Changes forced by the global pandemic, the geopolitical landscape, the evolution of technology, demographic dynamics and the increasing embrace of stakeholder capitalism are affecting every industry right now, but perhaps none more so than wealth management. A new report reveals huge challenges for the industry, but also enormous opportunities.
Nobel Prize-winning physicist Albert Einstein once said: “The world as we have created it, is a process of our thinking. It cannot be changed without changing our thinking.”
There is a lot of thinking going on in the wealth management industry right now at a point in history when many of the old assumptions the industry has lived with for four decades or more are coming into question.
Key assumptions challenged
One such assumption is the remorseless advance of globalisation and the diminishing importance of nation states. As events in Ukraine have reminded us, borders and geopolitics matter again. And capital is returning to domestic markets.
A second assumption, related to the first, is a global marketplace for talent and seamless supply chains. The pandemic has reduced global mobility, shrunk labour pools, placed pressure on government budgets and revived inflation.
A third assumption is the inviolability of certain sections of the financial services to disintermediation and digital disruption. Peer-to-peer technology, blockchain and robotics threaten to reshape banking, insurance and wealth management.
A fourth assumption relates to demographic change. We have been warned for years about the implications of an ageing population in developed economies. And now, those implications are staring us in the face.
The average share of the global population above 50 years of age has increased from 15% to 25% since the 1950s and is projected to rise to 40% by the end of this century. According to a recent Stanford University paper, this will lead to increased wealth-to-GDP ratios, lower returns from asset markets and wider global imbalances.
Finally, the 50-year-old Friedmanite doctrine that the only responsibility of businesses is to increase their profits for shareholders has been declared dead and buried – not in the pages of the New Left Review but in Fortune Magazine.
In 2019, the US Business Roundtable — representing some of the biggest names in global business — formally ditched shareholder primacy as a philosophy to reposition the purpose of the corporation as serving all stakeholders.
Wealth management implications
It is this challenging gumbo — of faltering globalisation, tighter labour markets, increasing digital disruption, rapid demographic change and the growth of purpose-driven capitalism — that the wealth management industry is now having to contend with.
Just what it might all mean for the industry in the coming years is set out in some detail by the multi-national professional services firm KPMG UK in a recently released and appropriately named report, Future of Wealth Management.
While the report talks up the wealth sector’s growth prospects — driven by such factors as growing household wealth, under-funded retirement savings and intergenerational wealth transfer — it also says the industry is being reshaped by these other forces.
“In the wake of COVID-19, recession, weakened consumer confidence, unemployment, rising debt and low growth are likely to impact wealth managers serving the mass market segment, causing a rethink of business and operating models,” the report says.
“The ‘three Ds’ of depopulation, deleveraging and deglobalisation are also having an impact. Population growth is slowing globally, while declining in some developed nations, potentially reducing consumer demand and shrinking labour pools that will likely hurt productivity and drive up wages.”
Drive for efficiency
The report says these trends point to increase consolidation in the wealth management industry as players seek greater efficiencies in the face of rising costs, intensifying regulatory pressure and the arrival of new, agile and innovative fintech disruptors targeting younger savers.
Environmental, social and governance (ESG) influences are only seen likely to rise on board agendas under pressure not only from end investor demand but from the insistence of regulators for greater transparency on climate and other risks.
“Wealth management businesses should stay attuned to customers’ ethical expectations, which go beyond merely offering ESG funds and call for a purpose-driven culture,” the KPMG report says.
Three distinct models
In terms of the future, the report sees the market broken down into three quite distinct wealth management models — firstly, the digital-first, mass-market financial wellbeing providers; secondly, the domestic wealth managers targeting high net-worth clients; and thirdly, global providers offering a full suite of customised services for the ultra-wealthy.
“The three future business models are based on serving client needs and preferences, rather than focusing on their wealth levels,” the report says. “Each has unique characteristics and success factors, making it hard for any organisation to participate across the three models.”
In the UK and Europe, the report finds domestic players are increasingly mass-market financial wellbeing providers or wealth management firms, and sometimes a combination of the two.
Within this sector, there is a growing move toward hybrid services to offer remote, global investment advice to the mass market.
“This calls for a combination of human and digital capabilities, including more women advisers, plus increased automation and self-serve portals.”
To hark back to Einstein’s opening quote, this is all going to require a good deal of thinking among wealth management firms — about how they connect with clients, how they balance digital and human connection, how they drive efficiencies and reliability, and how they service ESG demands.
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