Volatile markets mean investors are desperate for advice, creating opportunities for wealth managers
Challenging market conditions offer wealth managers huge opportunities to engage a whole new client segment. This comprises a new group of investors, those who started investing only recently, in the past two to three years, have created wealth in rising markets and are now experiencing choppy, volatile markets for the first time in their lives, explains Natalie Wolfsen, CEO of AssetMark, a California-based provider of wealth management and technology solutions, and an asset manager with $85bn in AuM.
Generally young, but partly also belonging to older generations – including millennials, Generation X and baby boomers – they represent roughly 15 per cent of all investors. They see investing as “fun, interesting and exciting”.
This group was able to start investing because the barriers to entry, be it cost, price or information, have largely been swept away. Fractional stocks have allowed investors to diversify a smaller portfolio by investing in companies that otherwise might have been out of reach. Social media platforms like Reddit have empowered them, leading them to feel “they have information to overcome insiders”, while new offerings such as zero commission trades have helped democratise investing.
Moreover, digital assets such as cryptocurrencies, which skyrocketed in price to reach their peak last November to then fall dramatically since, have captured the imagination of these young individuals, especially during the pandemic. Being entirely digital, crypto was one of the Covid dollars, one of the pandemic darlings along with stocks such as Peloton and Netflix.
But challenging economic and geopolitical conditions, including the war in Ukraine, energy and food crises, high inflation and interest rate rises, mean the markets of the past few years no longer exist.
Today’s markets are harder to understand, driven by fundamentals and macro factors, rather than just individual security selection, and investors are no longer able to influence prices as they might have done in the past.
Many of these new investors are now looking for help. “When markets do nothing but go up, investors can self-manage effectively, but in this kind of environment, they seek advice,” says Ms Wolfsen.
They want to continue to engage with the market but are looking to separate their wealth into the money they self-manage and that is needed to achieve their long-term goals.
“The decline in assets is what triggers the need for long-term planning, which is great for the wealth management industry,” she says.
Being able to serve younger individuals is crucial, especially with the largest intergenerational wealth transfer in history looming, which will pass down an estimated $30tn to $68tn in inheritance from baby boomers to millennials and Generation X over the next few decades.
The older generation of investors got their fingers burned in the dotcom bubble of 2001 and the financial crisis of 2008 and became sceptical of markets and risk averse, which made it difficult for them to build wealth. In contrast, this new generation is “excited about investing and willing to take risk”, which necessarily leads them towards advice, explains Ms Wolfsen.
Wealth managers should also capitalise on increased digitalisation in the sector. Post-pandemic, investors’ preferred channel of communication is electronic. Adviser-client relationships are enriched by technology, she says. Digital channels facilitate conversations about goals and allow the visualisation of decision-making results, allowing advisers to communicate with clients more effectively, more frequently and in a more personalised way.
They can communicate at a higher scale, which brings down the cost to serve, which means they can serve more clients than in the past, and with lower wealth levels.
“Because of the pandemic, advisers today are much more prepared for this younger generation than they were two years ago,” believes Ms Wolfsen.
Stay relevant
But to stay relevant with younger generations, as well as existing clients, financial advisers need to be “knowledgeable and credible” with digital assets classes such as cryptocurrencies (see Great Debate on page 10 and Fintech on page 26).
“Wealth managers need to have a perspective on digital assets,” she says. They need to advise clients whether these assets are speculative, and therefore more appropriate for the clients’ ‘play account’ or the account they self-manage; or, if they believe they are long-term investments, they need to be able to bring them into clients’ goals-based accounts.
The average age of financial advisers is around 55 in the US, but this is not an issue, says Ms Wolfsen, as many are keeping up to date with new developments in the investment world. Moreover, a new generation of financial planners is emerging, with advisers often having succession plans in place.
Unlike advisers of the past generation, who started their careers on security selection, these younger professionals focus on individuals’ goals and financial planning. Financial planning degree programmes are much more common in the US now than they were even 10 years ago, churning out new graduates very interested in these new asset classes, reports Ms Wolfsen. They are a “great group” to serve younger investors and will also spearhead an innovation wave at the firms they join, she believes.
Education
For wealth management firms, hiring crypto experts that understand how the market is evolving is vital, as is making decisions around whether they should own necessary infrastructure or partner with the right counterparties, says Sandra Ro, CEO of Global Blockchain Business Council (GBBC).
Yet, the cultural issue at private banks must not be underestimated, as “it is difficult to want to take a risk on something that is foreign to most people, very technical and requires a lot of research”.
“The cultur e change has to happen from the top. If there’s resistance at the board level, at the C-suite, it’s very difficult; making changes at lower levels is hard,” says Ms Ro.
The problem is “more philosophical in nature than based on infrastructure”, believes Rayhaneh Sharif-Askary, head of investor relations at digital currency investing services company Grayscale, stressing the importance of understanding how digital assets fit into the “postmodern portfolio”.
“There is lack of education and misinformation out there, there’s a lot of noise. It’s very easy to see what’s gone on with [the collapse of] the Terra-Luna crypto system and just get scared away.”
Younger investors, who trust their peers for information, ‘crowdsourcing advice’ on social media channels, are perhaps even more vulnerable to scams. Social media is full of accounts of suicide attempts and financial ruin.
“Facebook, YouTube, Twitter have been able to make any one of us advertisers, and that sounds great. But the danger is that people take their entire life savings and dump them into whatever project or whatever token,” says Ms Ro at GBBC, calling for social media platforms and fintech websites to be regulated.
However, while there must be guardrails in place, regulation allowing only qualified investors to invest in these new products may be a “double-edged sword”. It may mean creating more wealth for the wealthy.
“We have to find a middle way, where we safeguard consumer protection, but allow people who are not sophisticated investors to invest small amounts, at lower levels, because investing is the only way to create wealth. It’s not your paycheque.”
