channels is expected to rise to 72%, while learn and buy products increases from 58% today to 65% over the coming years.
Transparency and trust
One of the powerful advances in the digital age is that, in certain sectors, transparency is on the increase. While for the longest time a wealth management firm’s reputation was its bread and butter, digital analytics, a highly educated population and the ease of displaying complex information in easy to read formations, means that transparency has become the primary trust driver for clients.
Across all regions, firm reputation was cited as the client trust driver by 42% of respondents, while transparency in portfolio performance, fees/commissions came in at 59%. Transparency was particularly important in LATAM at 66% of respondents, followed by APAC at 61% of respondents. In North America, the reputation of the firm and its manager remain more important than the global average, at 46% and 42% respectively, while transparency comes in at 53%.
The research also found that across all regions, a disconnect exists between the current and preferred fee structure. Globally, the annual/fixed fee structure was preferred by 25% of respondents, although currently only 17% are enrolled in it; while far fewer are keen on the transaction-based structure, from current 34% to preferred 26%. Respondents are also 8% less interested in the % of invested assets fee structure than are currently enrolled in the model.
A preference for annual/fixed fee structures are particularly strong in the EMEA, where there is also currently a 10% difference compared to those currently enrolled in the model – considerable uncertainty exists about what is best for their specific needs, however, with more than 10% not sure. The high level of discontent suggests that the right proposition might go a long way to sway the up to 40% of all clients surveyed that are open to switching wealth managers under the right circumstances.
Nalika Nanayakkara, EY’s US Wealth Management Leader, says: “In an industry where advances in technology, new types of competition and client expectations are changing rapidly, firms that challenge traditional norms while remaining true to their core value proposition will be better positioned to succeed. Delivering a comprehensive client experience is the linchpin that will make or break a firm in this wealth management landscape.”