With both the asset and wealth management sectors plagued by higher interest rates and fee pressures, the industries have valuable lessons they can teach one another.
At the start of 2024, consultancy PwC laid down five priorities for asset and wealth managers looking to transform and grow, against a backdrop of business and economic challenges.
The predictions are already proving pertinent. They included leveraging GenAI as part of “strategic” digital investments and deepening relationships with high net worth clients, through promoting private market products in particular.
During the first four months of this year, activity in these spheres has been intense, resembling the all-consuming craze around ESG investments, which obsessed the industry during the Covid-19 pandemic and beyond.
Even elementary students of science are aware of Newton’s Third Law of Motion – that for every action, there is an equal and opposite reaction. The current backlash against ESG investments shows this reaction is well under way for responsible investments.
This has been triggered partly by political polarisation, with US critics complaining ESG concerns are “woke” and excessive, and European observers believing they do not go far enough.
There is already a danger the private markets push could suffer a similar fate, with some private bank investment bosses reluctant to channel clients into illiquid assets which may not best suit their needs.
The AI revolution may be similarly challenged. These tech tools are often deployed by wealth managers to cut costs and improve efficiencies, rather than engender client trust and improve the experience, which wealth managers claim is their main aim. Moreover, advisers are still at a premium, despite the investment industry’s long-term prognosis of robotisation.
Wealth and asset managers will focus on renewed growth triggered by strategic partnerships and M&A
But the main trend highlighted by PwC somehow slipped through the cracks and received less day-to-day attention than the passion for private markets or AI infatuation. This is that wealth and asset managers will focus on renewed growth triggered by strategic partnerships and M&A.
Of course we have seen the recent high-profile absorption of Credit Suisse into the UBS global wealth machine, following Swiss political pressure. And a much lower-profile integration of Investec Wealth & Investment into the UK Rathbones franchise is another indicator of the shape of things to come.
However, it is the increased backroom activity linking up asset and wealth managers in strategic partnerships and less formal relationships which offers greater potential. At long last, asset and wealth managers are recognising both their strengths and limitations. Wealth managers have finally realised their previous raison d’etre of managing secretive portfolios for oligarchs and fugitive politicians has evaporated. Asset managers have also twigged they need to improve relationships with major investors to boost market share.
New arrangements linking the two key cohorts, both plagued by higher interest rates and fee pressures, are helping these players redefine business models, adding asset classes, investor segments and new channels to capture investors’ wallet share.
This is one reason we are seeing the asset management colossuses – including $10tn US house BlackRock and $2tn European leader Amundi – reaching into the wealth sphere.
This requires a change in culture and mentality. Until now, the major fund houses have employed “snipers” selling exchange traded funds and other products to multi-asset teams at wealth management houses. What is needed now is a more strategic relationship with top management, where “partners” co-operate on research, technology and operational support.
Whereas most wealth managers have been investing in advanced CRM, compliance and financial planning tools, have they yet evolved into the highly sophisticated centralised machines which the largest asset managers aspire to become?
“Private banks mainly run at 80 per cent cost-income ratios, which are super-expensive. They employ far too many people and can learn a lot from asset managers,” believes Pascal Duval, deputy head of solutions and services at Amundi. “They have good relationships and enjoy the trust of clients, but lack any industrialised system of managing them. They need to take this on board.”
At the same time, he believes, large investment firms are mainly concerned with beating benchmarks and managing highly specific portfolios, with little understanding of the purpose of the wealth or assets they are managing. Closer collaboration through consolidation and outsourcing deals can help re-adjust these inconsistencies.
Tech-led mass market production must be industrialised, while trust-related private banking specialities must be preserved
This transformation can involve a delicate balance. Tech-led mass market production must be industrialised, while trust-related private banking specialities must be preserved.
But there are also calls for a broader shake-up in the role of wealth advisers, who some commentators feel are poorly prepared for the revolution sweeping the industry.
The problem in private banking, says one senior European asset management leader, is not the firms, but the bankers themselves. “Private bankers see their role as a stockbroker, discussing stocks, sharing clever investment ideas and recommending innovative tax structures,” he says.
This can lead to a “very dangerous situation” in a highly regulated wealth industry, where holders of two portfolios with the same risk profile receive a very different diagnosis, because they are being advised by different private bankers.
Industry voices believe private banks have yet to realise their job is shifting, from individual advice to a more systematic model, where particular client profiles are shepherded into the most appropriate investment solution.
These changes may help boost growth and profitability, but on their own they are not enough to encourage the type of wholesale transformation which leaders claim is well underway.
Many private bank bosses and asset management CEOs remain paranoid about sticking with trends and not falling behind rivals. As a result, manifestos of leading players are remarkably similar, both in business models and digital developments. Surely it is time for bolder statements of direction and innovation, rather than purely following pronouncements of a handful of business leaders, such as JP Morgan Chase chief Jamie Dimon or BlackRock boss Larry Fink. Otherwise it is likely big tech firms will start to fill the vacuum.
While the notion that “fortune favours the brave” dates back to ancient Greece, it is time for top management to reconsider the wisdoms of yesteryear.
