The wealth management industry is confronted with disruption, changes in clients and their demands, technology, and competition. As such, it is now time for wealth management firms to adapt to these changes and ensure they remain successful and competitive in the future.
There is a significant trend of the overall society ageing, meaning there is an increasing number of people heading towards retirement and eventually passing on their wealth to their children. For wealth management firms this means wealth will from now on continuously change hands from people of the baby boomer generation to younger clients. This is likely to devalue decade-long relationships with existing clients, as it is not guaranteed that their heirs will have the same financial requirements and demands. Thus, this is a difficult and decisive situation for wealth managers in which they need to find ways to create value and purpose so that the next generation keeps the same wealth manager and decides not to use their assets in different ways or move on to a different advisor.
This is sure to prove a challenge for wealth managers since they are ageing too, meaning they eventually must pass on their clients just as their clients pass on their wealth. In the US, over 40% of all financial advisors are over the age of 55, and it is expected that about 1/3 of the workforce will retire in the next 10 years. This clearly emphasises that there is a big gap between experienced advisors who were in business for a long time and potential new clients. When looking at data from the US, 90% of people inheriting money change advisors. While on one hand, this is a major threat for current wealth advisors, it also provides an opportunity for new wealth advisors or those trying to expand their network.
What do the next generations’, i.e., X and Y’s, expectations look like and how do they differ from those of past generations?
Being considerably more exposed to technology at a younger age than baby boomers, millennials’ minds have changed accordingly. The availability of laptops for mass use and later the introduction of smartphones enabled companies to be accessible in an omnichannel environment at any time. Facebook, Amazon, and Google have been decisive in shaping the desire for 24/7, effortless accessibility since they showed to what extent digitalisation can make your life easier and better connected.
Furthermore, these generations have experienced two severe financial crises – the burst of the dot-com bubble at the end of the 1990s and early 2000s, as well as the global financial crisis of 2008-09. This raised awareness of the risks connected with the stock market. There has been a notable increase in the popularity of target-date funds amongst the younger generation. Target date funds adapt an individual’s asset allocation more risk aversely as the chosen target date (e.g., retiring in 2040) comes closer, e.g., via changing investments and ratios within the fund. Concretely, in the US 62% of 401(k) retirement plan* participants in their twenties held target date funds in 2018, vs. only 50% in their sixties.
Lastly, there is an overall shift away from seeing society as competition, meaning that younger millennials (born in the 90s) often do not see the traditional corporate ladder as something worth climbing while older millennials (born in the 80s) who have now reached management positions feel disillusionment. While millennials are keen on making an impact, this is not equal to the traditional attitude of “being in a higher position than you”. Millennials seem to have higher demands and expectations for life and the workplace as opposed to the previous generation baby boomers who were seen as hard-working loyalists. In terms of wealth management, that means millennials expect the same treatment as ultra-high net worth clients would, and don’t want to be seen or treated as second-class investors if they do not have a specific amount to invest.
How does communication in wealth management need to change and develop?
One thing that has been and remains true about wealth management is that relationship-building is just as important as returns and investment strategies. Strong relationships between clients and wealth managers are necessary to build both trust and confidence. This in turn is likely to aid the optimal, personalised portfolio composition as well as clients’ faith in the advisor when returns are not as desired in times of economic downturn.
However, relationship building does not have to be done through traditional methods such as face-to-face. The pandemic has highlighted the various channels through which clients and wealth managers can interact. During the beginning of the pandemic, client engagement across all digital channels of wealth management firms has increased by 7 - 10 times and digital research consumption has increased by 4 - 5 times. These trends have remained since – most notably, the idea of working and carrying out errands from home. Whether from home, underway, or their office, clients expect the technological infrastructure to enable them to solve problems independently and quickly. This wish for taking over control can be tackled by better mobile applications, customer portals and different interfaces in which clients can take action themselves – it signalises trust in your clients and gives them the feeling of self-determination.
Just like there is more diversity in the workplace today than there was 30 years ago, clients now expect more diversity in how wealth management companies communicate with them. There should be more types of access to services such as web portals, advanced chatbots and video calls. Furthermore, the style of communication is evolving too. We are moving away from overly formal conversations using jargon to gain respect and towards an informal communication culture. Besides that, in times of information overload, it is crucial to filter information and individually extract what matters to the client. Using artificial intelligence, data gathering and machine learning to find out what information and communication most appeal to a client makes personalisation easier than ever before. If the content is not customised, it will appear to the client that they are just one of 10,000 on a mailing list, likely leaving them feeling as though they are not worthy of personalised communication. The goal needs to be that the client gets the opportunity to genuinely understand what is happening in financial markets and thus in their portfolio – regardless of their background. Ultimately, this will increase efficiency and improve client engagement.
When developing investment strategies for clients, two things are highly important: Firstly, the risk-averseness of certain investor groups needs to be taken seriously, and secondly, alternative investment solutions to traditional portfolio structures need to be found. To do this successfully wealth managers need to find ways to make niche investments available for all types of wealth management clients – not just for ultra-high net worth clients. Through this, diverse demands can be satisfied and the feeling of first- and second-class investors is eliminated. It comes down to inclusion and equal opportunities for all clients (irrespective of whether they have a capital of $2m or $20m) within the wealth management industry.
*401(k) retirement plan: A retirement savings and investing plan offered by employers in the US, giving employees a tax break on the money they contribute. It can be compared to the UK workplace pensions.
Author: Sabrina Fuchs
sabrina.fuchs@bayes.city.ac.uk