GLOBAL WEALTH MANAGEMENT INDUSTRY
- Profit margins of wealth management firms are expected to decline from 30% to 10 % in the coming decade due to pressure exerted by passive players on pricing and flows, rising regulations which demands for greater transparency and increasing technology costs.
- Transparency becomes absolute as investors and regulators are asking for complete disclosure of fees and cost. Over 50 countries have signed up to the Common Reporting Standard (CRS), agreeing to share information on residents’ assets and incomes automatically that would entail to offshore tax jurisdictions.
Wealth Management is one of the most attractive sectors within financial services for at least two reasons: First, wealth management businesses tend to have greater growth prospects, lower capital requirements, and a higher return on equity (ROE) than most other retail banking businesses, hence they tend to appear as a lucrative option to financial firms at a time when capital is viewed as more expensive and growth is difficult to achieve. Second, wealth management offerings are essential to attracting and retaining profitable retail customers.
The wealth management industry faces four fundamental challenges – volatility, uncertainty, complexity and ambiguity. Volatility affects financial markets and business attractiveness with respect to clients , regions and offerings. Uncertainty plagues decision making at a macroeconomic level thereby impacting clients and institutional stakeholders.
Complexity is driven by regulatory change and newer internal structures introduced by players and changes in value chain. Ambiguity affects the industry’s fundamental assumptions about their business.
Wealth growth has always proved its resilient to weathering crises. The subprime crisis of 2008 that prompted massive government bailouts and central bank interventions drained off around USD10.2 trillion in private wealth at the end of 2008 which rebounded to an all-time high of USD 133.3 trillion by 2010.
In all, wealth growth over the past 20 years has been resoundingly strong—buoyed by global GDP performance, higher disposable incomes, and higher rates of savings.
WEALTH MANAGEMENT INDUSTRY SEGMENTATION
For most of time, mature markets accounted for lion share of wealth but economic growth has put more money in more hands. “Growth Markets” of Asia, Eastern Europe, Latin America, and the Middle East and Africa enjoyed rapid expansion, propelled by strong GDP performance and higher rates of individual savings, while the economies of North America, Japan, and Oceania delivered more modest growth.
In China, for example, households consistently saved more than 25% of their disposable income, on average, over the past two decades, compared with an average savings rate of less than 10% by households in Europe and the US.
North America continues to the home of the largest number of millionaires (16.4 million) in the world out of which (10.3 million) became millionaires in the 21 century and also accounts for the greatest number of High Net Worth Individuals.
Growth markets of Asia-Pacific and Middle East -Africa region is slowly catching up the mature markets on account of greater economic growth which provides a major opportunity for wealth management firms to make significant investments in these emerging markets.
Rising populism in Europe, Brexit negotiations, China’s transition to a consumer-driven economy, Asian geopolitics and the potential changes in US policies on regulation, tax and trade all create uncertainty for the industry’s growth .
Covid-19 has pushed most of the economies in recession, asset prices have declined and interest rates are falling continuously which has led to a decline in asset under management, asset accumulation and revenue in the first quarter of 2020 .
Fee income is already under pressure due to increasing regulations which is expected to decline further. This pressure on profitability is increasing at a time when firms need to invest in new talent, developing the products and technologies they will want as the industry moves towards a new paradigm.
In Europe, the MiFID II directive ,implemented in 2018, will push up asset managers’ costs. Most managers are now committing to absorbing research costs, which were borne by investors. This will have a negative impact on the research providers in investment banks.
The US is heading towards ensuring that high commissions do not influence advice, carrying on the initiative started by the UK Retail Distribution Review (RDR) in 2012.
Such challenges call for an overhaul of the entire business model of such firms in a manner where focus is more on performance-based fees and developing low-fee based active investing products. The pandemic would accelerate the adoption of newer technology by these firms which would demand greater investments and hence would hamper the profits in the long run.
TRENDS IN THE WEALTH MANAGEMENT INDUSTRY
Advisors need to leverage technological approaches to develop offerings that meet changing customer demands by maximizing the value of customer data. Many firms are starting to use predictive analytics to develop value propositions targeted at each customer.
The use of digital channels for wealth management will increase customer loyalty as data analytics increase returns on investment (ROI) for investors. Wealth managers will also be able to deliver the personalized offerings that today’s investors expect by obtaining a complete view of the customer.
Augmented Reality and Virtual Reality
Augmented reality (AR) and virtual reality (VR) help wealth management firms make managed investments more intuitive for clients, especially Millennials. The adoption rate of these technologies should increase as advisors become more familiar with their capabilities with respect to financial services.
AR and VR are also useful tools for engaging clients through gamification, which uses elements of game-playing to influence client behaviour. HNW investors are looking for more innovative ways to interact with wealth managers as they become more technologically savvy and such technology would help satisfy their demands.
Agile Distribution Models
The adoption of agile distribution models is making offerings from wealth management firms more responsive to customer needs. These firms are currently shifting their focus from products to customer service during a period of increasingly strict regulatory environments.
Agile distribution models will provide firms with greater access to new clients, especially younger investors who are more eager to adopt digital technology. The use of currently available data will also enable the development of services that reduce client attrition and improve client engagement.
Additionally, agile distribution will allow wealth management firms to meet new demands from clients more proactively.
Adoption of Open APIs
The trend toward open banking during the current period of low interest rates is squeezing profit margins, driving wealth management firms to seek additional revenue streams. Many of these firms are exploring partnerships with third parties that can develop and deploy application programming interfaces (APIs) more quickly than in-house efforts.
This growing competition and slow innovations is resulting in client attrition, making traditional business models unsustainable in the long term. Banking-as-a-Platform is a solution to this problem, which provides benefits for both wealth management firms and API developers.
The lower cost of innovative APIs will aid firms in retaining their existing clients and attracting new prospects. The improved service deployment that APIs provide will also enable an omnichannel experience for clients and create new revenue streams.
- Goldman Sachs
- China Merchant Bank
|2||Scope of the report|
|7||Insights from Industry stakeholders|
|8||Cost breakdown of Product by sub-components and average profit margin|
|9||Disruptive innovation in the Industry|
|10||Technology trends in the Industry|
|11||Consumer trends in the industry|
|12||Recent Production Milestones|
|13||Component Manufacturing in US, EU and China|
|14||COVID-19 impact on overall market|
|15||COVID-19 impact on Production of components|
|16||COVID-19 impact on Point of sale|
|17||Market Segmentation, Dynamics and Forecast by Geography, 2020-2025|
|18||Market Segmentation, Dynamics and Forecast by Product Type, 2020-2025|
|19||Market Segmentation, Dynamics and Forecast by Application, 2020-2025|
|20||Market Segmentation, Dynamics and Forecast by End use, 2020-2025|
|21||Product installation rate by OEM, 2020|
|22||Incline/Decline in Average B-2-B selling price in past 5 years|
|23||Competition from substitute products|
|24||Gross margin and average profitability of suppliers|
|25||New product development in past 12 months|
|26||M&A in past 12 months|
|27||Growth strategy of leading players|
|28||Market share of vendors, 2020|
|30||Unmet needs and opportunity for new suppliers|