The annual Boston Consulting Group report yields a trove of data about trends in wealth management. This article digs out its ideas on how the sector can remain competitive and find new sources of revenue.

The US wealth management market needs a “radically different business model,” according to the 2021 Global Wealth Report just released by Boston Consulting Group.

Clients with between approximately $100,000 and several million dollars in assets who have what BCG calls “simple needs” are being “wrongly served,” said Anna Zakrzewski, a managing partner and global leader of the consulting firm’s wealth management practice.

Financial advisory firms need to abandon their legacy platforms and offer services that are “digitally led with human guidance,” Zakrzewski said.

To be sure, wealth management firms are hardly struggling. Zakrzewski notes that wealth in the US grew by 10 per cent to reach approximately $104 trillion in 2020, aided by a strong equities market and low interest rates. Around 50 per cent of US assets were in equities, the highest rate in the world, and BCG expects that percentage to grow to 53 per cent by 2025.

Disruptors are lurking
But Zakrzewski warned that traditional wealth managers may be swept aside in the future as innovative companies with a digital-first orientation emerge. US advisors need a “Kodak Moment,” she said, referring to the one-time photography giant that didn’t adapt to a digital world until it was way too late.

Three companies have already disrupted the Chinese financial services market using state of the art technology, according to Zakrzewski: Tencent, Lusax and Ant Financial.

“These are non-traditional companies who entered the wealth management industry leveraging technology,” Zakrzewski explained. “They were able to improve client communications by leveraging social media. They increased NextGen sales by combining digital tools with a human element and they achieved faster innovation cycles by taking advantage of collaborative eco-systems.”

So what do US wealth managers need to do? Here’s what BCG suggests:

Explore the liabilities market
Wealth managers that want to grow their market share must professionalize their approach to credit risk management, the report stated. Liabilities can be bundled with traditional banking services such as savings accounts, credit cards, and overdrafts. Advisors can bring an integrated perspective to clients’ balance sheet planning and product engineering by advising on products such as Lombard loans and structured loans, and speed-up credit approval processes and procedures.

Supercharge the role of the relationship manager
Advanced technologies will enable relationship managers to deliver bespoke experiences at scale, the report maintained. With access to rich profile data, RMs will be able to tailor conversations to the individual. Behavioral analytics will reveal which clients have a passion for tech trends or other topics, which like to access information over their mobile devices - and what frequency of contact they desire. 

Digital tools will automate everything from portfolio construction to outreach and will permit end-to-end self-service for clients who prefer it. The potential is huge. Better digital intelligence can improve prospecting, upselling, and retention. Advanced analytics can help RIAs anticipate needs and curate best-fit investment products for their clients.

As their role evolves, relationship managers will need to master new knowledge in order to be credible advisors to their clients and work collaboratively to create customized experiences end to end. These changes will create a supercharged relationship which can serve a much larger client portfolio and generate significantly higher client satisfaction and net promoter scores.
 

Consider new pricing models
The traditional asset-based fee model based on a percentage of AUM has been “very lucrative” for wealth managers, according to Zakrzewski, who are loathe to give it up anytime soon.  

But, she warned, clients will be increasingly asking “where is the firm delivering value?” and market disrupters will be quick to point out the dubious value of asset-based fees for clients in bull markets.

In the future, pricing needs to be more simplified and value-driven, Zakrzewski argued. To build client trust and stay ahead of regulation, the BCG report recommends that advisors streamline pricing by embracing a hybrid model that combines asset-based pricing and a subscription fee, which gives firms greater revenue predictability. 

Subscription-based fees are quite familiar to clients who use popular services such as Netflix or Spotify, Zakrzewski pointed out. RIAs that target clients who have assets of $1 million or less may shift entirely to a subscription-based model, with pricing tiered to reflect the degree of customization and advice provided. 

Utilizing data analytics can help wealth managers identify which clients are price sensitive and adjust accordingly, Zakrzewski said. Advisors need to understand “the power of data” to identify client needs and price points more accurately, she added.

Enhance the client experience with a smarter design
Instead of crowded dashboards full of technical indicators, firms should consider a “less is more” approach, presenting core information in a clear and user-friendly way. They can also use pull-downs and interactive treatments to break deeper content exploration into separate, easy-to-consume sections. 

Robinhood’s app, for example, has a simple and lean home page that displays the account value and a caption with one piece of account-related news. Users can swipe right to see their account’s performance in different time scales, and they can scroll down to dig deeper into their holdings and the performance of individual stocks. 

Wealth managers also need to make portfolio dashboards and simulation tools readily available. A client can use them to explore scenarios such as whether investing slightly more per month might bring their retirement date closer, thereby increasing the tangibility of investment outcomes. And given the rising popularity of environmental, social and governance (ESG) investing, WMs should consider introducing visuals that display such things as the overall carbon footprint of a client’s portfolio.

Democratize more investments
Private equity, hedge funds, and venture capital have long been the exclusive preserve of institutional clients and very wealthy individuals. The same is true for securities-backed lending and thematic investment. 

Innovative wealth managers should provide mass affluent clients with greater access to these investment categories. For example, a pre-IPO investment that might normally require a minimum stake of millions of dollars could be sold to mass wealthy clients at much smaller investment levels by aggregating individual demand. 

What’s more, other high net worth offerings, such as access to subject matter experts, private equity deal talks, and hedge fund investing master classes, can be scaled down and made available to a wider range of clients.