Norway says it is going to ban petrol cars from 2025. Uber has placed an order for the first 500 000 driverless cars. The immediate impact of these changes on oil and auto companies may be obvious. But what about other, less obvious knock-on effects, such as the implications for insurance companies; whether or not we will still need parking and garages; and the layout of cities and infrastructure?
The world is changing fast and this is impacting all industries. It is easy to dismiss predictions and forecasts of change as fantasy, but it may well be worth heeding Bill Gates words: “We always overestimate the change that will occur over the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.”
So, what will the Wealth Management industry look like in 2020 and beyond?
What is useful is to identify some of the big trends that are likely to influence society, our industry and our businesses so that we are able to position ourselves to benefit from the tailwinds and avoid or manage the headwinds. One of the key tricks in this sort of analysis is to distinguish between fads and trends. Fads are short-lived and very difficult for most traditional businesses to leverage whilst structural trends are long-lasting and exceptionally valuable to be able to identify and react to.
We have identified three megatrends (and a number of sub-trends) which we think have a high probability of having a significant impact on the wealth management industry over the next decade.
While there are of course a range of demographic dynamics at play, the most relevant to the wealth management industry is an ageing population in developed countries (and amongst the wealthier in emerging markets) and longer life expectancies. Scientists believe the first person to live to 150 has already been born. However, our current financial models are just not built to deal with someone working and saving for 35 years and then having to live off those savings for 90 years!
The need for good financial planning will be more relevant than ever. Many retirees are going to need advice on deaccumulation as well as coaching on alternatives such as working longer and reducing discretionary spend to ensure that they do not outlive their savings.
The second demographic trend is the growing impact of women on the savings industry. In the US women already control more than half the nation’s wealth and this is expected to increase to 2/3 by 2020. Historically, the financial services industry has been set up to serve the male customer. In fact, the Boston Consulting Group surveyed that 73% of women were “most dissatisfied” with the service they received - often feeling that they were being spoken down to. There is clearly an unserved market or opportunity for those that position their businesses accordingly.
The third demographic trend is the ‘millennials’, or individuals born after 1980. Research shows that by 2020 this group will represent approximately 50% of the workforce. They are a mobile first generation who want to deal with you when they want, where they want and how they want. At the same time they are deeply distrustful of traditional financial services and are more influenced by their peers than traditional advertising. This group operates differently, has different values and therefore require different solutions. Clearly, a different approach will be required to be successful in this space.
Martin Ford’s “The Rise of Robots”, which won FT Mckinsey Book of the Year, is a must read and seemed to be central to many of the discussions at Davos 2016. The book is an alarming insight into the impact of automation. Ford shows how automation has resulted in significant increases in productivity but without increasing employment or wages, which has had significant consequences for society and inequality levels. He provides a compelling view that automation is moving from unskilled, to semi-skilled and skilled jobs and that not many industries are safe.
Irrespective of whether you buy into these big claims, there is no doubt technology is affecting our industry. The World Wealth Report stated that 2/3 of HNWs would in most likelihood leave firms that do not allow them to transact digitally. And clients are no longer happy with simple functionality – they want the simplicity and the delight of an “Uber” or “iPhone” experience. Financial services companies are going to need to up their game, including developing more comprehensive and engaging social media strategies.
Another big issue dominating headlines is fintech and roboadvisors. Venture capitalists have placed some big bets on the odds that these new players are going to massively disrupt incumbents. The jury is out. On the other hand, Morningstar stated that “We believe robo-advisory firms will have to eat through all of their capital to reach a profitable scale. Additionally, our view is that the cost advantage, intangible assets and switching-cost moat structures of all-service wealth managers will protect their assets.”
We believe robo-advisors are both a potential threat and an opportunity to incumbents. They may well increase the market share of the previously unserviced. They do some things very well which traditional providers can learn from - they tend to be cheap, transparent, are easy to use with really good user-interfaces and reporting and ironically, in things like tax-harvesting and re-balancing, offer even greater personalisation than many high touch firms.
The final influence with respect to technology relates to cybersecurity, something that is a big risk and should concern us all. Cybercriminals are becoming increasingly sophisticated and target the weakest link. All players will need to not only evaluate themselves, but also their clients and suppliers.
The third big trend is the rise of the voice of the consumer. In the 2014 Edelman Trust Barometer the public were asked their level of trust with respect to different industries. Tragically, the financial services industry came last. The broader industry has much to do to win back the trust of its clients.
While global regulators have spent most of their attention on the banking industry, the asset management and wealth management industry has not been left unscathed. The expectation is for this kind of consumer sentiment to continue. In particular, we should anticipate a specific focus on fees, conflict of interests and end customer outcomes. Those businesses that position themselves ahead of the changes and embrace the spirit rather than the letter of the law will prosper.
An inevitable consequence of the above will be a greater focus on fees and a resultant increase in market share of low-cost passive offerings.
How should you as a wealth manager react?
Every wealth manager would do well to study these three trends and their impacts on their business. While there are certainly a number of threats, there are also clear opportunities for those that position their businesses appropriately. It is very important for each wealth manager to honestly reflect on where they add value and ensure that their clients are aware and equally value the contribution. Successful advisors of the future will focus on three things:
- They will build strong relationships of trust with their clients.
- They will embrace technology to improve the client experience and deliver more efficient services.
- They will compete on value add NOT just cost, thus differentiating themselves from robots.
The industry is undoubtedly going to change and probably more than we anticipate at the moment. However, it is clear that the need for advice is growing and we believe that advisors who can deliver on these three things face a rosy future.