The year 2040 sounds futuristic, but it will be here before you know it. (The 20 years since Y2K have whooshed by, right?) And a new report from Boston Consulting Group that lays out potential scenarios for the wealth managment industry over the next two decades paints a picture where technology’s growing reach will help the profession rise while the human touch will remain its foundation.
BCG, a global management consulting firm, used the 20th iteration of its Global Wealth Report to look both backward and forward at 20-year intervals to show how far the wealth management industry has come and gauge where it might be heading. It noted that personal financial wealth globally nearly tripled from $80 trillion in 1999 to $226 trillion at year-end 2019. But it also postulates that serving wealth management clients will become a trickier deal.
“Effectively serving the world’s wealthy is going to get far more complicated in the years ahead,” the report said. “As the demographics of wealth shift, so will the needs and expectations of wealth clients.”
The report encompassed feedback from more than 40 business leaders in the wealth management and technology sectors, as well as from other related industries. BCG said it also included insights from experts on global megatrends and the digital future, and included input from nearly 200 people in the financial services world.
BCG collated their perspectives and concluded that disruptive trends already underway within wealth management will accelerate due to rapid digitization, a more knowledgeable and empowered client base, and far greater choice.
“In many ways, however, the most disruptive force over the next 20 years will be the rate of change itself,” the report said.
BCG posited that accelerating digitization will lower barriers to entry to the wealth management business and create more competition. It will also turn offerings that used to be differentiators into commoditized services.
The digitized information revolution will provide wealth management clients with reams of data at their disposal, and the three youngest generations—X, Y and Z—will be more educated and economically empowered than older generations.
“For these younger generations, wealth won’t just be about money,” the report noted. “It will also be about meaning, purpose, connection, and making a positive difference in the world. This orientation will create a very different future for wealth management providers.”
But if anything, many investors will be weighed down by information overload.
“The paradox of an information-rich society will be the poverty of time available to make sense of all the information on hand,” BCG said. “What wealth management clients will want most from their providers in the future is simpler and more accessible interactions. The ability to derive client-specific insights and act on them swiftly will separate the best firms from the rest.”
The report quoted a U.K.-based private banking executive who said, “The clients of tomorrow will simply not accept working with a wealth management provider that does not have top digital capabilities to let them access what they need at any time they want.”
But especially for clients on the higher end of the wealth spectrum who have more complex needs, trusted personalized relationships will remain paramount. “Human judgment, creativity, and empathy are essential to forging meaningful, trust-based relationships; and robots and AI cannot easily replicate these qualities,” the report said.
Or, as the head of digital strategy at a global wealth manager told BCG, “Trust will remain essential. Platforms and digital solutions alone will not be sufficient to establish trust.”
Ultimately, the BCG report said, the melding of technology and human capabilities will enable levels of customization for clients that previously would’ve been too costly, and the wealth management model will expand and refocus during the next two decades as the divide between people and machines fade.
Margin Pressure
While technology can help wealth managers improve their game by making their operations more efficient and letting them provide specialized services at affordable prices, the flip side is that accelerated digitization will alter the industry’s economics.
BCG predicts that revenue margins will be increasingly squeezed by the likes of fintechs and tech platform providers that offer low-ball prices for key services ranging from transactions and custody services to client-specific advice and portfolio management.
“In addition, younger generations, accustomed to pricing transparency in other parts of their professional and personal lives, will insist on greater fee transparency from their wealth advisors,” the report said. “Online comparison tools will make it easy for them to search for the most competitive offerings.
“Together, these pressures could cut margins on investment services by half, with the result that wealth management providers will have to meet clients’ burgeoning demands and find new ways to drive value with just a fraction of today’s resources,” the report added. “That’s a tall order.”
To counter that, BCG said, wealth management providers will shift to dynamic, value-based pricing with a customizable mix of asset-based fees, performance-based pricing and fixed-fee models that are not necessarily linked to assets under management.
“Clients will be able to understand pricing arrangements with greater granularity,” the report said.
Elsewhere, BCG said the need for scale, specialization and choice could cause the wealth management industry to remake itself around four models:
• Large-scale consolidation. “We’ll see a separation between larger organizations that can deliver multijurisdictional, multicapability, multi-time-zone service, and niche players that can charge a premium for specialized expertise. The middle will get squeezed out.”
• Niche Plays. Fewer boutique firms will survive, but the survivors will serve clients with complex wealth management needs and/or will offer access to sophisticated investment vehicles. “These providers will embrace digitization, but their models will lean more heavily on intensive human interaction, superior relationship management skills, and specialized advice.”
• Retail Bank and Asset Manager Expansion. “Retail banks and asset managers will use technology and hybrid models to aggressively undercut traditional wealth management providers and offer simple but appealing investment solutions across their existing client base.”
• Entrance of Big Tech. Don’t look now, but the likes of Amazon, Google and Microsoft could leverage their heft and scale to provide wealth management services to affluent individuals and those in the lower end of the high-net-worth scale. BCG pegs the lower HNW level at between $1 million and $20 million in personal wealth.
Regardless of how many of BCG’s prognostications pan out, it's a safe bet the next 20 years will bring much change to the wealth management space. But whatever happens, perhaps the following observation can be described as the BCG report’s nutgraph: “Wealth managers will prove their value not solely by the breadth of services they offer or by their subject matter expertise, but by the depth of individualized attention and insight they bring to addressing their clients’ most complex needs.”