Wealth Management in 2021: Are You Ready?

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We’ve all heard the sci-fi movie trailers that begin with a somber baritone voice intoning, “Imagine a world…” Well, imagine this one: a world in which Amazon and Google become major players in the wealth management business. Leveraging their enormous customer data advantage, they’re able to target investors with highly tailored offers – product recommendations, as it were – based on their purchasing or search histories.

This scenario is not as far-fetched as it might sound. In an eye-opening webinar titled Wealth Management in 2021, Cerulli Associates’ Managing Director of US Research, Bing Waldert, explores the four key disruptive, converging trends shaping the industry’s future:

Demographics: The full-service wealth management industry today is characterized by “aging baby boomers serving aging baby boomers” – meaning that both the advisor talent pool and the investor client base are shrinking. Advisors are exiting the business faster than they can be replaced, and firms are still trying to figure out how to serve the next generation that is starting to accumulate wealth.

Retirement Regulation: Regulations intended to “do the right thing” and protect small investors are having the effect of keeping assets locked up in employer-sponsored defined benefit plans. This poses a potential threat at the low end of the industry by diminishing the value of advisors.

Digitization: Advisors who once saw the “robo” trend as a threat have actually embraced it as a means of attracting and serving less profitable clients cost-effectively. The next challenge for firms is to figure out what else they can automate to gain scale and drive efficiency.

Innovation in Asset Management: New product concepts tend to start at the institutional level and eventually make their way to the retail level. Advisors are already applying a broader mix of asset classes and strategies in their clients’ portfolios.

The logical conclusion of these trends, Waldert says, is that the full-service wealth management industry is contracting. The future will see fewer, more productive advisors serving fewer, wealthier clients. Already the industry is dominated by well-oiled “mega teams” – firms of $500 million or more in AUM that control a majority of investable assets and tend to attract new advisor talent.

Meanwhile, the direct-to-consumer channel dominated by Charles Schwab, Fidelity and Vanguard captures a bigger share of assets year after year, notably among up and coming wealth accumulators that full-service firms seem to be losing. As the largest record-keepers of 401(k) accounts, these institutions enjoy a massive data advantage that enables them to market extremely efficiently to their customers. That is what leads to speculation that data-powered, non-traditional players like Amazon could enter the market with an even bigger data advantage.

Waldert delves into a number of other trends, including the changing dynamics between wealth managers and wholesale asset managers, the shifting balance of asset flows from active to passive strategies, and the very real fee compression that all participants are experiencing.

The threads running through all these trends are the rapid advancement of technology and the explosion of data, and the need for wealth managers to harness them strategically. Waldert does not see technology totally displacing human judgement, however. Even the pure-play robo platforms offer the option to talk to a real person. At the upper end, clients continue to rely on advisors to talk them through the tradeoffs of emotionally charged life decisions, not just investment choices, as no algorithm can. As long as emotions about money and family run high, there will always be the need for the human element, he stressed.

The full webinar runs about 45 minutes. For anyone who has a stake in the future of the wealth management industry, it is time well spent.

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Posted in Wealth Management and Financial Planning

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