The following is an excerpt from the white paper, Wealth and Asset Management 2021: Preparing for Transformative Change, written by Roubini ThoughtLab based on a global survey that BMO Global Asset Management sponsored. To download the full content of this section, scroll to the bottom of this page.
To meet fast-changing customer demands, investment providers will need to reassess many aspects of their strategies, from their product offerings to go-to-market approaches. Competition will heat up, as “born digital” companies, including Internet giants such as Alibaba, enter the market, and traditional providers expand their product offerings and market scope to create more digitized, personalized, and democratized products.
Top product priorities for the future
Rapidly evolving investor needs and advances in technology are prompting wealth and asset management firms to reset their product priorities for the next five years. At the top of their priority list is developing fintech capabilities that will enable clients to use technology to manage their investments. Investment providers in our study are following a variety of approaches to break into the fintech space: Some, like UBS, are setting up their own fintech platforms inhouse; others are setting up partnerships (RBC with FutureAdvisor) or making acquisitions (Mass Mutual Life Insurance and LearnVest).
Digital technology is also helping companies deliver on other top product priorities, such as creating more customized products and adding smart beta products. Professor Luis Viceira of Harvard Business School explains, “Technology is making customization easier and cheaper each day.” Alexa von Tobel, Founder and CEO of LearnVest, believes that technology will enable companies to widen their product portfolios, another top priority. “Technology enables us to provide services that were never available to the broader market—services that will make their lives better. That’s one of the best things about technology. It democratizes personal finance.”
Another product priority facilitated by technology is adding smart beta and passive funds. With outflows from active to passive funds reaching record heights—what Morningstar has dubbed “Flowmageddon”—it might seem surprising that only 35% of surveyed providers are planning to add smart beta products to their offerings. But a more meaningful indicator is the percentage of mutual fund companies (47%) and full service banks (41%) that are prioritizing passive management.
These percentages are in line with investor demands from our survey: In the next five years 57% of investors will use passive funds versus 49% who will rely on active approaches. The shift to passive will be even more pronounced among the coveted super-rich segments, with 77% of UHNW investors and 68% of VHNW investors planning to use passive funds in the future.
But as products become more commoditized through technology and fee structures become more transparent, many investment providers think advice will turn into the ultimate
differentiator. That is why focusing on superior returns and advice and moving to specialized holistic wealth advisory services are also core to future product plans (Listen to our Better Conversations podcast on this topic: Stop providing only investment advice).
Jon Stein, CEO and Founder of Betterment, explains why his firm, a pioneer in roboinvesting, is building up advisory capabilities: “I view the future of wealth management moving continually to a more advisory environment. There is a multitude of reasons – transaction and trading costs are practically down to zero. You have lower costs for the actual funds themselves. As a result, we see the business heading more towards an advice-driven central relationship.”
One fast-growing product area is “goals-based, multi-asset implementation,” according to EVP and Head of SEI’s Investment Management Kevin Barr, who says, “The number of ‘income strategies’ coming to market is starting to accelerate.” Bob Reynolds, President and CEO of Putnam Investments, agrees: “Of the nearly 30 new products which Putnam has released in the last seven years, none are index-linked. Instead, they are designed to be non-correlated and focus on goals such as absolute return from investment.”
Adapting marketing approaches
Investment providers are also recasting their strategies for retaining and acquiring a more diverse set of customers. As Figure 3-2 shows, investment providers are using technology to broaden their client bases. Full-service banks and alternative investment firms in particular see the acquisition of more clients through technology platforms as central to their future go-to-market plans. These technology platforms offer cost-effective ways to reach a broader spectrum of customers, including the mass affluent. (Listen to our Better Conversations podcast on this topic: Create, curate and connect: social media for advisors).
Another go-to-market strategy is to build on existing client relationships, particularly those preparing for intergenerational wealth transfers. To do this, 55% of investment providers are extending business to other family members and friends. According to Bob Dannhauser, Head of Global Private Wealth Management, CFA Institute, “The family patriarch is probably least likely to want to Snapchat with his advisor. But the third generation of that family may find that perfectly reasonable.”
To expand relationships, half of surveyed investment providers are segmenting their client base more finely by demographic and psychographic characteristics. Al Chiaradonna, SVP, SEI Wealth PlatformSM, North America Private Banking, believes that providers may need to go even deeper and shift from “wallet segmentation” (i.e. segmentation by wealth level) to “true behavioral segmentation.” He explains the difference: “Behavioral segmentation is more about how you invest and spend your money, not how much you have. That is why we keep talking about goals. We don’t have the analytics where you can tie these things together yet, but we will.”
A significant minority of providers are also using technology to reach investors in other countries. The strongest proponents of globalization will be full-service banks (51%), mutual fund companies (50%), and alternative investment firms (47%). As Andrew Wilson, State Street’s SVP and Head of Asset Managers Solutions EMEA, notes, “Borders are coming down. These companies are going global.”
In addition to globalizing, 42% of investment providers plan to expand their client base across wealth levels and other investor segments. (See Figure 3-3.) Most providers already target the mass affluent and high-net-worth investors, but many will be setting their sights on VHNW and UHNW investors over the next five years.
Competing in a new playing field
The shifts in product and go-to-market strategies will realign the global playing field for the wealth industry. Investors in the future plan to make use of a broader array of investment providers. Inevitably, preferences will vary by types of investors, sometimes significantly. For example, UHNW investors will continue to be much higher users of alternative investment firms than mass affluent investors. (See Figure 3-5.)
But the democratization of wealth services, combined with greater wealth accumulation, will mean that every type of provider will have a bigger range of potential customers. SEI’s Barr believes this transition has already begun: “Hedge fund strategies are already mainstream, and multi-asset investments are a growing trend.”
Competition will heat up as investors reach out to more investment providers. Our survey shows that by 2021 every type of investment provider will become more competitive with other types of wealth firms.
Alternative investment firms, full-service financial firms and fintechs, particularly, will become greater competitive threats.
Rising competition will put further pressures on margins, and make it even more challenging to demonstrate value to investors. SEI’s Barr says, “In the past, by showing relative returns, you compared yourself against your peers. Now companies need to rethink how they express value. Performance-specified investor goals is one way.”
Yet the most worrying competitive danger lurks outside the industry – from the big internet players, such as Google, Apple, Amazon, and Alibaba. Already 30% of providers report that nontraditional wealth services providers are the main competitors; by 2021 the percentage will rise to 35%. Meanwhile, by 2021, 45% of investors say that they will use nontraditional investment providers, such as Internet platform companies.
As has been seen in retail and entertainment, these Internet juggernauts have the power to disrupt an industry. Apple Pay, and more recently Samsung Pay, are reshaping transaction and payment processing within financial services. As an example, the assets under management of the online money market business started by Alibaba, Baidu, and other Chinese Internet companies stood at about $700 billion by the end of 2015.
Amit Sahasrabudhe, RBC’s Head of Wealth Management Strategy and Digital Solutions, speaks for many, “More worrying than fintech start-ups is the potential impact from the
Googles, Apples, and Amazons of the world. Von Tobel of LearnVest agrees: “The Amazons and Googles of this world have the right data and technologies. The real threat to the industry is coming from them.”
Focusing on the customer
In this sea of change, leading investment providers see the customer as their ultimate compass. By becoming hypersensitive to clients’ expectations and behaviors, wealth-service firms can stay competitive. In fact, many wealth-service firms are taking this goal to the next level by transforming themselves into “customer-investment hubs.” According to Stein of Betterment, “We want to become that central financial relationship in clients’ lives.” Rodolfo Castilla, Global Head of Wealth Management Products and Platforms at Citi Consumer Bank, summed it up, “We want to own the client.”
In this quest, investment providers plan to deepen their understanding of the customer over the next five years by leveraging advanced analytics. Specifically, they plan to install CRM systems that provide an integrated view of the customer; use predictive models to identify future investor trends; and set up real time tracking systems to stay on top of fast-changing customer needs.
Who will come out on top?
To judge from media accounts, the winners in the wealth management revolution will be…
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This article was written by Roubini ThoughtLab and is based on a global survey that BMO Global Asset Management sponsored. BMO Global Asset Management is not affiliated with Roubini ThoughtLab. The views and opinions expressed in this article do not necessarily reflect those held by BMO Global Asset Management or any division of BMO Harris Bank N.A., nor by BMO Financial Group or any part of BMO Financial Group.