Wealth Management 3.0: The Future of Financial Advisory is Already Here

9 September 2022

Banks and financial institutions have been serving the financial needs of affluent clients for centuries, even before the advent of digital technology, to the mutual satisfaction of both parties. However, each historical phase brings about changes and evolutions that sometimes become a “ford” to cross in order to avoid ending up in the river. According to the view expressed in a well-argued research by Morgan Stanley and Oliver Wyman last July, this is one of those crucial moments.

Only companies that, thanks to increasingly powerful and accessible technologies, can successfully transition from the current model to the paradigm referred to as Wealth Management 3.0, regardless of their size, will be able to face the challenge posed by a more competitive and difficult market with structurally under pressure margins.

The bull market has come to an end, and not only that…

Let’s say that one did not need to be Cassandra to expect a market reversal after over 10 years of a bull market and continuous growth. The real problem is that this is not just a technical correction of trends, but rather a very worrying and complex scenario whose repercussions and duration are difficult to predict.

The contemporaneity of bad news is discouraging: from high inflation, which seemed episodic and now appears to be becoming structural, to an unprecedented energy crisis, to a political scenario that seems destined to witness the end of globalization and the beginning of a new era of protectionism and nationalism. This scenario not only makes it difficult to find a so-called safe haven for investments but also makes the work of wealth advisors who need to explain performance to their clients very challenging.

Even the operational margins of the sector are under pressure due to structural reasons that add to the uncertainties of the macro context. Reasonable forecasts indicate that the stellar growth rates of wealth management in 2021, a record year for the industry, will be difficult to achieve in the coming years.

But even in a challenging context, new clients and increased revenues can be found

In the last 20 years, wealth managers worldwide have mostly focused on the UHNWI segment (Ultra High Net Worth Individuals), that is, the segment of the wealthiest individuals. This is typically a highly competitive market segment that is difficult to scale for companies that do not have a very prestigious brand and strong capabilities in investment banking.

On the other hand, in the “lower” segment of the HNWI world, i.e., the segment ranging from $300,000 to $5 million, not only have wealth managers invested little, but many “new” clients have emerged who, following the pandemic, have been left to their own devices by traditional banks.

According to estimates proposed in the aforementioned research, this pool of wealth currently amounts to approximately $230 billion, including lower HNWI and the so-called upper affluent. In this market segment, the penetration of wealth management is only about 15-20%.

By 2026, it is estimated that this market segment will generate $45 billion in new revenues, accounting for 60% of the global revenue pool for the sector in 2026.

It is reasonable to ask why wealth managers have not invested in this market segment. The answer is simple: the operational costs of serving this segment are too high.

The research (one of the few that accompanies theoretical frameworks with robust numerical evidence!) estimates that the cost of serving an average client in the HNWI/UHNWI segment with the traditional model ranges from $8,000 to $20,000. In the case of a “hybrid” model (human and digital), the estimated cost to serve a client drops to $2,000-8,000, and in the case of a fully digital service, it can range from $500 to $2,000.

New clients, new needs: it’s the season of private

Customers have changed in recent years. Today, approximately 66% of clients in the industry use digital channels (compared to 43% in 2017). Customers want and are accustomed to a higher degree of service personalization. Research suggests that for 70% of clients, the level of service personalization is a critical factor in choosing a wealth advisor, regardless of their wealth level.

Even in terms of products, needs have changed. Traditional products are no longer sufficient. It is essential to offer clients ESG products, new asset classes such as digital currencies or NFTs, and, above all, private markets. Given investors’ demand for new real returns, private markets will be the key drivers of revenue growth in the sector over the next five years.

Reducing costs and increasing customer satisfaction through personalized service models

This is one of a key aspect of transitioning to Wealth Management 3.0. New technologies allow for personalized customer experiences and solutions while simultaneously lowering service costs.

Today, almost all wealth managers have digital channels and services to meet changing customer expectations. However, the service model is generally the same for all clients. It is necessary to envision different modular service models:

  • Traditional/human;
  • Hybrid (with fully customizable discretionary features);
  • 100% digital.

These different models can coexist within any company, tailored to the economic potential, customer needs, and digital preferences.

Personalizing the service model offers multiple advantages: serving more clients, serving them better and more personally, preparing for the “generational transition,” and making even those clients with high net worth but preferring a managed and autonomous regime economically profitable. Each wealth manager can differentiate their approach based on their unique characteristics and strengths.

Greater service personalization, now accessible on any scale through data analytics, is a key variable in choosing a provider (according to research, it is important for 70% of clients) and a key factor in attributing value to advisory services.

The traditional methodology of segmenting clients based solely on their wealth is no longer sufficient. Personalization and streamlining the service model require a deeper understanding of clients, which is now readily available through data analytics and profiling tools.

Client profiling not only enables upselling to existing clients but also allows for more effective client acquisition campaigns.

Operational structure and technology: It’s time for a change

This is the crucial point for embracing the benefits of Wealth Management 3.0 and making the service model more cost-effective and flexible. To fully leverage the potential and value of data and interact effectively with external product and service partners and suppliers, companies need to change their way of working, streamline and automate processes, and modernize technology. But more importantly (and more challenging) than modernizing the technological infrastructure is changing internal processes and working methods.

The strategy to adopt involves gradually abandoning legacy processes, automating manual tasks, and creating a modular technological infrastructure centered around an aggregation layer. This layer feeds apps and channels while integrating the functions of legacy components with third-party and partner components.

Utilizing real-time data and digital processes also impacts control functions and result measurability, enabling what Morgan Stanley and Oliver Wyman call dynamic value management. This refers to the ability to constantly monitor productivity and adherence to plans, resulting in significant efficiency and transparency benefits.

Below is the operational/technological model of Wealth Management 3.0.

But how much does it cost to become WM 3.0?

It is difficult to estimate the cost required for the transformation required by Wealth Management 3.0. However, research provides a reference regarding the investment levels of the major players in the global wealth management industry in process efficiency and technological transformation. Investment levels range between 6-8% of revenues for industry leaders and 2-3% for those slightly behind.

And in Italy? I have no idea how much the major wealth managers are investing. What I do know is that the wealth management sector itself is moving quite rapidly in terms of customer analytics and personalization of AI-based advisory processes.

At Wealthype, we specialize in these areas and have already helped thousands of advisors improve their work. If you would like to see a demo of our tools, you can contact us at the link below and discover how to apply the principles of Machine Learning to your business processes.