A turbulent environment for the management of wealth is being reshaped by profound trends, which are shifting the priorities and change agendas of boards and management teams.
Following years of a benign backdrop, the macroeconomic and geopolitical environment suddenly shifted towards inflation and high interest rates. Last year, many clients lost money and global wealth declined for the first time in years, due to volatility and uncertainty.
Given a more dynamic, turbulent and uncertain world, executives and boards now need to find a new equilibrium moving beyond their inside knowledge to embrace more external perspectives. This requires shifting discussions from ‘business as usual’ to include more focus on a responsive change agenda, to meet new challenges and opportunities which impact their firm’s future growth, returns and risks.
Growth is now harder. Many investors are on the sidelines, invested in risk-free interest-bearing cash deposits. Margins in traditional investment products are under pressure and operating costs and risks are also rising.
This creates the need for executives and boards to be more vigilant in anticipating evolving challenges, spotting new opportunities and making the right moves. Each firm’s context is specific, but some common themes are observable.
Margins in traditional investment products are under pressure and operating costs and risks are also rising
There is often a ‘knowing-doing’ gap around staying with a business-as-usual approach, given this has worked well in the recent historically benign era, versus embracing the need for a change agenda to reshape and reinvent the business, to meet disruptions underway which affect key areas of the business.
The agenda for change
There are some key areas on which firms should be focused on. One is regulation. This will involve meeting more stringent regulations such as KYC (know your client) and AML (anti-money laundering) rules and greater client protection rules such as consumer duty in the UK and MiFID II in the EU, as well as ESG rules to avoid greenwashing. These add to costs and risk, impact pricing and value to clients.
Then there will be the need to transform investment solutions to deliver lower cost investment options such as exchange traded funds and managed fund portfolios, adopting a more centralised investment proposition. All of this challenges the traditional discretionary portfolio management offering. There is also a shift to higher margin offerings such as private assets.
Streamlining traditional high-cost trading, settlement and custody areas is another priority, as the industry moves towards ‘T + 1’ criteria – settling securities trades one business day after the transaction. Wealth management firms are also looking to embrace greater automation, better interoperability and the longer-term exploration of blockchain to reduce transaction costs and drive further efficiencies.
Adopting the right mix of modern technology and digital innovation is becoming central to reinventing client experience, enabling growth, reducing costs and effectively managing risks
A looming talent crunch, and the rising cost of staff, are further issues. Around a third of advisers plan to retire in the next few years, triggering the need to attract a newer, more diverse, younger cohort to the profession, retaining key staff and managing cultural change.
Adopting the right mix of modern technology and digital innovation is becoming central to reinventing client experience, enabling growth, reducing costs and effectively managing risks. This is challenging, given the proliferation of options including cloud, application programming interfaces (APIs) and more recently, generative artificial intelligence (AI).
Mixed success for M&A
Executives and boards need to revisit their future development path and capabilities including exploring the mix between relying on internally driven organic growth versus considering externally driven opportunities such as alliances, joint ventures, mergers and acquisitions. More firms are now exploring new growth markets, opportunities to outsource parts of their technology stack and potential targets to be acquired.
Not all wealth managers have, however, been successful with their M&A efforts. For example, Goldman Sachs was involved in ill-fated attempts to enter the US affluent wealth segment, but will now double down on their ultra-high net worth business for future growth. This is in contrast to Morgan Stanley’s successful acquisitions to scale wealth activities and performance across all wealth segments.
Recent examples in Europe include UBS and Credit Suisse, RBC’s acquisition of Brewin Dolphin and Rathbones’ merger with Investec’s Wealth & Investment arm. It is too early to judge post-merger success, but retaining key staff, managing culture, upgrading investment offerings and technology integration may all be key to future success.
A more structured and targeted change approach may help, by better envisioning, designing and communicating effective business models and the future vision of the industry. This could encompass awareness, assessment and a focus on key areas where critical gaps exist, supported by a step-based transition approach and roadmap to guide future success.
Given the fast-changing external environment and potential impacts on firms’ growth, return and risk performance, the challenge for executives and boards is to move beyond their traditional business as usual rhythm. They must also craft a responsive change agenda to ensure they don’t miss out on the expected wealth market and industry rebound in 2024.
Ian Woodhouse is a board adviser/partner to wealth management firms, technology vendors and fintechs. He also serves as a judge for the PWM/The Banker Global Private Banking Awards
