Executive Summary:
The wealth industry is on the cusp of the next evolution stage towards “Wealth Management 3.0”. To tap into the substantial revenue pools across wider wealth brackets and customer segments, wealth managers need to diversify and modularize their service and operating models, taking full advantage of technology. This will help address the fundamental growth and profitability challenges the industry faces.
For over a decade many wealth managers have put their growth focus on the ultra high net worth (UHNW) and higher high net worth (HNW) segments, thus not prioritizing less wealthy clients. In their home markets, wealth managers also had propositions for “affluent” clients, but in practice they mainly focused on the lower HNW segment. Only players with a premium brand or strong investment banking capabilities have been able to profitably grow in the highest wealth band segments, as the UHNW market as a whole is both hard to scale and highly competitive. At the other end, the lower HNW and affluent segments have been undervalued and underinvested in, which has limited value creation at the industry level. Wealth managers are increasingly realizing that they are leaving money on the table in the lower segments. Indeed, we see a revenue pool of ~$230BN in the lower HNW and affluent segments.
We believe the next decade will be about the transformation to a scalable and modular wealth management proposition. Facilitated by technology, wealth managers can make superior financial advice and investments accessible to a more diverse client base at lower, differentiated costs to serve. Clients can pick and choose different modules of advice, products and services to create their own, personalized solution. Wealth managers will support their clients along the journey through different channels, from human- to digital led. Digital solutions will also form the base layer to cater to more traditional, higher wealth bracket clients, who increasingly expect enhanced digital experiences along with traditional human led bespoke service offerings.
For many wealth managers, this will require significant change and investment in their coverage and service models as well as operating models and technology in order to win market share profitably in the future. Leading firms which are accelerating the transition to Wealth Management 3.0 have been investing a high single-digit percentage of their revenues in this transformation effort and are planning to continue to do so for the next 3 to 5 years.
For asset managers, the wealth management channel becomes ever more important. We expect the share of the wealth and retail client segment of total assets under management (AuM) to grow from 58% to 64% in the next 5 years. Asset managers face fundamental choices: partner and distribute through wealth managers, build captive digital-led wealth management distribution solutions, or establish open platforms geared towards this segment. A combination thereof may also work for some. Each model comes with benefits and drawbacks, but they all require re-architecting the wealth channel and associated operating model.
Macroeconomic and geopolitical regime shifts to accelerate transformation
After a decade-long bull market across asset classes (supporting ~9% CAGR of industry AuM), the market outlook is much more uncertain and muted (we see ~4-5% CAGR over the next 5 years). There is a considerable risk of sustained inflation and much tighter liquidity disrupting economic growth. Moreover, the war in Ukraine raises the prospect of a new era of geopolitical escalation and deglobalization, not only in terms of supply chains but also asset allocation.
This regime shift will accelerate the transformation of service and operating models, as complexity, margin and cost pressures intensify. At the same time, client demand continues to evolve rapidly towards new products and features such as ESG, private markets and digital assets, more personalization, and seamless digital and hybrid experiences. As a result, technology will play an ever more critical role in this transformation.
Substantial opportunities and challenges for both wealth and asset managers
We see “Wealth Management 3.0” as this next stage of evolution triggered by the paradigm and regime shifts outlined above. Over the last couple of decades, wealth managers have successfully moved to more digitalized, data- and IT-driven models (“Wealth Management 2.0”) from their brick & mortar, paper-based, white-glove only origins (“Wealth Management 1.0”). The next stage will be defined by substantial modularization and diversification of offerings, service models and operating models, allowing lower, more differentiated costs to serve – all facilitated by technology.
Wealth Management 3.0 is the amalgamation of trends across these key areas: The client scope is broadening to include client segments in lower wealth bands as well as segments with more diverse needs. Channels and coverage models are diversifying and more clearly differentiating into digital-led propositions, hybrid models with pooled advisors and specialists, and the traditional human-led approaches. The product universe is continuing to broaden, encompassing alternatives and private markets, ESG and digital asset investments. Wealth managers’ solutions and service offerings continue to be modularized, enabling better customization to specific client needs. To lower and differentiate costs to serve across models, wealth managers need to continue investing in more efficient operating models and technology, streamlining and automating key client journeys, processes and value chain steps front-to- back. They will move from monolithic legacy core banking systems to more modular architectures centered on an aggregation layer that leverages capabilities from legacy as well as new, third-party and partner components. Advanced technology such as Cloud and API, and potentially distributed ledger technology (DLT), will need to be leveraged for fast deployment and better interaction across the wider wealth management ecosystem.
Wealth managers: three priorities in Wealth Management 3.0
We see three priority investment areas for wealth managers to accelerate their transition:
1. Coverage and service model: Introduce full omni channel capabilities, complementing human-led with distinct hybrid and digital-led interaction models.
2. Delivery model: Make delivery more flexible, differentiate and lower costs to serve clients through operating model and tech transformation. A wealth manager’s costs to serve an average client today in the traditional UHNW/HNW bracket is $8-20K (and we expect this to remain rigid for traditional human-led premium propositions), but this can drop to $2-8K in a hybrid model and $0.5-2K in a digital-led model.
3. Value management: Create transparency on client-level economics, develop a systematic approach to measure, manage and communicate value creation with the support of digital dashboards with real-time information. This will enable dynamic management of revenues, costs and profit- ability at the product, advisor and client level.
The future success of wealth managers will be determined by exe- cuting on these priorities while keeping sight of their primary pur- pose of protecting and building clients’ wealth in a more uncertain environment. We acknowledge that several wealth managers have already started on the path to Wealth Management 3.0, by offering digital-led service models to affluent clients or hybrid propositions.
Asset managers: from intermediation to integration
As the wealth channel becomes more dominant and wealth man- agers transform their service and delivery models, asset managers need to rethink their positioning with wealth managers and ultimately the end clients. We expect a significant shift in the way they interact, from a simple intermediated distribution between an asset manager’s wholesale team and the wealth manager’s fund selection team towards a deeper technical integration. This will support delivery of more customized content, products and solutions, enabling a more personalized end-client experience at lower costs. We expect a few asset managers will create their own end-to-end wealth ecosystem with direct captive or open digital investment and wealth management platforms.
Despite the opportunity for direct distribution models, we expect intermediated channels via wealth managers to dominate. A strategic priority of asset managers will be refining the interface with wealth managers and adapting their operating models accordingly. We see three emerging themes that asset managers need to address to succeed:
1. Increased importance of integration and customized con- tent: In selecting asset managers, wealth managers will place increased weight on the ability to build technical integrations with their own operations to streamline content delivery, facilitate development of customized products and outcome-oriented solutions. Enhanced end-to-end client experience through more tailored experiences and reporting capabilities will also matter.
2. Technological adoption and sophistication as drivers of economics: Technological capabilities are becoming more important than pure scale as a driver of operational efficiency, allowing smaller players to compete more effectively against scale players. Asset managers need to invest into optimizing the application landscape, employing cloud-optimized technology infrastructure, creating a lean, flexible data environment, and renewing focus on identifying opportunities for outsourcing and managed services across the value chain. Scale advantages we expect will remain critical when distributing and servicing the global wealth management players in the medium term (e.g. to engage and explain products to stakeholders across continents), though we see a possible opportunity for tech savvy managers to narrow this advantage by deploying these new technological capabilities.
3. Supercharging advisors and clients: As end-clients inWM 3.0 need more (digital) guidance on a broad suite of products and a higher quality digital customer experience, asset managers must develop the (digital) content capabilities that truly elevate their advisor partnership. Tailored market insights, data and analytics, and better access to investments through digital- and human-led channels and portals will enable advisors to deliver value to their clients across the full lifecycle.
