Threat or opportunity? That depends on you.

Evolving client expectations and needs have resulted in wealth managers facing up to the reality of having to adapt and update their business models in order to succeed. As a result, firms are experiencing mounting pressure to provide a distinct proposition, as they all vie for the same pot of money.

Consequently, we spoke to senior executives for our latest report, Wealth Management at a Crossroads: 11 Trends to Watch, (PDF) to hear directly from the coalface the exact challenges wealth management firms are experiencing and how they expect the industry to develop over the remainder of the year and beyond.

Wealth managers won’t necessarily face every problem; indeed, some are already well geared up, or are in the process of being able to tackle some of the trends identified. However, by speaking to those in charge of the some of the biggest firms in the UK, these are the challenges that have been identified as defining how wealth managers will work in the future.

1. Vying for the same pot

Among private investment houses, the baby boom generation is the main client base, with a preponderance of 50+ year-old clients who are retired or semi-retired. As such, one of the major challenges firms face within this highly-competitive corner of the wealth market is the size of the pot.

2. Finding a distinct voice

In an environment where firms are directly competing in the same demographic space, businesses have to differentiate. There is a belief that a firm’s level of personal and professional service was an important part of standing out, as well as offering an end-to-end solution.

3. Clients becoming more complex

From pension reforms to new tax rules, clients have to rethink the way they manage their finances. They are living longer, and therefore require more money to see them through retirement. These challenges do have a silver lining for firms, however, since clients are more likely to seek advice during periods of change and uncertainty.

4. Shifting the demographic dial

Given the many challenges associated with an older client base, there is a need to tap into younger generations. This is a trend that is becoming more prominent as clients hand money down to younger generations. That said, some firms still seem unsure about the levels of wealth that younger generations can realistically accumulate, or, how they can tap into that in a cost-effective way.

5. Upgrading digital infrastructures and capabilities

As client expectations surrounding transparency and delivery of information are leading firms to invest in their online portals, one interviewee went as far as to say that the one biggest threat is settling for the status quo. Those with higher net worth clients see it as less of an imperative, though, as clients “don’t want to look at it every day,” or they’ve paid someone else “to worry about it.”

6. Embracing robo-advice

Executives do not see face-to-face client interactions going away, but they understand the growing need for digital self-service models. Wealth managers will need to have an omni-channel strategy in order to serve a range of customer needs, as when it comes to significant investment decisions around matters such as pensions, face-to-face will still be required.

7. Regulatory impacts

The most frequently mentioned set of regulations that was considered to have an impact was MiFID II, which was even referred to as one firm’s #1 pressure in 2017. Firms are therefore looking for technology solutions to help them deal with the increased transparency and reporting requirements, as well as reducing the cost of complying with these.

8. Margins and fees squeeze

Aware that margin pressure is going to be significantly greater in the future than it is today, some firms are moving away from third-party funds and instead focusing on direct investing and passive solutions where required. There is a feeling that wealth management firms will not bear the brunt of the pressure, and that it threatens people further back in the value chain more.

9. Geopolitical tensions

While most believe it is too early to tell what the true impact of Brexit will be, there is concern that it will have a “corrosive effect” over the longer term. This view was, however, tempered by confidence that the UK, and markets generally, have weathered crises of a similar magnitude in the past.

10. Inorganic growth triumphs

More firms may now aim to own the whole of the value chain in order to get back the margin erosion they’ve lost on their core business. To achieve this scale, the majority see mergers and acquisitions (M&A) playing a part in their growth strategies. Many also see M&A as playing a necessary role in bolstering the outlook for the sector and bringing it into the 21st century.

11. Outsourcing for profit and growth

According to the majority of firms, profit and growth will come from within. They believe that the secret to success is upholding the quality of their own proposition by focusing on their core skills. As a result, outsourcing is done by firms at varying degrees, offering significant cost efficiencies and allowing firms to focus on what they do best.

Wealth management firms are facing a number of challenges that if not confronted, have the opportunity to put the industry under threat. However, it also produces a number of exciting openings, when approached in a sensible manner, can pay dividends for a firm. 

Download the full report (PDF)