The wealth management industry has traditionally focused on serving wealthy individuals with complex needs. But, according to a new report, a revolution is underway that will force a complete change in strategy. The winners, it says, will be firms that cater to the mass market — in other words, clients with more modest portfolios and simple needs.
Wealth managers are overlooking a large and growing opportunity in failing to cater to clients with modest wealth and simple needs — but they will need first to embrace a radically different business model.
That’s one conclusion of the recently released Global Wealth Report 2021 by Boston Consulting Group, which points to a radically different market for wealth managers in the wake of the global pandemic, but one rich with opportunity.
Subtitled “When Clients Take the Lead”, the report finds the pandemic has sharpened people’s sense of what is essential and what is not. Many are reappraising their lives, and seeking advice around new ways of making their wealth work for them.
“For a long time, the typical industry model has operated in an inside-out fashion,” the report says. “It’s time to correct that. Instead of following a corporate agenda, wealth managers must pursue a client agenda.”
Needs not wallet size
So instead of sorting clients by their wallets, managers and advisers must differentiate them by their needs and use behavioural insights to unlock new sources of value.
The authors use as an example of this client-led growth the untapped opportunity among the “simple-needs” segment of people whose wealth is $US1 million or less, while the next tier up ($1-$3 million) is frequently over-serviced.
“Wealth managers,” it says, “are staring at a large, untapped market. It consists of individuals who have uncomplicated investment needs, somewhat limited financial knowledge, and financial wealth of between $100,000 and $3 million.”
“The simple-needs segment numbers 331 million individuals, holds $59 trillion in investable wealth, and has the potential to contribute $118 billion to the global wealth revenue pool. And that base is about to get larger.”
Global wealth at all-time high
Boston Consulting’s research shows global financial wealth reached an all-time high of $250 trillion in 2020 as household savings rose and as financial markets showed unexpected resilience in the face of the protracted COVID-19 pandemic.
“The next five years may be stronger still. We see signs of an emerging economic recovery that could significantly expand prosperity and wealth between now and 2025. This growth will create extraordinary opportunities for wealth managers.”
However, the authors warn that winning this lower-tier segment will require wealth managers to embrace a radically different business model, predicated on a deep understanding of client needs and optimised for efficiency.
For example, the wealth management industry still tends to use excessively arcane terminology and technical language around finance that intimidates many people, who would otherwise seek out advice if the content was made engaging.
Wealth managers must think like tech firms
The report finds five sources of client friction with this huge potential market for advice. The first is excessive product complexity, the second is a lack of transparency around the cost of advice, the third is limited financial literacy, the fourth is lack of an engaging experience and the last is a lack of personalisation of client offering.
Success in this new environment inevitably will involve wealth managers thinking more like technology companies, using digital platforms to offer personalisation at scale, contextual learning and simplicity in pricing and reporting.
“The race is on,” Boston Consulting concludes. “The next few years will see a revolution in how wealth managers serve the simple-needs segment. The winners will be those that can spin up the most compelling digital wealth platform at the fastest rate and sustain that pace over time.”
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